No, it’s not the end of capitalism. An alternative to Thomas Piketty’s ‘terrifying’ future

Image Credit: shutterstock

Image Credit: shutterstock

AEI’s Kevin Hassett provided a pointed critique of Thomas Piketty’s new book, “Capitalism in the Twenty-First Century,” Tuesday, telling an audience at the Tax Policy Center that Piketty’s prediction of a “potentially terrifying” future, in which capitalism collapses under the weight of wealth concentration, is not grounded in economic reality. Hassett showed that Piketty’s analysis doesn’t factor in the actual relationship between capital and labor, existing taxes and transfers, the negative effects of a global wealth tax, and the global decline of income inequality resulting from capitalism.

Piketty, a professor at the Paris School of Economics, argues that when the rate of return on capital exceeds economic growth, there is increasing wealth concentration. This dynamic was held at bay during the 20th century by the world wars (which destroyed significant portions of capital stock) and population growth. However, such forces may not occur in the 21st century. If capital accumulation continues unchecked and growth remains slow, Piketty posits that the wealth-income disparity could reach or surpass 19th century oligarchic levels and result in political and social upheaval. He proposes a global wealth tax as the solution to rising inequality.


Hassett, appearing with Piketty, argued that Piketty’s argument rests on the assumption that the elasticity of substitution between capital and labor is greater than 1, which is to say that capital and labor can be easily substituted. This would mean that higher levels of capital accumulation by wealthy people would not reduce the return on capital very much, so that capital share of income would skyrocket.

However, Hassett points out that the elasticities in the economics literature are much lower than Piketty needs to support his story, and even these estimates are high because they exclude structures from the analysis, something Piketty includes. In plain English: if you cannot make a hamburger with a building, then capital and labor cannot easily be substituted for each other, and the collapse of capitalism that Piketty predicts does not occur.

A significant portion, and in some countries the entire amount of the observed increase in capital’s share of national income in Piketty’s data, is attributable to increases in housing.  Indeed, if housing is excluded, the sharp increase in capital is almost eliminated, and the collapse of capitalism he projects disappears. This is especially important because housing cannot be substituted with labor (e.g. people holding umbrellas cannot substitute for houses), which again casts doubt on the idea that the elasticity of substitution of capital and labor is greater than 1. Moreover, Piketty’s entire framework to address the link between capital and growth is based on the idea that capital is like a robot or a machine. But his data are dominated by capital movements that cannot be modeled well by his approach.

In his policy proposals to combat the explosion of wealth that he predicts, Piketty dismisses the “serious efficiency costs” of a wealth tax and its impact on savings. This is especially problematic for him, since the redistributive income taxes he proposes are far more harmful to the economy when the elasticity of substitution between labor and capital is large. Generally, those who support high marginal tax rates do so because they believe that elasticities are small. Piketty’s evidence and policy position, then, are inconsistent with one another. (He also largely dismisses the consumption taxation literature for no clear reason.)

Piketty examines pretax, pretransfer incomes over the past several decades, a time during which the US has massively expanded its transfer programs. Indeed, transfers have increased relative to GDP more than the income share of the top, so ignoring them has a significant impact on the results. When assessing incomes in the US on a post-tax, post-transfer basis, income inequality is much less severe than the levels identified by Piketty. When assessing inequality on the basis of consumption, it is even less pronounced. However, Piketty does not examine consumption inequality. By focusing on only part of the overall story, capitalism appears to be unstable, whereas the political process has produced fairly stable consumption shares through expanded transfers.

Piketty’s view of inequality on a within-country basis fails to acknowledge that capitalism has led to a decline of income inequality globally and has helped lift millions of people out of abject poverty. If the world implements a global wealth tax, as he suggests, we could curb that progress in the developing world and perhaps increase global inequality.

Piketty argues that political power becomes as concentrated as wealth. For him, this is a key reason to aggressively redistribute income. Hassett points out, however, that transfer programs have increased dramatically while incomes have become more concentrated.   If the wealthy and politically powerful were using their political might to increase their own welfare at the expense of others, one would expect to see the opposite pattern.

Piketty’s critiques of capitalism were predicted decades ago by Joseph Schumpeter. Schumpeter predicted that academics would have “a group interest in shaping a group attitude that will much more realistically account for hostility to the capitalist order than could the theory,” and that capitalism would sow the seeds of its own destruction by sending the children of capitalists to universities that bombard them with anti-capitalist propaganda. Hassett argues that this threat to capitalism seems at least as plausible as that mentioned by Piketty.

Hassett’s full powerpoint deck (and charts) can be found here.

Follow AEIdeas on Twitter at @AEIdeas.

22 thoughts on “No, it’s not the end of capitalism. An alternative to Thomas Piketty’s ‘terrifying’ future

  1. One of the things that redistributionists never seem to address is the transaction costs of the redistribution itself.
    Compliance costs for income taxes run around 20% of the tax collected. Even if redistribution were to have some theoretical benefit, it would have to overcome this enormous penalty to recognize benefits in the real world.

  2. Well there’s a problem with this analysis. And the problem is it doesn’t apply to the world’s largest capitalist economy.

    Housing prices in the US rose modestly for 20 years until 2000, increasing by only 25% in that time.

    But productivity had been increasing much more dramatically, almost doubling in the same time

    Prior to this period, middle class wages increased with production (fig A, above.) Since that time, most income growth has gone to the 1% and middle class wages have been stagnant. That can not be explained by housing price growth.

    Piketty asserts the owners of capital can set their own wages as well as the wages of workers. And that seems to be the case. As the US right gutted labor unions, middle class workers lost bargaining power, resulting in 3 decades of wage stagnation

    Finally, it doesn’t matter what Piketty acknowledges about capitalism’s past. He’s giving capitalists a shot across the bow that something may be wrong in the theory underlying capitalism. As owners of capital take more out of the economy than productivity growth justifies, the ONLY way to pay for this is middle class wage stagnation.

    And it’s ironic AEI’s staff admits the 19th century was a time of oligopoly since there was no govt regulation of the economy at that time. The 19th century is what America would look like if conservatives had their way.

    • Yet the country in the world that has a history of embracing free-market capitalism the strongest (us) is the most prosperous, and countries that introduce it whereas before resisted it begin to prosper. No other system has pulled so many out of poverty than has free-market capitalism. This country has provided the rest of the world with a blueprint to achieve wealth that has proven itself out for about 200 years now — adopt a strong legal system that maintains contracts, recognize and encourages private property and leverage free-market transactions and capitalism to increase the wealth and wellbeing of society. To me, providing that blueprint for all others to follow is humanitarian contribution enough. I’ll skip the “wealth tax”, thanks.

      • The US is not the most free market, I refer you to the Heritage rankings. The US has not had a history until relatively recently, with Reagan.

        The idea that capitalism has lifted more people out of poverty isn’t really saying much because the only real system that its possible to compare would be feudalism, seeing as how every other possibility was suppressed with massive violence soon after they came into existence.

        • Feudalism as a comparison?

          What about communism? Communism ala the U.S.S.R. was not suppressed by violence, but it may have been enforced by violence because it goes so strongly against the grain of human nature.

          • Soviet socialism lifted many people out of poverty as well. Many people are attributing technological developments to the economic systems themselves. At the beginning of 20th century Russia was a backward country. In 1980 it had a respectable standard of living compared to what it had before.

          • Soviet socialism did not lift anyone out of poverty, it instead condemned people to be equally poor and stuck in squalid poverty.

      • In case you missed the information, the U.S ranks 28th when it comes to child poverty rates. So your premise that it’s the free-market capitalism in the U.S. that has pulled so many out of poverty is just incorrect. Twenty-seven other countries have pulled more children out of poverty.

        • Two points:

          One: You have to state what measure of poverty is used to determine poverty. How many “impoverished” people in other countries of similar rankings have cell phones, are obese, have access to the best medical care in the world, have autos, TVs, etc? Also ask how many have access to one of the most generous welfare systems in the world? Was welfare scored in that poverty ranking? Was social security disability, social security, medicare, medicaid scored?

          Second, we are not a truly capitalist nation. Heavy regulations and crony capitalism prevent the U.S. from participating in a true free market environment. Consider the often told story of women who want to open up hair braiding operations but cannot because of restrictive regulations. Consider many small businesses that cannot make a go because larger politically tied operations gain protection from the political class. Also, everyone has to pay more than world market prices for some items because of protectionist tariffs, sugar is a classic case in point, dairy and steel are also in this category because these industries are “coddled” by politicians who reap ample campaign funds for their cronyism.

          There are many meta-issues of controversy that misallocate resources or otherwise hamper progress: a broken public school system, government control of too much of the medical economy, etc. But these are related to cronyism, coddling unions for campaign funds and ground work, etc.

          The U.S. has a ways to go to have a truly capitalist economy. To imply that capitalism is not working in the U.S. means nothing if we are not a true capitalistic country and it also means nothing if the measurements used to rank poverty are bogus.

          • This idiotic meme of the right that, because the poor have CELL PHONES!!!!! everything is OK is just another weak minded cliche

            The right has diligently fought against healthcare for the poor and middle class. Trust me, if it’s between a cell phone and chemo, I think most would take chemo.

            One of the most generous welfare systems in the world? Where? Is this proof of a multiverse where there’s ANOTHER America, absent a right wing, where the poor ARE given assistance as needed?

            And spare me the crap about the ‘lack of freedom’. We have one of the top open economies in the world. The only problem is libertarians object to the absence of slavery, which would REALLY make America free. (

            And the US has virtually no unions. Wall Street did more damage to the US economy in 1 year than unions have in 100.

  3. I have been avoiding reading the book, because it appears that it, like most other leftist analyses of wealth distribution, ignores the extent to which the wealthy have their wealth/income determined by government rather than the market.

    For example, in the US, a very valuable piece of property is a tenured chair in a major university. Robert Reich worries greatly about inequality, but UC Berkeley pays him almost $250K/year, according to CA disclosure forms. If you capitalize the value of this and other government income streams, a rather different picture emerges than the left likes to peddle.

    Also, of course, crony capitalism is different from real capitalism, and cronies are adept at ensuring that real capitalism becomes impossible. After DOJ approves the Comcast/TW merger — a certainty, given the amount that Comcast has spent on the Dems — government road blocks to the development of competitive systems are likely to get higher.

    • “The fact the wealthy OWN govt, it seems, is ignored by the right.”

      The wealthy own the government because politicians promote crony capitalism. Both parties are good at this, but the Democrats have perfected this type of “capitalism”.

      “Besides, the right wing has deregulated this country to the point we’re back in the 19th century when there was NO govt regulation.”

      Good point. I pine for the old days where we paid a lot more for airplane tickets and phone calls. Isn’t deregulation a drag. It’s disgusting that we pay so little today. :-)

      • Hey I agree with you yet when the right screws up and lets the banking sector become TBTF because of deregulation, we are forced into crony capitalism.

        When Cliven Bundy demands socialist welfare support from the govt, thousands of right wing fanatics show up to support him

        When the rich get preferential treatment in the tax code with low capital gains tax rates, the right forces Congress to promise NEVER to make them pay the same tax rate as I do.

        When fertilizer plants blow up in TX killing a dozen courageous firefighters, right wingers in the TX legislature tell us they’re too busy regulating abortion clinics to bother with dangers that wipe out whole communities.

        Why not put a fertilizer plant next to YOUR kid’s school? See how long it takes you to regulate it.

        • We can agree that perhaps some regulation is necessary.

          I hope we can agree that the current state of regulation is suffocating and is promoting unnecessary government bloat with huge expenses placed on the economy and our prosperity in general.

          If we cannot agree to the latter, then we can agree to disagree.

          • The most rational approach is a lifecycle cost/benefit. That way we have an objective measure that incorporates ALL factors such as environmental, EH&S, etc.

          • A cost analysis will not happen IMHO. It’s been talked about for a long time, but political favoritism always wins.

            I favor a regulatory sunset law. All regulations at “X” years after introduction have to expire unless extended by vote of congress.

            The problem with regulations is that they are being made by an ever growing, bloated blob that is not elected. Even politicians have trouble getting a handle on regulators and regulations.

            This is tyranny by an unelected, un-Constitutional 4th branch of government.

  4. If ‘our’ US Government enforced Anti-Trust Law most greed-mongers would be restrained from causing
    Economic-havoc, and absurdly extreme division between the ‘richest’ and poorest members of our Country!

  5. This “discussion” reveals nothing more that preconceived biases and ideology on both sides. The way to resolve these huge differences is to start with the fundamentals, and agree on one thing, then the next. For instance, do we agree that human beings have an inherent right to life, liberty and pursuit of happiness WITHIN THE LAW as it exists? If not, what laws need to be changed, or do we throw out the entire rights altogether? Once we reach agreement, let’s then work on the the next level: The CONSEQUENCES of that agreement. It is fundamental to the entire nature of conflict resolution. So long as Gilens’ and Page’s work is true, only the most wealthy will ever have a say in the matter, and that means the rest are simply left to the right to starve to death for the sake of the rich.

  6. I think what Piketty has done is to re-legitimize data that is very long-term and from varied economic contexts. He has given policy-makers (and talking heads) the tools, the language to dismiss out of hand any economic data that is limited to a few decades or contexts. In the face of a return of levels of inequality not seen in the US since pre-WWII and in the face of globalization and its levelling of all economies to similar terms, it was inevitable that bigger data sets were going to come into play for policy. But Piketty is the person who has crystallized this and arguing against his specific conclusions or recommendations is beside the point, in some sense.

    Until a few months ago, it might have been possible for a serious economist to use data from the last 30, 50, even 100 years to argue for policy. However, post-Piketty, the problem with these analyses is clear to nearly anyone in a position to influence policy. Of course, you will still get people who argue like “DrZ” above that lower airfares since airline “deregulation” offer proof of the success of free market capitalism, I don’t think we’re going to see as much enthusiasm for that kind of, um, limited data set henceforward.

    • I do not think you can say with certainty that airline deregulation offers proof of success of free market capitalism.

      Some points that can be made was that the old regulations were stifling and that they hurt the consumer.

      Whether or not airline prices have fallen to a natural, free market point is not a point I am qualified to make.

      That the old regulations were contributing to higher prices than would occur with these regulations is hard to doubt.

      • Correction: “That the old regulations were contributing to higher prices than would occur with these regulations is hard to doubt.”

        I meant to write: …..without these regulations…

  7. Sweeping statements like “regulations are bad” or “capitalism is good” are uninteresting. Piketty is at least attempting to understand the relationship of growth, capital and labor income, not wishing away the discussion with various generalities or cherry-picked statistics. To Hasset’s credit he at least is making a technical critique of Piketty’s findings, something missing in the comments here.

    Some comments on Hasset’s presentation:

    (1) The 95% point of an income distribution is an arbitrary representation, one that is likely to be trend-irrelevant as the real changes are occurring at much higher percentiles.

    (2) There is no breakdown of the transfer payments made by the gov, and it seems clear to me that in a very real sense all expenditure of tax monies is a transfer to something (corporations aren’t people) or someone, so what is the point of that slide? I could easily read it as 88% or so of our tax monies go to corporate welfare while 12% is spent on actual, real people not employed by the government. Am I supposed to think this is too much? Not enough?

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>