Economy
4:45 pm
Fri April 4, 2014

Mystery Of Mounting Inequality Might Find Answer In Brand-New Tome

Originally published on Fri April 4, 2014 6:18 pm

Transcript

ROBERT SIEGEL, HOST:

A few decades ago, inequality started rising in countries around the world. That came as a shock to many economists who originally thought inequality tended to go down overtime. They wondered how inequality could rise in so many different places at once. Well, now a new book by one of the world's leading experts on the topic suggests an answer to that mystery. Jacob Goldstein of our Planet Money team reports.

JACOB GOLDSTEIN, BYLINE: The book is called "Capital in the Twenty-First Century." Here's the author.

THOMAS PIKETTY: My name is Thomas Piketty. I teach at the Paris School of Economics.

GOLDSTEIN: Piketty's book is big in every sense of the word. It's almost 700 pages long. It makes big sweeping claims about history and the nature of capitalism. Basically it's the it book that every economist is taking to the beach this summer. Here's Steven Durloff of the University of Wisconsin.

STEVEN DURLOFF: The aspect that I think is extraordinary is the fact that it developed a vision that is this big in terms of thinking about how societies evolve.

GOLDSTEIN: To get to this big vision about how societies evolve to solve the mystery of rising inequality, Piketty started out by reading a bunch of old novels: Jane Austen, Henry James and especially Balzac. He was not in it for the love stories.

PIKETTY: All of Balzac's novels are a lot about money. And in fact, all of, you know, 19th century novels are a lot about money.

GOLDSTEIN: Piketty got obsessed with the way inequality was portrayed in this one Balzac story. A young penniless nobleman moves to Paris to study law and he meets an ex-con. The ex-con sits him down and basically says, look, work is for suckers. And the ex-con actually goes through all the math. He says, say you become a judge. This is how much you'll make. If you make all the right connections and get really lucky, maybe you'll get to be a prosecutor general. Then you'll make this much. But no matter how lucky you get, the ex-con tells the nobleman, you are not going to get rich by working. You want to get rich? Marry that heiress who lives down the hall.

PIKETTY: And, you know, for a long time I was wondering is it only because Balzac was personally obsessed with money, or was he really describing something real?

GOLDSTEIN: Piketty dives into the numbers. He figures out what lawyers made back then, goes through tax receipts, looks at inheritances and he realizes the ex-con was right. It was almost impossible to get rich by working in Balzac's world. It was a world where to get rich you basically had to inherit money or marry someone who did.

Then Piketty digs through numbers for more countries, the U.S., England, Germany, Japan, not just in the 19th century but the 20th and the 21st. And he comes up with this grand theory, his theory of everything. Piketty says, take any society and look at how much money people are making on their investments. When they buy stock or bonds or rent out land, how do they do?

If those investments are growing faster than the rest of the economy, you're likely to have a society where inequality is increasing, where wealth is piling up in fewer hands. This is what was happening in the Balzac world. It's also what's been happening in the U.S. and other developed countries for the past several decades. But sometimes the opposite is true.

In fact, a lot of the economists working today grew up at a time when inequality was falling. In the 1950s and '60s, the economy was growing really fast. Investments were not growing so fast. So many economists came to believe this was just the normal state of affairs. In modern economies they thought inequality just tends to fall.

BRANKO MILANOVICH: And we've had big problem explaining why inequality then picked up again in the 1970s, in the 1980s and 1990s and now.

GOLDSTEIN: This is Branko Milanovich, an economist at the City University of New York. He says Piketty looks at the big sweep of history and figures a big chunk of the 20th century was a really unusual economic period. You had a world war, a depression, another world war and then a massive post-war boom.

MILANOVICH: Piketty would say that was not the normal world. That was really an exceptional world. And, you know, that is where actually this perception that Piketty brings in is so dramatically different.

GOLDSTEIN: The normal world, according to Piketty, is the world we're in now, the world where inequality is increasing. Now that does not mean we're back to that Balzac world. For one thing, today there is a middle class with some wealth, people who own their homes, who have some money saved for retirement. But Piketty says that may not be true in the long run.

PIKETTY: The key question is is that going to last? So are we going to have an expanding middle class in terms of wealth or are we going to have a shrinking middle class?

GOLDSTEIN: Piketty argues that, unless there are some big policy changes, wealth is likely to become more and more concentrated among the very rich. Inheritance will become a bigger deal. And it'll be harder to get ahead by working. Jacob Goldstein, NPR News. Transcript provided by NPR, Copyright NPR.