Capital in the Twenty-First Century

The central intellectual contribution of Thomas Piketty is the formulation of a unified theory of inequality, grounded in two fundamental laws of capitalism. The first law is an identity stating that the share of capital in national income is equal to the rate of return on capital multiplied by the capital-income ratio. The second, more dynamic law posits that in the long run, the capital-income ratio is determined by the savings rate divided by the economic growth rate. When an economy grows slowly but saves a significant portion of its income, the stock of capital accumulates relative to output, eventually reaching levels where past wealth dominates current labor.

This framework culminates in the celebrated inequality r > g, where r is the rate of return on capital and g is the growth rate of the economy. When the return on assets like stocks, real estate, and bonds exceeds the overall growth of wages and output, wealth inevitably concentrates at the top. This is not an accident or a market failure but a feature of the system itself. Unless specific shocks or policies intervene, the compound interest of existing fortunes will always outpace the creation of new wealth through labor, leading to a spiral of inequality that threatens the meritocratic foundations of democratic societies.

For much of the post-World War II era, economists believed that mature capitalist economies would naturally evolve toward greater equality. Piketty demonstrates that this period—roughly 1914 to 1975—was a massive historical anomaly, or what some scholars call el periodo especial. The mid-twentieth century saw a dramatic reduction in inequality not because of the internal logic of capitalism, but due to external shocks. Two world wars, the Great Depression, and rapid decolonization physically destroyed capital and wiped out foreign assets, effectively hitting the reset button on the concentration of wealth.

Following these catastrophes, the western world experienced a unique convergence of high economic growth and rapid population expansion. This high g temporarily exceeded r, allowing labor income to catch up to inherited wealth. However, as growth rates have slowed and population has stabilized in the twenty-first century, the historical norm has returned. We are witnessing a reversion to patrimonial capitalism, where the "dead hand" of past generations weighs heavily on the present. The U-shaped curve of the capital-income ratio suggests that the western world is drifting back toward the extreme inequality levels seen in the Belle Époque of the late nineteenth century.

A defining feature of this returning patrimonial society is the devaluation of labor relative to inheritance. Piketty illustrates this through the "Rastignac dilemma," a literary reference to Balzac’s protagonist who realizes that marrying into wealth offers a far higher standard of living than the most brilliant career in law or politics. In a high-inequality environment, meritocracy becomes an illusion because no amount of labor can compete with the returns on established capital.

However, the modern landscape differs from the nineteenth century in one crucial respect: the emergence of the "supermanager." While the rentier class has returned, the top one percent now also includes individuals earning exorbitant labor incomes, particularly corporate executives and financiers. This creates a dual engine of inequality. At the very top, the distinction between labor and capital blurs, as high salaries are often converted into accumulated wealth, allowing the working rich to join the ranks of the rentiers. This shift complicates the class dynamics, creating a coalition of high earners and wealth owners who pull away from the rest of society.

Piketty’s thesis has faced scrutiny from across the ideological spectrum. From the Marxist perspective, the analysis is criticized for ignoring the social relations of production. Critics argue that Piketty’s formula relies on a neoclassical view of growth and fails to account for the tendency of the rate of profit to fall. They contend that capital accumulation ultimately leads to crises of profitability, suggesting that Piketty’s prediction of a stable return on capital forever is theoretically flawed.

Conversely, conservative economists and institutions like the Tax Foundation argue that Piketty’s proposed remedies would cause economic ruin. They contend that aggressive taxation on wealth would depress the capital stock, reduce wages, and shrink GDP by discouraging investment. Furthermore, institutional economists argue that Piketty focuses too heavily on economic determinism, ignoring how political institutions and social norms—rather than just the math of r > g—shape the distribution of resources. The essay collection After Piketty further expands the critique by noting that the original analysis largely overlooked the critical dimensions of race, gender, and the geography of wealth.

To arrest the drift toward oligarchy, the core prescription offered is a progressive global tax on capital. This is not merely an income tax but a levy on the total net worth of individuals, designed to prevent the endless accumulation of dynastic wealth. The logic is that if the state cannot raise the growth rate g, it must artificially lower the net return r for the wealthiest individuals to prevent destabilizing inequality.

While acknowledging that a truly global tax is utopian, the argument is that regional cooperation—such as information sharing between the United States and the European Union—could make such a system viable. The goal is to enforce transparency and regain democratic control over global capitalism. Without such intervention, the prediction is a future of slow growth and extreme inequality, where the past devours the future and birthright once again supersedes talent.