The Piketty Effect: Part 1

Thomas Piketty’s Capital in the Twenty-First Century was published in English to instant best-seller status and wide acclaim and debate. In the United States, his author appearances drew enormous audiences...
New York City's financial district

This spring Thomas Piketty’s Capital in the Twenty-First Century was published in English to instant best-seller status and wide acclaim and debate. In the United States, his author appearances drew enormous audiences. At our own Public Books event in New York, lines of standing listeners ringed the packed two-hundred-person auditorium and crowded in at the door.

The book, originally published in French, draws on three centuries of evidence across nations to expose the roots of economic inequality. It makes a powerful historical and empirical observation: that returns on capital outpace the rate of economic growth, without significant state intervention. But what meaning can we draw from the intellectual upwelling around Piketty’s book? How might we now think of “Economie politique” or “Political Economy,” both culturally and politically in France, in Europe, and in the United States? What concerns does his book obscure? And how might we advance an agenda to address the varied sources of economic inequality?

This month Public Books is delighted to announce our first collaboration with the French online journal La Vie des Idées, to examine what we call “The Piketty Effect.” Our first pair of essays, by American sociologist Erik Olin Wright and French economist Nicolas Frémeaux, address the questions of class that remain inchoate in Piketty’s work and detail how inequality has evolved since the 2007 crisis. In our December 1st issue, we will co-publish a second set of reflections by American feminist economist Nancy Folbre and Düsseldorf-based economist Ulrike Stein. Allons-y!


— Erik Olin Wright: Stay Classy, Piketty

— Nicolas Frémeaux: Income and Patrimony: The Growth of Inequality from 2007 to 2014

 Stay Class, Piketty

Erik Olin Wright


At first blush, Thomas Piketty’s book, Capital in the Twenty-First Century, harkens back to Marx. The title, after all, deliberately invokes Marx’s Capital and much of the book talks about “capital” and “labor” as the two fundamental elements of the capitalist system. But for all of its nods to Marxism, Piketty’s analysis neglects and obscures a crucial fact about class: the long history of exploitation and domination of labor by capital.

It’s not the case that Piketty is unaware of this history: he begins chapter one of his book by telling the story of the bloody class struggle between miners and owners of the Marikana platinum mine in August 2012, in which 34 miners were killed by police. He uses this conflict to pose an overarching question:

This episode reminds us, if we need reminding, that the question of what share of output should go to wages and what share to profits—in others words, how should the income from production be divided between labor and capital?—has always been at the heart of distributional conflict.

He goes on to conclude:

For those who own nothing but their labor power and who often live in humble conditions (not to say wretched conditions in the case of eighteenth-century peasants or the Marikana miners), it is difficult to accept that the owners of capital—some of whom have inherited at least part of their wealth—are able to appropriate so much of the wealth produced by their labor.

This is solid class analysis: the income generated in production is divided between antagonistic classes, capital and labor, and the part that goes to capital constitutes the appropriation of wealth produced by the labor of miners. Classes are understood relationally, and these relations involve domination and exploitation systematically connected to production.

But this relational understanding of class largely disappears after the opening of the first chapter.1 When the term class is used at all, it is treated as simply a convenient way of talking about regions of the distribution of income or wealth—a top, upper, middle, and bottom. The owners of capital receive a “return on capital”; they are not described as exploiting the labor of workers. The distribution of income reflects a division of the national income pie into “shares”; it is not a real transfer from one class to another.

There is much of value in Piketty’s empirical research and in his theoretical arguments about the long-term trajectory of income and wealth inequality that does not depend on a relational class analysis. But the absence of a sustained class analysis of the social processes in which income is generated and appropriated, which is what I mean by the term “relational class analysis,” obscures some of the critical social mechanisms at work. Let me elaborate this point with two examples, one from the analysis of income inequality and one from the analysis of returns to capital.


Income Inequality


One of Piketty’s important arguments is that the sharply rising income inequality in the United States since the early 1980s “was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms.” This conclusion depends, in part, on precisely what is considered a “wage” and what is “capital income.” Piketty adopts the conventional classification economists use, treating all of the earnings of top managers as “income from labor,” regardless of the form the earnings take—an ordinary salary, bonuses, or stock options—or the specific mechanisms by which the level of earnings is determined.

This is perfectly fine for the purposes of tax law and the theories of conventional economics, in which a CEO is just a well-paid employee. But this way of treating the earnings of CEOs is less meaningful when we analyze the position of CEO (and other top managers) in terms of relational class processes. As Piketty points out: “Top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity.” This is especially true for top executives:

At the very highest levels salaries are set by the executives themselves or by corporate compensation committees whose members usually earn comparable salaries … It may be excessive to accuse senior executives of having their “hands in the till,” but the metaphor is probably more apt than Adam Smith’s metaphor of the market’s “invisible hand.”

Now, what precisely does this diagnosis of CEO and other top executive salaries mean in terms of a relational understanding of class? Class relations are fundamentally power relations. To say that capitalists “own” the means of production and workers “sell” their labor power for a wage is to describe a set of power relations binding together the activities of capitalists and workers.

Among the powers of capitalists in these relations are the powers to offer employment at given wages, issue orders to employees about what work they must do, and dispose of profits for alternative purposes. The list could go on, but it should already be clear that what we call the capital/labor relation is actually a very complex multidimensional bundle of power relations.

In the modern corporation, many of the powers of capital are held by the top executives. This means that their role cannot reasonably be described as simply “labor” within the firm, only with better pay. These executives occupy what I have called contradictory locations within class relations, meaning that relationally they have some, but not all, the powers of capitalists.2 This has direct implications for how we should think of the super salaries of CEOs: a significant part of the earnings of top managers and executives should be thought of as an allocation by the executives themselves of the firm’s profits to the personal accounts of managers, rather than a wage in the ordinary sense. They exercise their capitalist-derived power within the class relations of the firm to appropriate part of the corporation’s profits for their personal accounts. If this is correct, then a substantial part of their earnings should be thought of as a return on capital, albeit of a different form from dividends derived from ownership of a stock.

The implication for Piketty’s overall analysis of the trajectory of income inequality is that a significant part of the increase in remuneration going to “super-managers” should be attributed to capital’s share of total income rather than labor’s. This means that you cannot estimate capital shares and labor shares simply by taking at face value the categories of national income accounts. And this claim, if accepted, also calls into question one of Piketty’s key conclusions: “This spectacular increase in inequality largely reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population.” To be sure, the explosion of inequality does represent the explosion of very high incomes of top managers, and this certainly does create a “separation of the top managers of large firms from the rest of the population,” but this should not be treated as entirely due to increasing inequality in incomes from labor.


Returns to Capital


The absence of a relational class analysis is also reflected in the way Piketty combines different kinds of assets into the category “capital” and then talks about “returns” to this heterogeneous aggregate. In particular, he combines residential owner-occupied real estate (homeownership) and capitalist property into the aggregate category “capital.” This is a pretty important issue, for homeownership comprises somewhere between about 40 and 60 percent of the value of all capital in the countries for which Piketty provides this breakdown. Combining all income-generating assets into a single category is perfectly reasonable from the point of view of standard economic theory, in which these are simply alternative investments for which a person receives a return. But combining these two kinds of economic processes into a single category makes much less sense if we want to identify the social mechanisms through which this return is generated.

Owning a home generates a return to the owner in two ways: as “housing services” which are then valued as a form of imputed rent, and as capital gains, if the value of the real estate appreciates over time. In the United States in 2012, about two thirds of the population are home owners. Roughly 30 percent of these own their homes “free and clear”; another 51 percent have positive equity but are still paying off their mortgages.3

We have to put class exploitation and domination at the center, not the margins, of the discussion.

The social relations in which the economic returns are linked to these patterns of homeownership are completely different from those within capitalist production relations. Of course, there are important social and moral issues linked to homeownership and access to affordable housing, and so inequalities in this form of “capital” matter. But they don’t matter for the same reasons that inequalities in capitalist property matter, and they don’t operate through the same causal processes. As a result, the social struggles unleashed by inequality in homeownership, on the one hand, and by inequality in the ownership of capitalist capital on the other, are fundamentally different. And, crucially, the public policies that would help remedy the harms generated by these different kinds of “returns to capital” would also be different: for example, eliminating the tax deduction for interest payments on mortgages for expensive homes, or reducing the tax deductions progressively for high-income homeowners would significantly affect the inegalitarian implications of housing-based “returns to capital.” Piketty’s proposed global tax on capital is a plausible element in a policy designed to respond to the inequalities linked to the global mobility of capital, but this seems to have little relevance to the harms generated by inequality in returns to homeownership.

In sum, Thomas Piketty and his colleagues have produced an extraordinary dataset on income and wealth inequality that includes data on the wealthiest of the wealthy. And by making these data publicly available in such an accessible, user-friendly way they have performed a wonderful service to the academic community.4 What we still need is a systematically relational class analysis of these data in order to identify the diverse mechanisms generating economic inequality. For if we are ever to undo the historical and ongoing legacies of capitalist inequality—or even prevent them from further deepening—we have to put class exploitation and domination at the center, not the margins, of the discussion.


Jump to remarks:

Erik Olin Wright, Nicolas Frémeaux

Income and Patrimony: The Growth of Inequality from 2007 to 2014
Nicolas Frémeaux


The 2007 crisis reignited the debate on the growth of inequality. Only major institutional changes, like those proposed by Thomas Piketty, can halt the trend of increasing income and wealth disparities. But how precisely has inequality evolved from 2007 to 2014?


In the Wake of the Crisis


In the developed world, the immediate effect of the 2007 economic crisis was less inequality. 2008 and 2009 saw a decline in the percentage of income retained by the wealthiest households. The scope of this decline varied by country. In English-speaking countries and certain European nations, such as France, Ireland, and Denmark, the income of the top 1 percent fell by about 10 percent from 2007 to 2009. In Sweden, Japan, and, to a somewhat lesser degree, Italy and Spain, the drop was more moderate. This shift can be explained mostly by the volatility of capital gains—dividends, interest, rents, and surpluses—which carry so much weight for those at the top of the wealth distribution, compounded by capital losses. In fact, the reduced holdings of the wealthiest households can be explained by capital losses alone. In the United States, if we take out these cyclical components of income, we see no decline in inequality.

The compressed income distribution immediately following the crisis has been canceled out in the years since 2010. The economic recovery, though fragile, has been most beneficial for the most well-off. This is mainly due to the passage of time between the financial crisis itself and its present effects on the economy; it had a powerful and immediate effect on capital income, whereas the impact on unemployment, and consequentially the overall economy, took months and years to materialize, at which point capital income had had time to rebound. In the United States, like in France, inequality has returned to its pre-crisis level. Thus from 2009 to 2012, in the US, income growth for the top percentile was at 31.4 percent, while the other 99 percent saw their income stagnate, increasing only 0.4 percent during the same period. The top 1 percent thus captured 95 percent of the gains of the American economic recovery. A Federal Reserve study confirms this result, showing a widening gap between average and median pre-tax household income. From 2010 to 2013, median income fell by 5 percent while the average went up 4 percent. These opposing movements indicate growing inequality. Income distribution in the United Kingdom seems to have followed the same trend, because after a drop in 2009 and 2010, income inequality was on the rise again in 2011. The economic recovery seemed to have the least benefit for the wealthy in Australia and Canada, where inequality has never (yet) returned to pre-crisis levels. For Scandinavian countries such as Denmark and Sweden, the data indicate a reversion to the inequalities observed before the crisis, but these countries had more income parity in the first place. Metrics in Germany, Italy, and Japan are available only through 2009 or 2010, but the results suggest a similar growth of inequality.

The statistics on high income are of a fiscal nature. They provide information on taxable income, but by design they ignore the effects of taxes and public transfers.5 These two elements of household fiscal structure must be accounted for to evaluate a household’s standard of living. A 2014 study by the French National Institute for Statistics and Economic Research (INSEE) details the recent evolution of French living standards. Taken as a whole, the country’s median household standard of living remained steady between 2007 and 2012. However, this did not hold true for everyone. During the economic crisis, the lower deciles saw their standards of living decline while those of the upper strata were rising. The contrast between the lowest and highest parts of the income distribution automatically led to greater disparity in standards of living. So after remaining stable in 2008 and 2009, the Gini index6 of household living standards reached 0.306 in 2011 before stabilizing in 2012. The rise of inequality is confirmed by other indicators such as the ratio of overall standard of living to the progression of the poverty rate. In 2012, the wealthiest 20 percent had a living standard 4.6 times higher than that of the poorest 20 percent (compared to 4 times higher during the 1990s and 4.3 times higher in the years before the economic crisis). In France, the poverty rate reached 13.5 percent in 2009 and 14.3 percent in 2011, and the depth of poverty, measured by the difference between the living standard of the poorest households and those at the poverty line, was markedly exacerbated in 2012. The system of social protections has not been enough to compensate for elevated inequality and poverty in the years since the recession. Nevertheless, without social and fiscal transfers, this elevation would have been even more prominent.


Inequality Growing Exponentially since the 1970s


To better understand the short-term trends around inequalities, it is essential to take a long-term view.7 Growing inequality is not a new phenomenon. In most developed countries, the end of the 1970s was the point of departure for a growing disparity in income and patrimony. In English-speaking countries, but also to a lesser degree in Western Europe and Japan, the 1970s marked the end of a half-century of declining or relatively stable inequality. It is nonetheless significant and interesting to note that the forms of these inequalities, and their timing, varied from one country to another.

The increasing disparity of income distribution has affected every developed nation to some degree, even in Scandinavia, the most historically egalitarian region.

In English-speaking countries, the scale of the increase is unequivocal. In the United States, since the late 1970s, almost 15 points of national income were transferred from the lower 90 percent of households to the wealthiest 10 percent. The United Kingdom and Canada saw a similar, though slightly more moderate, shift. In Europe and Japan, inequality was also up during the 1980s, but it grew in slower and smaller increments. The transfer of national income to the top 10 percent in Japan was around 10 points. For European countries, this transfer was usually “limited” to 5 points of national income, though there were differences between continental Europe (Germany, France, the Netherlands, and Switzerland) and southern or northern Europe; the continental countries experienced a more moderate rise in inequality. Still, even at the heart of these regions, differences remain. France was a notable exception, with inequality slightly decreasing in the 1970s and ’80s. Yet by the end of the 1990s income inequality was up, particularly at the top of the distribution. So from 1980 to 2010, income inequality in France resembled a U-curve. It’s important to note that the increasing disparity of income distribution has affected every developed nation to some degree, even in Scandinavia, the most historically egalitarian region.

The inequality trend has many causes, and they vary by country. Even if the distinctions are complex in reality, we can attempt to isolate the common factors across all countries (globalization, technological progress) from the country-specific factors (fiscal politics, labor market regulations, relative standards of executive compensation). An increasing distribution of income to the upper percentiles tends to indicate that technological progress, which should be beneficial to skilled workers, is not a sufficient explanation.8 Diminishingly progressive fiscal systems since the 1980s, as well as the influence of capital, seem to better correspond to observed realities. Though they are complex, the analysis and quantification of these different explanations are promising areas of research.


The Resurgence of Patrimony in Developed Nations


For a comprehensive analysis of income inequality, we must also consider the role of patrimony and the income it generates (interest, rents, dividends). This is crucial to our understanding not only of the effect of the economic crisis on inequality but also on the progression of inequality over time.

Analysis of income composition for the upper income strata indicates that capital gains are a significant component. For the richest 0.1 percent, capital gains are larger than earned income. The consequences of lost financial capital due to the crisis were correspondingly large for people in this category. Besides the income from patrimony, however, consider the patrimony itself. Piketty and Gabriel Zucman, estimating the ratio of private patrimony to national income from 1970 to 2010, found evidence of a resurgence of capital in most developed countries.9 There are notable differences between continental Europe and the English-speaking world. Among the countries studied, during the 1970s the ratio was in the range of 200 percent to 300 percent; today it ranges from 600 percent to 700 percent in continental Europe versus 400 percent in English-speaking countries. The central mechanism of this emerging capital, that is, the difference between the rate of economic growth and the rate of capital returns, indicates a return to levels observed in Europe at the end of the 19th century. When we look at patrimony, we can show that inequality takes different forms. Patrimony has a much heavier influence in continental Europe and Japan than in English-speaking countries, where wage inequality is more of a factor. Emmanuel Saez and Zucman have shown, however, a severe increase in patrimony inequality in the United States since the 1980s, especially at the top of the distribution, where the current holdings of the richest 0.1 percent are comparable to 1920 levels.10

Accounting for patrimony allows for a more complete analysis of shifting inequality; we can see that the more moderate growth of income inequality in continental Europe than in English-speaking countries is counterbalanced by the stronger influence of patrimony. The nature of inequality is not identical for every wealthy country.


Economic Crisis, Political Response


Historically, the rise of inequality immediately after the 2007 crisis is not so surprising in light of past economic events. The crash of 1929 provides a clarifying example. Much like the current recession, the crash damaged income through depreciation and the reduction of capital gains. Nonetheless, the change in composition of income between 1929 and 2007 tends to indicate that the Great Depression probably had a more severe effect. In 1929, capital gains were higher than earned income for the wealthiest 1 percent. In 2007, this was true only for the wealthiest 0.1 percent. Contrary to popular belief, the Great Depression led to no lasting reduction of inequality in the developed world. Only the political responses brought to bear on this crisis have had the least effect on inequality of income and patrimony.

The politics in action after the 1929 crash, and more generally the institutional changes occurring in the 1930s and 1940s, had a marked and lasting impact on the distribution of wealth. In most developed countries, the highest marginal tax rate had jumped significantly in earlier years: in France, from 2 percent in 1915 to 72 percent in 1924. That rate fell until the start of the 1930s, when it reached a quasi-confiscatory level (almost 90 percent) especially in the US and UK, and stayed there until the 1980s. There was an appreciable difference in the political response following the 2007 crisis, as there were no higher taxes on the wealthy (or very few) to offset austerity measures.

If we want to effectively combat inequality today, we have to account for financial integration, creating a regional, if not global, tax system.

The 2007 crisis launched a debate on the role of inequality in triggering the collapse. Had rising inequality weakened the financial system? Many recent findings seem to answer in the affirmative.11 In particular, the growing gap in income and patrimony since the 1980s may have led people of modest means to go into debt in order to maintain their level of consumption. This is still up for debate, as inequality linked to exploding private debt is less evident in European countries, yet the financial crisis still trampled them. Moreover, economic history indicates that financial instability can also be caused by other factors.12 The effect of inequality and, by extension, of a tax system considered overly favorable to the wealthiest classes is consistent with the line of research led by Piketty and Saez, which aims to interrogate the existing models of optimal taxation.[1 The fact that high inequality arises in large part from growing income for the top percentiles of the distribution poses a challenge to the standard models of optimal taxation, which use disincentive to work as an argument against high taxes.] In their view, elevated taxes on income or patrimony can be implemented without creating disincentives to work and save money. If we want to effectively combat inequality today, we have to account for financial integration, creating a regional, if not global, tax system. This would require a census of patrimony at the global level and a fight against the financial opacity created by tax havens.

Considering that the crisis coincided with weaker support of the welfare system in France and a hardening of public opinion against social aid for poor households and the unemployed, transforming the taxation system is especially necessary. The situation is atypical, given that periods of rising poverty are usually accompanied by social and political support for the most unfortunate. Public mistrust is fueled by the sense that certain people profit from an unjust socioeconomic system. Without an appropriate political response, this economic crisis, which could have been revelatory, will ultimately have no bearing on the question of wealth distribution. Regardless of magnitude, an economic crisis has merely a temporary effect on the distribution of resources. Only major institutional changes can check the trend of growing inequality of income and patrimony.


Translated from the French by Jolie Hale, with financial support from the Cultural Services of the French Embassy.


Jump to remarks:

Erik Olin Wright, Nicolas Frémeaux icon

  1. Occasionally in the book a shadow relational class analysis appears. In one place, for example, Piketty invokes the idea of a transfer of income when he writes: “It is important to note the considerable transfer of US national income—on the order of 15 points—from the poorest 90 percent to the richest 10 percent since 1980 .… This internal transfer between social groups … is nearly four times larger than the impressive trade deficit the United States ran in the 2000s.” But even here the “transfer” refers to shifts in income from the mass of people to the top, not between relationally interacting social categories. “Transfer” here simply indicates a division of the pie more favorable to the top of the distribution, not the actual appropriation of income from one class of people to another.
  2. For my approach to these issues see Erik Olin Wright, Classes (1985) and Erik Oin Wright, Class Counts: Comparative Studies in Class Analysis (1997).
  3. See Cory Hopkins, “More Homeowners Are Mortgage-Free Than Underwater.”
  4. Much of this dataset is available at The World Top Incomes Database.
  5. By design, income that eludes taxation either by legal means (such as exemptions) or by illegal ones (tax fraud) does not appear in tax declarations.
  6. The Gini index is a measure of income inequality that ranges from zero to one. A value closer to zero represents more evenly distributed incomes, whereas a value closer to one indicates that there are larger gaps between rich and poor. Because standards of living are assessed using relatively small sample sizes, indicators of income distribution (such as the Gini index or interdecile range) that do not focus on the top portion of the distribution are more pertinent.
  7. The study of inequality’s progression in developed countries and its effects was the subject of a European research project, Growing Inequalities’ Impacts (GINI). See also Facundo Alvaredo et al., “The Top 1 Percent in International and Historical Perspective,” Journal of Economic Perspectives, vol. 27, no. 3 (2013), pp. 3–20.
  8. Biased technological progress means that development of production processes that work against the interests of unskilled workers (e.g., robotization in the automotive industry). This implies that the growth of inequality is due to falling income for unskilled workers.
  9. Capital Is Back: Wealth-Income Ratios in Rich Countries 1700–2010,” Quarterly Journal of Economics, vol. 129, no. 3 (2014), pp. 1255–1310.
  10. Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data,” National Bureau of Economic Research Working Paper 20625, October 2014.
  11. See Marianne Bertrand and Adair Morse, “Trickle-Down Consumption,” Chicago Booth Research Paper no. 13-37 (2013), and Michael Kumhof, Romain Rancière, and Pablo Winant, “Inequality, Leverage, and Crises: The Case of Endogenous Default,” International Monetary Fund Working Paper 13/249 (2010), among others.
  12. See Thomas Piketty, Emmanuel Saez and Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” American Economic Journal: Economic Policy, vol. 6, no, 1 (2014), pp. 230–271, and Piketty and Saez, “Top Incomes and the Great Recession: Recent Evolutions and Policy Implications,” IMF Economic Review, vol. 61, no. 3 (2013), pp. 456–478.
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