The Return of "Patrimonial Capitalism": A Review of Thomas Piketty's "Capital in the

Twenty-First Century"
Author(s): Branko Milanovic
Source: Journal of Economic Literature , JUNE 2014, Vol. 52, No. 2 (JUNE 2014), pp.
519-534
Published by: American Economic Association

Stable URL: https://www.jstor.org/stable/24433816

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Journal of Economic Literature 2014, 52(2), 519-534
http://dx. doi.org/10.1257/jel.52.2.519

The Return of Patrimon Capitalism'

A Review of Thomas Piketty s Capital
in the Twenty-First
Branko Milanovic

Capital in the Twenty-First Century by Thomas Piketty provides a u

of the functioning of the capitalist economy by linking theories of econo
and functional and personal income distributions. It argues, based on
historical data series, that the forces of economic divergence (including r
inequality) tend to dominate in capitalism. It regards the twentieth
exception to this rule and proposes policies that would make capitalism
the twenty-first century. (JEL D31, D33, E25, ΝΙΟ, N30, P16)

1. Introduction state that we are in the presence of one of

the watershed books in economic thinking.
Piketty is mostly known as a researcher
I am
bookhesitant
Capital intothe
callTwenty-First
Thomas Piketty's
Century new of income inequality. His book Les hauts
(.Le capital au XXT Steele in the French revenus en France au XXe Steele: Inegalites
original) one of the best books on economics et redistributions, 1901-1998, published in
written in the past several decades. Not that 2001, was the basis for several influential
I do not believe it is, but I am careful because papers published in the leading American
of the inflation of positive book reviews and economic journals. In the book, Piketty
because contemporaries are often poor documented, using fiscal sources, the rise
judges of what may ultimately prove to be (until the World War I), the fall (between
influential. With these two caveats, let me 1918 and the late 1970s), and then again the
rise in the share of the top income groups
in France. Piketty revived the methodology
originally used by the two pioneers of income
distribution studies—Vilfredo Pareto and
* World Bank, Research Department. I am grateful to Simon Kuznets. It consists of the use of tax
the editor, Steven Durlauf, for many detailed and very
useful comments and to Ann Harrison, Christoph Lakner,
data, rather than household surveys and, as
Peter Lanjouw, Niels Planel, and Leandro Prados de la such, is especially powerful in uncovering
Escosura, who read and commented on the first version the distribution of top incomes. This focus on
of the text.
* Go to http://dx.doi.Org/10.1257/jel.52.2.519 to visit the
the top makes both economists and the gen
article page and view author disclosure statement(s). eral public more aware of the rich and their

519

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520 Jou rnal of Economic Literature, Vol. LII (June 2014)

income levels than do broader distributional A reader who knows Piketty from this pre
studies that are more concerned with over- vious work would naturally expect Capital
all measures of inequality like Gini. Piketty s in the Twenty-First Century to focus on
French study was soon followed by a similar income concentration. He or she will not
long-term study of top incomes in the United be disappointed. The international evidence
Kingdom (Atkinson 2003), the United States of income concentration is described and
(Piketty and Saez 2003), the rest of Europe explained probably more clearly than ever,
and the developed world (Atkinson and However, this is not the only important part
Piketty 2007), and, most recently, in a num- of the book. The key contribution is Pikettys
ber of emerging market economies (Atkinson analysis of capitalism. Issues of inequality
and Piketty 2010; Alvaredo et al. 2013). The are only one facet of that analysis. Pikettys
work that is principally associated with these unstated objective is nothing less than a uni
authors includes now many long-run studies fication of growth theory with the theories
covering, in some cases, a century or even of functional and personal income distribu
two, from more than twenty countries. An tions, and thus a comprehensive description
impressive interactive database "World Top of a capitalist economy.
Incomes Database" (http://topincomes.g- The book is divided into four parts and
mond.parisschoolofeconomics.eu/) has been sixteen chapters. The four parts are as fol
created. Currently (October 2013), it con- lows: first, some "clearing of the decks,"
tains the data from twenty-seven countries. which consists mostly of definitions, national
The prominence of the work of Piketty accounts identities, and relationships to be
and his associates has also been helped by used later; second, focus on the capital
the revived interest in inequality, which coin- income ratio and functional distribution of
cided with the onset of the Great Recession national income; third, inequality in inter
and the realization that, in the United States, personal distributions of wages, property
incomes around the median have been stag- incomes, and wealth; and fourth, policy rec
nant in real terms for almost forty years, while ommendations. Capital, as the title suggests,
the top 1 percent, or even more narrowly the is at the center of the book. It is a huge and
top 0.1 percent, have dramatically increased extremely rich book. Suffice it to say that it
their share of total income (reaching for the presents two to three centuries of empirical
top 1 percent some 1/5 of total income). The data on capital and output, national income
rise in the political importance of inequality, distributions, the rate of return on capital,
exemplified in the United States by political inflation, inheritance flows, and more for
activism associated with the Occupy move- the most important rich economies (France,
ment, its 99 percent versus 1 percent slogan, the United Kingdom, the United States, and
and John Edwards's political rhetoric of "two somewhat less Germany, Japan, Sweden, and
Americas," had its empirical basis in the work Canada). The books range is immense: from
done by Piketty and Saez (2003). Their famous the exchange rate of the livre tournois on the
graphs of the income shares of the U.S. top eve of the French Revolution to the 2013
decile, top 1 percent, and top 0.1 percent Cypriot financial crisis; from the capital
showing that, at the turn of the twenty-first ized values of slaves in the Southern United
century, the rich's income shares approached States to Chinese private foreign holdings
the high values of the Roaring Twenties, are today; from the percentage of the popula
now ubiquitous in the popular media. But tion with the right to vote in France under
the origin of the graphs goes back to Pikettys Bourbon Restoration to today s incarcera
2001 book on top incomes in France. tion rates in the United States. In addition,

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 Milanovic: The Return of "Patrimonial Capitalism" 521

this 700-pages long book is accompanied by income is called β. From historical studies of
an enormous online technical annex (http:// France, the United Kingdom, and the United
piketty.pse.ens.fr/fr/capital21c) that contains States (chapter 3), Piketty establishes that β
all the underlying data used in the book, has, from the time of the French Revolution
tables, graphs, references, and the summary to today, followed a U-shaped pattern. It
of the essential points. So by using less than was high, reaching a value of about seven
1 percent of the total space of Piketty s book in France and the United Kingdom before
and annex, this review will attempt to pro World War I (and around five in the contem
vide an exposition and assessment of the porary United States), and then declined by
books key points and messages. more than half during the next fifty years in
continental Europe and the United Kingdom
(and to less than four in the United States).2
2. Fundamental Economic Laws
In the past thirty years, however, the ratio has
of Capitalism
begun to rise again, reaching, or coming close
To understand Piketty, one must return to, the values from the turn of the twentieth
to the classics of economics. Like David century.
Ricardo, Thomas Robert Malthus, and KarlThis U-shaped curve of the K/Y ratio
Marx, Piketty builds a simple "machine" was known to the readers of Piketty's pre
vious work. In this book, he marshals more
that captures the key features of a capitalist
economy. He then uses that machine to illu compelling evidence to show that this is a
minate the discussion both of the past and process that characterizes all advanced capi
the future. The machine or, in more modern talist economies. But the full significance of
parlance, the "model," consists of one defi increasing β comes out clearly only when it
nitional relationship, two fundamental eco is combined with Piketty's first fundamen
nomic laws of capitalism (as they are called tal law of capitalism and one key inequal
by Piketty), and one inequality relationship.ity relationship. The first fundamental law
Lets start with the definition (chapterstates1) that the share of capital incomes in
that links the stock of capital (K) to the flow national income (a) is equal to the real
total
of income (Y). The stock of capital includes rate of return on capital (r) multiplied by β.3
all forms of explicit or implicit return-bear
ing assets: housing (which Piketty, unlike
many authors, treats as an integral part thatofenables its owner to receive a return, including the
implicit return on housing, is capital.
capital), land, machinery, financial capital2Pre-World War I United States is an interesting case.
in the form of cash, bonds and shares, intel The North had low values of β (around three), while the
South had an almost European-like capital-income ratio of
lectual property, and even human persons at
six. The gap was even greater before the Civil War, when
the time of legalized slavery. Thus defined
the value of slaves in the South, as estimated by Piketty, was
capital is more akin to what is often called
about 150 percent of Southern national income (chapter 4).
White Southerners were, on average, wealthier than the
wealth.1 The ratio between capital and annual
Northerners even if we exempt slaves. Per capita incomes
in the South were also higher until the early-nineteenth
century (see Lindert and Williamson 2012).
IPiketty uses two terms ("capital" and "patrimoine" 3 The first fundamental "law" is in reality an identity.
= wealth) interchangeably (see chapter 1, p. 47). However, we can consider it a "law" of capitalism in the
Regarding land, he rejects the distinction between the sense that in a private-capital economy, the returns on
"original and indestructible productive powers of the soil" capital are income of capital owners. Differently, suppose
and land improvements, which alone, for some, should that capital is state-owned and returns distributed to all
be "capital." Similarly, he rejects the distinction between citizens. Then obviously capital share in national income
wealth used in "unproductive" and "productive" activities (whether it is close to 1 or not) has no influence on per
(where only the latter would be called capital). Any asset sonal income distribution.

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 522 Journal of Economic Literature, Vol. LII (June 2014)

Now, if the rate of return on capital remains breaks down turns on whether the evidence
permanently above the rate of growth of the for r > g is sufficiently strong or not. We
economy (g)—this is Piketty s key inequality shall return to it.
relationship r > g—then a increases by defi The second fundamental law deals with
nition. This, combined with the increasing β, the long-term determination of β. From basic
drives the share of capital in national income growth theory, we know that the steady-state
arbitrarily close to one. The process has a capital-output ratio will be equal to the sav
positive feedback loop: as a increases, not ings rate divided by the rate of growth of the
only do capital owners become richer, but, economy. Thus, one can determine the (long
unless they consume the entire return from run) equilibrium ßs, which may vary between
their capital, more will remain for them to countries. This is an equilibrium condition,
reinvest. The increased saving in turn makes not an identity like the first fundamental law.
the growth rate of capital exceed further the However, the second law plays a rather sub
growth rate of national income and raises β. sidiary role in Piketty s analysis, and he resorts
Thus, not only does higher β lead to higher a to it only when he considers where eventu
but higher a leads to higher β.4 ally ßs may settle in some (perhaps mythical)
This is, in short, how Pikettys machinery steady state.6 Let us now go more carefully
works. Take the fact that β has been rising in over the historical calculations that underlie
advanced economies, combine it with a defi and support Piketty s model.
nitional relationship, and assume that r >g·
The process generates a changing functional
3. Reinterpretation of Recent
distribution of income in favor of capital and,
Economic History
if capital incomes are more concentrated
than incomes from labor (a rather uncon We have seen that β has been rising in
troversial fact), personal income distribution the advanced countries from around 1700
will also get more unequal—which, indeed, until the First World War. Piketty explains
is what we have witnessed in the past thirty the rise, uncontroversially, as the outcome
years.5 So far so good. of a continuing high return on capital acting
The model, however crucially depends on upon a steadily accumulating capital in an
the inequality relationship r > g. If r = g, environment that was institutionally favor
then capital and national income increase able to capitalists, rather than to workers.
at the same rate, β is stable, and the share France and the United Kingdom, as well
of capital in total output remains the same. as Germany and Japan (for which the time
Thus, whether Pikettys approach survives or series however is not as long), display the
same movements of the capital-output ratio.
The United States less so because it was a
4 The mechanism is reminiscent (but just reminiscent)
of Marx's. In Marx, increased "organic composition of capi "wealth-young" country, in the sense that
tal" (basically higher KJL ratio and higher β) leads not only the colonists had to start from scratch and
to higher a but through monopolies to greater concentra
tion of income among capitalists and diminished demand did not inherit any wealth from the previous
for labor. Thus a permanent pool of the unemployed, the generations.
"reserve army of labor," is created which allows wages Using very effectively literary examples
to remain low. None of the latter elements is present in
Piketty.
from Jane Austen and Honore de Balzac,
5 Strictly speaking, the requirement is not only that
capital incomes be more concentrated, but that they
be positively correlated with total income: as we move 6Note that if g —» 0 (as, we shall see, Piketty thinks),
up along income distribution, the importance of capital then in the long-ran β —> oo and however small r, the
income increases (see also Atkinson 2009). share of capital in total income will be high.

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 Milanovic: The Return of "Patrimonial Capitalism" 523

Piketty shows that in a capital-rich society revolved type of society that developed capi
with high returns on capital, as was Europe talist economies are trending, argues Piketty.
in the nineteenth century, it often made no They are, he believes, moving toward the
sense to work but to concentrate rather on income relationships where the Rastignac
finding a rich spouse or otherwise (by any dilemma will again be relevant,
means) inheriting property. The trade-off But why did β, after the period of the
between a brilliant career, based on study Belle Epoque,9 decline precipitously in con
and work, and a much more lavish lifestyle tinental Europe, the United Kingdom, and
that could be afforded if one married an Japan (and less so in the United States)? It is,
heiress is presented with unmatched clar- Piketty argues, because of physical destruc
ity and brutality to the young Rastignac by tion of capital during the extraordinary period
the world-sawy Vautrin in Balzac's Le pere of two world wars and nationalizations after
Goriot. This trade-off, called the Rastignac wards; high taxation of inheritance and "con
dilemma by Piketty (does it pay to work hard fiscatory" income taxes (both being closely
when one can inherit much more by marry- linked to the need to sustain war effort); high
ing well?), is very well known to the readers inflation that helped debtors versus credi
of English and French literatures of the nine- tors; and finally, because of the more labor
teenth century.7 So obvious was the answer friendly political atmosphere after World
that the Rastignac dilemma is not even posed War II. All of these factors were detrimental
in most cases. No reader of Austen is left in to capital accumulation, reducing β and the
doubt that education is a pleasant activity share of capital in national income. It was,
mostly useful to enhance marriage prospects however, capitalism's Golden Age, the years
of young ladies and gentlemen (we are far of "les trente glorieuses" (1945-75), as they
from human capital here!), work is never to are called in France, or 'Wirtschaftswunder"
be undertaken (unless characters really get in Germany. The European economies and
into serious trouble), and everybody's social Japan expanded the fastest in their histo
position is measured by the annual rent he ries, and the United States at the rate that
(mostly he) commands. Or, to give an exam- matched its best performance to date. The
pie from Patrick Colquhoun's social table European economies and Japan almost fully
for the early nineteenth-century England: caught up with the United States in terms
annual income of temporal peers, at £8,000, of workers' per-hour productivity,10 the
was estimated ten times that of high-level capital-output ratio and net return on capi
civil servants, merchants, and manufactures tal were low, taxation high, the functional
(Milanovic, Lindert, and Williamson 2007).8 distribution shifted in favor of labor, and the
It is back to this, by the most current views, personal income distribution became more

7The American literature was just slightly behind

(because the circumstances were different). But Henry 9 La Belle Epoque normally designates in France a
James's Washington Square has exactly the same plot, as period of the third republic, from the suppression of the
does the movie "Titanic" (both of which Piketty cites). An Commune in 1871 to the break out of World War I. It is
almost endless number of such literary examples can be the same period whose description appears in the famous
given containing—and this is unique to the nineteenth first pages of Keynes' Economic consequences of the peace.
century literature—very detailed information on monetary One is never sure to what extent Piketty uses the term with
incomes. Incidentally, Balzac was very much appreciated a slightly ironic touch.
by Marx. l°See the latest Penn World Table version 8.0 where
8 Peers were also supposed to have larger families, or U.S. per-hour productivity in 2011 is estimated (in 2005
more hangers-on, so that, on a per capita basis, the differ constant PPP dollars) at $55, and French and German at
ence was less. $50.

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 524 Journal of Economic Literature, Vol. LII (June 2014)

equal.11 This was, seen from todays perspec and Japan grew faster than they would have
tive, a Golden Age indeed, whose passing is if they were at the technological frontier.
often lamented (as Piketty points out) by the The increasing population growth rate also
now aging baby boomers born and raised at drove g ever higher (note that g is the sum of
that time. population growth and growth of per capita
But with the Thatcher-Reagan revolutions income). Furthermore, institutional factors,
in the early 1980s, the Golden Age receded, including high taxation and the electoral
and capitalism reverted to the form it had power of communist and left-wing socialist
in the late-nineteenth century.12 Capital was parties in continental Europe, kept r low,
already being rebuilt before, both to make and thus, uniquely in the history of capital
up for the losses sustained during the war ism, reversed the inequality r > g (chap
and through new investments, but from the ter 10). All positive developments during the
early 1980s, with reduced taxes on profits Golden Age—and this is no exaggeration
and income (a point which Piketty exten flowed from the reversal of that inequality.
sively documents), and the quasi elimina Piketty's reinterpretation of the twentieth
tion of taxes on inheritance, the rebuilding century economic history of capitalism
accelerated, β began its steady climb reach sharply contrasts with interpretations of the
ing, in the early twenty-first century, values same period in some influential recent books
from around a century ago. The growth rate by top economists and economic historians.
of advanced capitalist economies declined Examples include Landes' The Wealth and
because the convergence came to an end, Poverty of Nations (1999), Deaton s The Great
and both the functional and personal distri Escape (2013), Clark's A Farewell to Alms
butions deteriorated; the first moving against (2007), and Acemoglu and Robinson's Why
labor, the second against everybody but the Nations Fail (2012). For these authors, the
top 1 percent. entire period after the Industrial Revolution
Does this interpretation of economic his is seen as a final "enfranchisement" of man
tory differ from many others and how does it from the "brutish and short" Malthusian
relate to the r > g inequality? Piketty s view existence. A well-publicized graph by Clark,
of the Golden Age is that it was a very special based on Maddison's data, illustrates it best:
and unrepeatable phenomenon in the his after thousands of years of stagnation, the
tory of capitalism. Thanks to the process of world's output, starting from the Industrial
convergence, Europe's capitalist economies Revolution, is following an exponential curve
to which there is no apparent end. The
elixir of economic growth once discovered,
11 If we rank countries in increasing order of their whether it be human capital, institutions,
GDPs per capita in 1950, their average real GDP per
control of diseases, or all of them, knows no
capita growth rates over the next sixty years were: Japan
4.6 percent, Germany 3.3 percent, France 2.4 percent, the stopping. But in Piketty's reading of history,
United Kingdom 2.0 percent, the United States 1.7 per this extraordinary exponential curve, while
cent. Textbook case of convergence economics.
12 The Thatcher-Reagan revolution was driven, Piketty being "ignited" by the Industrial Revolution
writes (chapter 2, p. 164), by the factually correct idea as well as by the French and American politi
that the United States's (and, to a lesser extent, the United cal revolutions, was held "alive" in the twen
Kingdoms) preeminence was being eroded. But this fact
was wrongly interpreted as being due to the bloated wel tieth century by the convergence economics,
fare state rather than to the general catch-up of the war demographic growth, and, paradoxically, cat
ravaged capitalist economies of Europe. In other words, aclysmic developments during the two world
the Thatcher-Reagan revolution changed capitalism, but
failed to raise the rate of growth that was its ostensible wars. This is now coming to an end for the
motivation in the first place. rich countries, and after China (and India,

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 Milanovic: The Return of "Patrimonial Capitalism" 525

one would expect) converge to rich countries' reached a very high level of income. It is
income levels and population growth fur- the high KJY ratio, the "dead hand" of the
ther decelerates, this will indeed be true for past generations (Fisher 1919), and the high
the world as a whole. From a convex curve, returns on capital that destroy the fabric of
we are likely to go back to a rather flat line todays advanced capitalist societies. "The
implying barely rising or even stagnant per past devours the future" (chapter 16, p. 571).
capita incomes. While other economic histo
rians see the twentieth century as the dawn . ,T7.„
c , ,, , ,, ., 4. Will r Always Exceed er
ot even better days to come, Piketty sees it as jo
"el periodo especial" of capitalism. Never to But, the reader will ask
be repeated unless—and that would come in put ratio increases so m
his policy recommendations—we do some- marginal return to ca
thing very radical. not r go down? The "stickiness" of the rate of
Indeed, things are different now, after "el return is obviously a weak point of Piketty's
periodo especial" of capitalism ended, broadly machinery. He summons a lot of histori
in the 1980s. First, economic policies, in par- cal evidence to show that r has generally
ticular regarding taxation of profits, have been stable during the last two centuries,
changed. Plus, demographic transition (low despite massive changes in the K/Y ratio,
rate of population growth) now affects all He also argues (chapter 10) that, even if we
European countries and, to a lesser extent, go further back into the past, to the Roman
the United States. This reduces g further. The times, r has been steady at around 5-6 per
end of convergence implies that all advanced cent (see also Goldsmith 1984, p. 277 and
countries will grow at the rate of technological more recently Scheidel and Friesen 2009).
progress, which, Piketty believes, is around A remarkable graph (p. 356 in the book),
1-1.5 percent per year. Add to it 1 percent reproduced below, shows a huge positive
population growth and g cannot exceed 2.5 gap between r and g from Antiquity to the
percent per year. If r remains, as Piketty early twentieth century, its disappearance (or
thinks, at its historical rate of 4—5 percent p.a., rather, the inversion, g > r) for most of the
all the negative developments from the nine- twentieth century, and then recent reemer
teenth century, encapsulated in the Rastignac gence. Moreover, Piketty sees, interestingly,
dilemma, will be repeated. todays processes of expanding financial
Note that long-term growth is given exog- sophistication and international competi
enously by technological progress and popu- tion for capital as helping keep r high. While
lation growth. The problem is that this new many people question financial intermedia
rate, g, is low and will likely be less than the tion and blame it for the onset of the Great
rate of return to capital. It is the distribu- Recession, Piketty sees it as helping to
tional effects of the latter (that is, of the r > g uncover new and more productive uses for
inequality) that are deleterious for the soci- financial capital, particularly for those who
ety as a whole: they favor property owners own a lot of it, and maintaining the rate of
over labor, not working over working, make return high and greater than g. But far from
a mockery of equal opportunity and meritoc- making this high r a good thing for the econ
racy, and undermine democracy as the rich omy, he regards it, unless checked by higher
use their money to buy policies they like. taxation, as undesirable.
Piketty does not blame low growth for the Will the reader be convinced by the
Western economies' current predicament: argument that the elasticity of substitution
low growth is inevitable once countries have between capital and labor is likely to remain

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 Journal of Economic Literature, Vol. LII (June 2014)

ο
1
A
ψ
V
1
A 4
V
ψ
i
^
Sh
bß

Pure
Pure rate
rate of
of return
return to
to c
(after-tax
(after-tax and
and capital
capital lo
lo

-R-
-R- Growth
Growth rate
rate of
of the
the w

y
3
1
c
3
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0-1000 1000-1500 1500-1700 1700-1820 1820-1913 1913-1950 1950-2012 2012-2050 2050-2100

Figure 1. After-Tax Rate of Return versus Growth Rate at the World Level, from A

Notes: The rate of return to capital (after-tax and capital losses) fell below the growth
century, and may again surpass it in the twenty-first century.

Source: http://piketty.pse.ens.fr/files/capital21c/pdf/G10.10.pdf. Reprinted wi

publisher.

high, and that an increase in volume of capi and the United Kingdom in chapter 6). But
tal will not drive r down?13 It is difficult to he may be running against one of the funda
say. Pikettys arguments, particularly those mental laws of economic theory: decreasing
drawn from economic history and the data returns to an abundant factor of produc
he has put together, are strong, even persua tion.14 Of course, it could be said that returns
sive (see for example his estimation of two to capital and labor are not determined by
centuries of net return on capital in France marginal productivity, and that r can remain
indefinitely high, regardless of the KJL ratio.
Piketty is indeed critical of a blind belief
13 High elasticity of substitution is necessary to make r
remain relatively stable in the face of an increase in the K/Y that marginal returns always set the price for
ratio. The extreme example is a society where the entire labor (interestingly, he is less so for capital),
output is produced by robots. The returns will go entirely
to the owners of robots and factoral income distribution
would be 100 percent capital, 0 percent labor. Piketty
(chapter 6, p. 217) mentions this possibility. Even when
Piketty allows for a decrease in r, he tends to believe (chap 14 While reading the book and writing the review, I real
ter 6, p. 221) that the "volume effects" (increase in K) tend,ized that the long-run empirical evidence on the rate of
in the long-run, to dominate the "price effects" (decreasereturn to capital is much weaker than the evidence on the
in r), thus ensuring that capital share will go up. evolution of real wages.

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 Milanovic: The Return of "Patrimonial Capitalism" 527

but these arguments are not developed and "cohabit" the "coupon-clipping rentiers" and
come in the form of obiter dicta. the "working rich" (chapter 8).15 Essentially,
The validity of Piketty's model thus the modern "patrimonial capitalism" has suc
depends on the key proposition of relative ceeded in spreading modest property across
stability of the rate of return on capital in the entire top half of the income distribution
the face of capital deepening. In addition (as opposed to the top 5 percent in the early
to the empirical evidence he has amassed 1900s) and in creating high labor incomes.
for this proposition, Piketty defends it on But the ownership of capital, often
two grounds: high elasticity of substitution through inherited wealth, still remains cru
between capital and labor, and increasing cially important, and—in a remarkable sta
returns to top wealth holders, made pos tistic—Piketty shows that the annual flow of
sible by financial globalization, which keep inheritances as a share of national income
the weighted rate of return on capital high. in todays France, United Kingdom, and
However, because the proposition of "sticki Germany is about the same as a century
ness of r" may, in some cases, run counter to ago: between 8 and 12 percent of national
the economic logic and an alternative model income.16 Moreover, the percentage of pop
of factor remuneration is not presented, we ulation born in the 1970-1980s that receives
have to treat it as an empirical proposition
inheritance equal to the capitalized lifetime
whose accurateness will be confirmed or notearnings of a worker in the bottom half of
by future developments. the wage distribution is about 12 percent,
again the same as a century ago. Among the
coming generations it will likely reach 15
5. Patrimonial Capitalism
percent (chapter 11). In conclusion, Piketty
How does the view of the "return of agrees, yes, today's "patrimonial capitalism"
is not exactly the same as a century ago: it
capital" or even of the "return of the rentier"
has a broader base and the concentration of
square with the evidence of the rising impor
tance of education for earning high laborwealth at the top is less; high labor incomes
incomes and of something that Piketty andare more frequent. But its key feature—abil
Saez (2003) and Piketty here (last section
ityof
to generate a satisfactory income without
chapter 8, pp. 298-302) have documented: the pain of work—is still there. Rastignacs
dilemma is back.
the increasing share of high labor incomes
among the top 1 percent? Aren't we far fromIn some ways, there are three types of
the rentier capitalism of the nineteenth capitalism.
cen One "classical" of the Belle
tury Europe? Epoque with very high correlation between
Piketty agrees. High β does not mean ownership of capital and high incomes; the
exactly the same thing today as more than"convergence capitalism," where that cor
100 years ago. We are indeed living again inrelation
a was weaker because of physical
destruction of capital, low rates of return,
"patrimonial capitalism" (a new term coined
by Piketty, the inheritance-based capitalism),
but with (i) lower concentration of property
15 This point was originally made by Wolff and Zacharias
at the top, (ii) property ownership that has
(2009).
"penetrated" much more deeply into the
16 This is a useful and new statistic that, in detailed
middle classes, and with (iii) labor incomes
form, Piketty writes, exists only for France and the United
Kingdom. It is the sum of all bequests at the time of death
received by top managers and bankers that
and of "fiscal gifts" inter vivos ("donations" in French)
place them, alongside the "rentiers," into the
in a year divided by yearly national income. This topic is
top 1 percent. Thus, among the top 1 percentexpanded in Piketty (2011).

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528 Jou rnal of Economic Literature, Vol. LII (June 2014)

and rising importance of education; and the exceeds the rate of growth of the economy,
third "globalization capitalism," which repre- will always tend to convert entrepreneurs
sents a return to the nineteenth-century ver- into "rentiers." In such societies "the idea
sion with an important modification—high that unrestricted competition will put an
labor incomes now play a much bigger role. end to inheritance and move toward a more
But are these high labor incomes of bank- meritocratic world is a dangerous illusion"
ers and financiers classical labor incomes (chapter 11, p. 424).
determined by marginal productivity?
Piketty doubts it. He cites evidence to show „ „ . ,. , , r,
, ] , , , , , b. Emerging Market Economies
that such earnings at the top depend mostly °
on chance events that have nothing to do Where do China and India (to me
with the quality of management. (Although only these two emerging market econ
taking advantage of luck might require some fit in this scheme? Pikettys discuss
skill.) He does not think that the marginal it should have been apparent by now,
product of bankers and top managers can dominated by the experience of
be determined with any certainty: their high countries. Piketty does not address
wages are the product of a collusive agree- tion of emerging economies explicitly,
ment between themselves and the boards think that he would (not unlike Mar
(chapter 9). And in order to limit them, Preface to Capital) say that the mor
Piketty sees a role for high ("confiscatory") oped capitalist economies only show t
taxation. High taxes on the super rich will less developed the image of their own
have minimal revenue effects. But they will Once Chinas convergence ends, its gr
dissuade bankers and managers from asking rate will diminish. Its capital-outp
for such exorbitant salaries. As Piketty points (which Piketty does not show) may
out, when, as in the 1960s and the 1970s, the today, because China, like the Unite
U.S. marginal tax rate on highest incomes in the eighteenth and nineteenth centu
was in the neighborhood of 90 percent, it "wealth-young" country where wealth
did not make sense for managers to insist on low compared to the annual flow of i
another million if 90 percent of it would end But it will soon rise. Moreover,
in taxmans coffers. But with a marginal tax already experiencing a fast demo
rate of 25 percent, the story is entirely differ- transition, and thus in some fifty y
ent. So, the role of "confiscatory" marginal not be in a position too different fro
taxation is not to garner revenue, but to limit of todays France. It is just, one coul
high incomes, which are a waste, in the sense that China, like in a fast-forward m
that they are not needed to make greater has compressed the period of West
output forthcoming. In addition, taxation is development to some fifty to sevent
needed to curb political power of the rich. 17 rather than a century and a half.
In a nutshell, societies where the K/Y ratio
is h i ch and the rate of return on canital

18 This is indeed the finding reported by Davies et al.

(2011) in the first estimate (and its sequels) of global dis
17Piketty says it clearly (chapter 9, p. 533): "the decrease
tribution of wealth. The average per adult wealth in China
in the top marginal tax rate led to an explosion of veryishigh
estimated in 2011 at $21,000 while its GDP per capita
incomes, which then increased the political influence of
is $5,600 (ratio of 3.8). By comparison, the similarly cal
the beneficiaries of the change in the tax law, who had culated
an ratios for Switzerland and Italy are 6.5 and 6.1
interest in keeping top tax rates low or even decreasingrespectively (data on wealth, from a personal communica
them further and who could use their windfall to financetion by Jim Davies based on his joint work with Rodrigo
Lluberas and Anthony Shorrocks).
political parties, pressure groups and think tanks" (p. 335).

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 Milanovic: The Return of "Patrimonial Capitalism" 529

What about Africa and India? Piketty does empirical finding, but not more than that,
not say anything, but again, we can assume here it is set in an overall economic frame
that in some more distant future, the same work where we see why and how it emerged,
process will befall them, too. This, however, Pikettys theory of income concentration
opens a potential crack in Pikettys argument, can be called a "political theory" because
even if it is fully logically coherent. Namely, the main forces that shape concentration of
that the period of high global growth (on incomes are political: wars, high taxation, and
account of convergence) may continue dur- inflation.
ing the entire twenty-first century. And if it As in his previous work (Les hauts reve
does, then the inequality r > g may be over- nus en France) Piketty dismisses Kuznets s
turned as it was during "el periodo especial" view of income inequality increasing at
and the bleak future described in the book low-income levels, peaking at some mid
may be postponed by at least another one dling income, and diminishing as the coun
hundred years. tiy becomes rich. He does so on several
grounds. First, he does not see any spont
_ „. . , „ neous forces in capitalism that would drive
7. Dismissal of the Kuznets Curve . ,. r . 1 η , , „
J inequality ot incomes down: both Kuznets
From the fact that in this review only and Tinbergen saw them
now we come to the issue of interpersonal broader education that
distribution of income, the reader will have mium down. Second, he
concluded that we are dealing here with an misinterpreted a temp
immensely rich book. In some 700 pages inequality after World
are packed so many topics, insights, com- a more benign nature
ments and observations that affect almost all Piketty argues that it w
spheres of economics, that no single review and unrepeatable circum
can do them justice. But the distribution of no "structural transf
income between individuals, and concentra- ism (Pikettys French
tion of income at the top, are so much linked is stronger). Third, he t
with Pikettys work that they must be men- theory owes its success
tioned as indeed they play an important role. mistic message ("fairy
The well-known findings of a U-shaped conveyed during the Col
income concentration curve over the last poorer capitalist econ
one hundred years in most capitalist coun- ever condemned to hi
tries, but especially in the United Kingdom was the light at the end
and United States, are reprised here. But followed the Washingto
they are also placed in a larger framework enough, not only will me
of a similarly U-shaped movement in the inequality will become
capital-output ratio and the reverse (inverted rightly points out that
U-shaped) movement in marginal tax rates. Kuznets (which Kuzn
These last two forces basically determine edged in his famous 19
what happens to income concentration: if the Address) were minimal,
capital-income ratio is high and taxes low, Kuznets is not the on
incomes will be concentrated. While in the criticized for not using s
previous work of Piketty and associates, the evidence or reading too
U-shaped historical movement of income few data points availab
concentration was presented as an important ing work that was undul

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530 Journal of Economic Literature, Vol. LII (June 2014)

in the spirit of "el periodo especial" and the 8. Concentration of Incomes versus
Cold War's idea of "benign capitalism."19 Inequality or Fiscal Data versus Household
Growth theory with constant income shares Surveys
of capital and labor (Solow-Swann) implied
that wage bargaining was meaningless Piketty has revolutionized the field of
(by pushing for higher wages, you would income distribution by the use of fiscal
reduce employment and leave labor share sources and by his focus on top income
unchanged); Gary Beckers idea of human shares. It is thus striking, although not alto
capital obfuscated the classical distinction gether surprising, to read a book that, in a
between "earned" (labor) and "unearned" significant part deals with interpersonal
(property) income; and Franco Modigliani's income distribution, but contains not a single
("one-dimensional," p. 384) life-cycle the- reference to household surveys or Gini coef
ory with optimal zero assets at the end of ficient. In effect, the latter is dismissed as an
one's life is manifestly wrong, as people "aseptic" measure of inequality because of its
routinely leave large inheritances. There lack of intuitive meaning (what does a Gini of
were, Piketty intimates, also some political 0.45 mean to an average person?). It conveys,
undertones that made these theories partic- Piketty argues, very little information about
ularly attractive: constant factor shares led income distribution. Piketty thinks that it is
to the shelving of the issue of distribution, perhaps that very aseptic feature that con
human capital put on the same footing of tributed to Gini's popularity with statisti
"capitalists" workers and property owners; cal offices and politicians. On the contrary,
life-cycle theory implied that we need not income shares are intuitive and meaningful,
worry about inherited wealth. And when Piketty's preference is to split the distribu
one thinks of these theories together, rather tion into four parts: bottom 50 percent, the
than separately, it does seem that they all next 40 percent, top decile, and as a part of
had a very optimistic halo that may be at it, top 1 percent. It is indeed an appealing
odds with what the Zeitgeist is today. It way to look at the distribution, even if the
does not necessarily makes them wrong, but reader may at times get tired or confused
Piketty is, I think, right to underline that, by a plethora of numbers and shares, which
from Ricardo and Corn Laws, all success- at some point, not unlike the reviled Gini,
ful economic theories tended to reflect the begin to lose their intuitive appeal,
prevalent issues and the spirit of the times. Piketty's use of fiscal data can also be ques
Indeed this may be an advantage for the tioned as the sole (or even the best) approach
acceptability of Piketty's theory today, but to the analysis of income distribution. Their
nobody can tell whether this would remain advantages are already mentioned: long-term
so in the entire century and beyond. series (a centuiy or more in developed coun
tries), and ability to focus on top incomes
and to capture them much better than
household surveys.20 And also to focus on
what Piketty correctly calls "concentration"

19 Keynes is criticized (p. 600) for accepting Bowley

constancy of factor shares as a "law" while having access to
20 Partly because household surveys are always samples
only a couple of data points from the 1920-1930 Britain. and rich individuals are few in numbers (although if we
Tinbergen's race between technology and education, had data on the entire population their inclusion may have
recently made popular as the explanation for the rising a nontrivial impact on inequality statistics), and partly
income inequality in the United States by Goldin and Katz because the rich refuse to participate in surveys more often
(2010), is thought "simplistic" (p. 305). than the nonrich (see e.g., Deaton 2005).

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 Milanovic: The Return of "Patrimonial Capitalism" 531

of incomes, rather than inequality. The dis that disposable income inequality declines.
advantages, however, are significant too. Let It did not happen in the case of the United
me run through some of them. Historically, States, as we know from the detailed work
income tax returns have been filed by a small by Burkhauser et al. (2012), who have com
percentage of the population even in todays pared non-top-coded U.S. household surveys
rich countries, so the long-term series can be with Piketty's results.22 But such a divergent
of dubious quality. The same is true of devel movement cannot be excluded, in principle.
oping countries now. At best, we might know To conclude: the concentration of market
the top of an income distribution (the richest income among fiscal units may or may not
tax filers) but have no information about the tell us much about the inequality of dispos
bulk of the population. Whether the highest able income among individuals, which is
tax filers are really the richest people is also ultimately the concept we are interested in.
questionable, not only because of the obvious I listed previously the caveats that have to go
incentive to underreport income, or because with any use of fiscal data. Piketty mentions
in the past some particularly rich classes some of them (chapter 8, pp. 281-83; chap
were exempt from taxation. There is also an ter 9, pp. 328-30), but does not dwell much
important, even if technical, detail. Taxes on it and essentially ignores them. However,
are paid by fiscal units, not by individuals: so on a more positive note, the revolution that
the richest fiscal units may change with the Piketty and his associates have brought to
tax rules (e.g., whether it is more advanta the field has certainly made everybody much
geous to file jointly or separately). Also, the more sensitive to the noncapture of top
income that is reported to tax authorities incomes by household surveys and to the
is fiscal income, not economists' concept need to combine (nobody yet knows how)
of income. For example, until 1987, inter household surveys that provide reasonably
est on government bonds did not appear in reliable income estimates for the bulk of the
U.S. tax returns because it was not subject to population with fiscal data that are undoubt
taxation; every economist would include it in edly better suited for the very top of income
income, however. distributions.23
Even if we disregard these problems,
Pikettys calculations refer mostly to mar
ket income—that is, income before govern
ment transfers and taxes. It is quite possible
that an increased concentration of market 45 percent. For the top 1 percent, the corresponding
numbers are 10 percent and 16 percent. (My calculations
income (such as Piketty and Saez report are from the "lissified" version of CPS; Piketty's numbers
for the United States) is not accompanied
from figures 8.7 and 8.8, p. 472.)
22These are internal Current Population Survey data,
by increased concentration of disposablewhere highest incomes are not top-coded (that is, reduced
income if taxes and transfers have become so as not to allow the identifications of rich individuals) as

more redistributive.21 It could even happenthey normally are in the surveys made available to the pub
lic. But even the latter data do confirm a steady increase
in U.S. income inequality when measured by disposable
income across persons or households (see e.g., Brandolini
21 Direct (and somewhat mindless) comparisons and Smeeding 2006, OECD 2011). Thus, in the United
between household surveys that generally present the data States, household surveys and fiscal data do agree on the
on the distribution of postfisc income and fiscal data,which trend. In some other countries, most notably in India,
are pre-fisc, are thus biased. The differences, even among they do not: household surveys show much more sluggish
the top, are much less when we compare like with the like. changes than fiscal data (see Banerjee and Piketty 2005;
Using the 2010 U.S. publicly available micro data from the Deaton 2005).
Current Population Survey (CPS), the top decile's income 23 For recent attempts, see Lakner and Milanovic
share in market income is 37 percent versus Piketty's (2013) and Alvaredo and Gasparini (2013).

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 532 Jou rnal of Economic Literature, Vol. LII (June 2014)

9. Economic Policy Recommendations unlikely to be forthcoming from the coun

and Method tries that currently benefit the most from the
opacity of financial transactions and offer tax
The policy recommendation that has havens to the rich. Moreover, some emerg
attracted most attention is Piketty's breath ing market economies may be unwilling to
taking call for global taxation of capital. It subscribe to it. But a more modest proposal
follows directly from his concern with r > g built around the OECD members (or the
European Union and the United States)
inequality. The only way to reverse it, if g is
exogenously given, is to reduce r. Despite is, Piketty argues, feasible. He takes the
its grandiose and perhaps unrealistic nature recently passed U.S. legislation (Foreign
(Piketty calls it, possibly in a nod to John Account Tax Compliance Act) as one of the
Rawls, a "useful utopia"), one would be first steps that could lead to regional taxation
wrong to dismiss the proposal out of hand. of capital. I will not discuss here other pros
Nobody else believes that it could be imple and cons of such a system. It is a big topic for
mented right now, and neither does Piketty. fiscal specialists, and, as is apparent, it runs
But it is based on several strong points. into a host of political economy problems.
First, the analysis sketched so far (if one But it is important to put it on the table and
accepts it fully) shows the flaws of an inheri not dismiss it out of hand.
tance-based system that favors those who do Appropriately for such a wide-ranging
not need to work for their sustenance. This book, Piketty closes his book with an essay
can be modified by a tax on capital. Second, on the method to be used in economics. He
regards economics as a social science (where
taxes on capital, whether in the form of taxes
on land or inheritance, have a long history— the emphasis is on "social") that can flourish
probably the longest of all taxes, precisely only if (i) it asks important, and not trivial,
because some forms of capital were dif questions (so adieu Freakonomics and ran
ficult to hide. Extending this to include all domistas), and (ii) uses empirical and histori
forms of capital seems logically consistent. cal methods instead of sterile model-building.
Third, technical requirements for such a tax These issues have been debated ad nauseum
(which, in a rudimentary form exists in most by the economists, and Piketty has nothing
advanced economies) are not overwhelming. new to add to that, except perhaps in a most
Housing is already taxed; the market value important way—namely, by showing in his
of different financial instruments is easily own work how these two desiderata should
ascertainable and the identities of owners be combined to create economic works of
known. 24 durable importance.
The problems are, of course, political.
The application of such a tax by individual 10. Closure
countries, even the most important, like the
United States, can easily lead to the outflow Capital in the Twenty-First Century is a
of capital. Thus, international collabora book of huge scope and breadth of vision.
tion is indispensable. That collaboration is It is unabashedly classical in its approach;
but its classicism is based on incomparably
better and richer data than ever available.
24 It may be interesting for the reader to get a sense of It is a very well-written book, erudite but
notional taxes proposed by Piketty: 0 percent for capital not heavy, of limpid prose where I do not
(wealth) under €1 million, 1 percent for capital between
think that I encountered more than half a
€1 million and €5 million, and 2 percent for capital above
€5 million (p. 517), dozen sentences I could not understand or

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 Milanovic: The Return of "Patrimonial Capitalism" 533

had to read twice. It is directed mostly to Atkinson, Anthony Β., and Thomas Piketty, eds. 2010.
economists, but also to the general educated Top Incomes: A Global Perspective. Oxford and New
York: Oxford University Press.
reader who "does not run away as soon as Atkinson, Anthony B., Thomas Piketty, and Emmanuel
he sees a number." Piketty uses irony with Saez. 2011. "Top Incomes in the Long Run of His
finesse, particularly in his footnotes where he tory."Journal of Economic Literature 49 (1): 3-71.
Baneijee, Abhijit, and Thomas Piketty. 2005. "Top
does not spare powerful political figures or Indian Incomes, 1922-2000." World Bank Economic
famous economists. Review 19 (1): 1-20.
Thomas Piketty has provided a new and Brandolini, Andrea, and Timothy M. Smeeding.
2006. "Patterns of Economic Inequality in Western
extraordinarily rich framework, allowing Democracies: Some Facts on Levels and Trends."
us to think about the recent increase in Political Science and Politics 39 (1): 21-26.
inequality not as an isolated Burkhauser,
phenomenon Richard V., Shuaizhang Feng, Stephen P.
and to forever discuss the merits and demer Jenkins, and Jeff Larrimore. 2012. "Recent Trends in
Top Income Shares in the United States: Reconciling
its of high-skill biased technological progress Estimates from March CPS and IRS Tax Return Data."
versus trade openness, but to see the risingReview of Economics and Statistics 94 (2): 371-88.
Clark, Gregory. 2007. A Farewell to Alms: A Brief Eco
inequality as part of a changing nature of nomic History of the World. Princeton and Oxford:
modern capitalism. Princeton University Press.
I would conclude, as I began, with a perDavies, James B., Susanna Sandström, Anthony Shor
rocks, and Edward N. Wolff. 2011. "The Level and
sonal observation. When reading Pikettys Distribution of Global Household Wealth." Eco
book, it is indeed hard to go back to thinking nomic Journal 121 (551): 223-54.
Deaton, Angus. 2005. "Measuring Poverty in a Grow
about anything else: one gets totally absorbed
ing World (or Measuring Growth in a Poor World)."
in it. This is perhaps the best compliment Review of Economics and Statistics 87 (2): 395.
that the author of an almost 700-page-long
Deaton, Angus. 2013. The Great Escape: Health,
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Oxford: Princeton University Press.
Don't take this book on vacation: it will spoil
Fisher, Irving. 1919. "Economists in Public Service."
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Goldin, Claudia, and Lawrence F. Katz. 2010. The Race
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