Tom MacWright

I read Capital in the Twenty-First Century by Thomas Piketty on


Capital is an incredible book, one that I’ll be processing for a long time and will likely re-read.

I didn’t know much about it before I started: I knew it was about the wealth tax and that it was critically acclaimed.

It’s surprisingly readable. It’s surprisingly not about the wealth tax - in its hundreds of pages, only 50 or so are dedicated to pitching the tax. The rest is dedicated to defining an economic philosophy based on first principles in accounting, history, and data. It’s refreshing, delivered without jargon and without relying on abstract theory.

Capital is, of course, long. It took me about two months to finish, with a several-week pause in the middle as I plodded through some of the middle chapters. It covers a lot of ground, enough to comprehensively justify the proposed policies and also give lots of detail to any statement. You learn that inequality is high, but hasn’t always been, that the rich are doing well, but not always. To the extent that he can, Piketty takes the extremely long view.

I highly recommend this, if you have the time and focus, not just because it pitches the wealth tax, but because it’s the most appealing take on economics in general that I’ve encountered. It’s economics for the computer age, but not that it uses data science or whatever: more that it just uses computing to do large-scale historical research and uses line-chart visualizations very effectively.

There are very few flaws. The length feels justified but I’m not sure that time is always spent wisely: some large claims are glossed over and small claims are dissected. And it relies on, funny enough, some familiarity with classic French and British literature in order to set historical context. I have not read much classic French fiction.

I might eventually transcribe my notes from this one - they’re just highlighted interesting facts and thesis I picked up.

I don’t know what could be said about Capital that hasn’t already been: it’s pretty darn great. It lives up to the hype.

Summary of the executive pay problem in Capital

All salaries are arbitrary, but the ones at the top are the most arbitrary and the ones at the bottom are the least. We can more easily quantify the incremental advantage of people who perform clearly-defined tasks. We can’t easily quantify the effectiveness or performance of executives, because they the only people in their jobs, they change jobs more rarely, and their skills are in fuzzy decision-making rather than craft or analysis.

Lower top-end income taxes made executives more incentivized to argue for higher pay. Progressive taxes, instead, meant that making $2 million before taxes was only slightly better than making $1 million. Without progressive taxation, every additional million still counts.

Executives salaries are set by boards, who are often picked by the executives. This is different from how all other salaries are set within a company hierarchy: executives are in a much better negotiating than anyone else, and more likely to receive unusually high pay.

We, culturally, are okay with it. Criticizing the income of billionaires is gaining traction but is not the norm in most circles. A lot of people think that CEOs deserve their pay because they’re innovating or have rare skills.

But: CEO pay does not relate to performance. Piketty’s data indicates that CEO pay had more to do with each company’s industry, rather than its performance in the industry. The data tells that you’re more likely to make outsize pay if you’re in a thriving industry, even if you are a poor decision-maker as CEO.

What taxes are for

Piketty advocates for a wealth tax in a much different way that candidates Warren or Sanders did in the last primary election. Every time that Sanders would bring up the wealth tax, he would tie it to revenue: that by taxing the wealthy, we’d be able to pay for things like free college. This is sort of an appealing argument, but it doesn’t really work.

Piketty, instead, makes a really interesting distinction. Taxes don’t have to be about revenue. You can institute a wealth tax because inequality is bad, just like you can tax cigarettes because smoking kills. Inequality, as a social ill, is a problem to solve, not just a source of revenue. And furthermore, though a wealth tax could help with the free college goal, the top real costs of the US government - healthcare, education, and defense, are expensive on a completely different level. The tax base of billionaires isn’t broad enough to cover those things: you actually do need to tax a wider swath of citizens to do it.

It’s fair that politicans need an alternative framing. But the idea of taxes being narrowly about revenue was so fixed in my mind that this simple observation really unlocked another perspective.