Is a New 'Gilded Age' Truly Inevitable?

June 2, 2014

Thomas Piketty’s 696-page bestseller, Capital in the Twenty-First Century, is the book of the moment.

After years of exhausting study into the history of income and wealth, Piketty finds that returns on capital invariably grow faster than returns on labor and that there’s no inherent force in capitalism to reverse this inevitability. As a result, inequality will continue driving higher and higher. Our future will look more like our past Gilded Age with every passing year.  

Here’s Larry Summers’ take on all of this—it’s perhaps the best review I’ve seen:

This rather fatalistic and certainly dismal view of capitalism can be challenged on two levels. It presumes, first, that the return to capital diminishes slowly, if at all, as wealth is accumulated and, second, that the returns to wealth are all reinvested. Whatever may have been the case historically, neither of these premises is likely correct as a guide to thinking about the American economy today. …

Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

Piketty's book is best seen then as a study on wealth rather than capital. Put that way, it doesn't seem too surprising to say that technological gains (which is different than saying capitalism itself) will encourage more wealth creation than ever before. Assuming Piketty’s findings hold true, the sort of growing inequality he points to may be a feature of capitalism undergoing a period of great change, not an inherent bug to root out. And it will not be permanent.

Ultimately, the danger we face with Piketty is in reading too far into today's circumstances. A century removed from World War I's devastation of capital, we have now regained those same heights of wealth. If we had looked at the future from 1910, perhaps we would see the same things that Piketty does. That would not be true a decade later. We risk making a similar error in seeing too much of the future in today's turmoil.

Capital says less about the twenty-first century than it does about today—and our fears of tomorrow.