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This article is an excerpt from the Shortform book guide to "Capital in the Twenty-First Century" by Thomas Piketty. Shortform has the world's best summaries and analyses of books you should be reading.

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What is Capital in the Twenty-First Century about? Why does Thomas Piketty believe capitalism generates economic inequality?

In Capital in the Twenty-First Century, Thomas Piketty analyzes national incomes, income tax returns, estate tax returns, and other financial data across multiple countries and centuries. The result is a groundbreaking study of the history of economic inequality and its implications for 21st-century society.

Keep reading for an overview of Capital in the Twenty-First Century by Thomas Piketty.

Capital in the Twenty-First Century

In Capital in the Twenty-First Century, Thomas Piketty argues that capitalism is the leading cause of economic inequality. This is because the rate of return on capital, “r,” has nearly always exceeded the rate of overall economic growth, “g.” In other words, r>g. Piketty identifies r>g as a fundamental economic law—and the key divergent and destabilizing force in capitalism.

He warns that we are headed toward an economic future in which existing wealth (wealth earned in the past) constitutes an ever-larger share of total global income. He warns that the 21st century may mark the return of an era dominated by wealthy heirs and heiresses—a stagnant and low-growth society defined by old wealth passed down from generation to generation and offering few opportunities for upward social mobility.

Part 1: Capital, Income, and Output Growth

Before discussing income and wealth inequality in-depth, Piketty establishes the broader intellectual framework that supports his analysis. He does this by defining some key economic terms, introducing the concept of the capital-to-income ratio, and exploring how we calculate capital’s share of national income.

Part 2: The Future of Growth

Piketty writes that the strong population growth of the past few centuries has been the primary engine of economic growth. This is because, as we explored, the key drivers of economic output are a country’s population (the raw number of people able to produce goods and services) and its productivity per capita (how much each person can produce in a given time). In other words, the more people there are, the more that can be produced. He warns, however, that the demographic trends that have sustained this growth represented a period of historical aberration—one that is likely coming to an end.

Part 3: The Diverging Labor/Capital Division of National Income

Piketty warns that the rising capital-to-income ratio will result in capital accumulating an ever-growing share of national income

As Piketty writes, understanding the capital-income ratio allows us to understand capital’s share of national income—which is always equivalent to the rate of return on capital multiplied by the capital-to-income ratio.

According to Piketty, the average rate of return on capital in most advanced economies is around 5%. And, as we saw earlier, the capital-to-income ratio is usually around 600%. If we multiply the two, this gives capital a 30% share of national income—meaning labor earns 70%. But if the capital-to-income ratio rises—which, as we’ve seen, will happen as population growth begins to decline—capital will consume an ever-larger share of national income. This contributes to inequality because it leaves a smaller slice of the overall economic pie for labor.

Part 4: The Return of Inherited Wealth

In the preceding sections, Piketty highlighted the coming demographic slowdown and the tendency of capital returns to be greater than overall growth (which Piketty notes mathematically as r>g) in a world with a rising capital-to-income ratio.

As growth slows down, Piketty warns that inherited wealth will come to account for a much greater share of overall wealth than that earned through work and savings. He writes that this is another indicator of rising inequality, as wealth earned in the past and handed down to rich heirs comes to far eclipse the wealth that people can earn in a lifetime.  

(Shortform note: Some evidence suggests that the coming wave of inheritance has already begun. One paper relying on Federal Reserve and academic data estimates that about $36 trillion in wealth is set to transfer from its current owners to their heirs over the next 30 years. And that’s just accelerating the already-skyrocketing pace of bequests. In 2016, Americans collectively inherited a staggering $427 billion—an increase of 119% from a generation ago.)

Part 5: The Role of Wage Inequality

So far, we’ve primarily explored concepts related to the dynamics of capital inequality—the capital-to-income ratio, the law of r>g, and the capital ownership distribution. But we haven’t yet touched on what Piketty identifies as a significant driver of overall inequality—wage inequality.

Piketty writes that economic inequality derives from wage (or income) inequality and capital (or wealth) inequality. As we’ve seen, capital inequality is inequality of income from capital due to unequal distribution of ownership of assets or unequal rates of return on different classes of assets.

Wage inequality, on the other hand, is inequality of income from labor. There is a multitude of factors at work in producing wage inequality—skill differences; hierarchical positions within organizations; educational attainment; as well as factors like age, race, and gender discrimination.

Part 6: The Global Wealth Tax

Piketty argues that since the 1980s, wealth inequality has made a troubling comeback that demands a response. His proposed solution is a global wealth tax.

Such a tax would be progressive, with higher fortunes taxed at a higher marginal rate than smaller fortunes. The tax would be relatively low (perhaps 1-2% of net worth per year) and would be assessed annually on the combined net worth of market assets of all asset classes.

Piketty argues that the purpose of the tax would not be to raise revenue. Instead, its purpose would be to stop the unchecked accumulation of wealth by the global hyper-wealthy, end the financial opacity that allows so much of the world’s wealth to exist in the shadows, and bring some much-needed redistribution of economic resources.

Capital in the Twenty-First Century by Thomas Piketty

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Like what you just read? Read the rest of the world's best book summary and analysis of Thomas Piketty's "Capital in the Twenty-First Century" at Shortform .

Here's what you'll find in our full Capital in the Twenty-First Century summary :

  • An analysis of incomes, tax returns, and estate tax returns across different countries
  • How capitalism, by its nature, generates economic inequality
  • How inherited wealth will soon account for more than earned income

Katie Doll

Somehow, Katie was able to pull off her childhood dream of creating a career around books after graduating with a degree in English and a concentration in Creative Writing. Her preferred genre of books has changed drastically over the years, from fantasy/dystopian young-adult to moving novels and non-fiction books on the human experience. Katie especially enjoys reading and writing about all things television, good and bad.

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