Taking on the heiristocracy: history shows that growth alone won't stop vast economic inequality.

• Author: Geier, Kathleen
• Position: Capital in the Twenty-first Century - Book review

Capital in the Twenty-first Century

by Thomas Piketty

translated by Arthur Goldhammer

Belknap Press, 696 pp.

In his annual address, the president of the American Economic Association, Irving Fisher, sounded the alarm about the issue he described as "the great peril today"--the "striking inequality of capital," which, he argued, was "perverting" American democracy. It was "distressing," he said, that wages were "actually decreasing while profits have been increasing." "Something like two-thirds of our people have no capital," said Fisher, while "the major part of our capital is owned by less than 2 percent of the population." Moreover, "half of our national income is received by one-fourth of our population."

In the year 2014, the theme of Irving Fisher's address is resonant--which is why you may be surprised to learn that he gave it in 1919. Fisher, moreover, was a mainstream economist, very much in the neoclassical tradition. Milton Friedman called him "the greatest economist the United States has ever produced." Today, the overriding concern of most mainstream American economists is what it has been for decades: economic efficiency. Questions of equity, on the other hand, have fallen by the wayside. But as Fisher's address vividly demonstrates, concerns about distribution were once seen as vitally important.

In his important new book, Capital in the Twenty-first Century, French economist Thomas Piketty asserts that one of his chief goals is "putting the distributional question back at the heart of economic analysis." As he notes, today the concentration of wealth has soared to levels that have not been seen in over a century. In recent years, the issue of economic inequality has moved out of the seminar rooms to become an issue of broad public concern. We've heard it in the rallying cry of the Occupy movement--"We are the 99 percent!"--and in Pope Francis's thundering denunciations of capitalist excess and "trickledown" economics. We've seen it in the surprising electoral success of economic populists like Elizabeth Warren and Bill de Blasio. Late last year, President Barack Obama gave a speech devoted to the subject, and the Democratic Party is pushing economic inequality as its major campaign theme for the 2014 midterm elections.

Inequality is on the political map, all right, and without question, the economist most responsible for putting it there is Thomas Piketty. Beginning in 2003, Piketty, along with his colleague and frequent coauthor Emmanuel Saez, published a series of groundbreaking studies documenting the dizzying rise of income inequality in the United States. Piketty's innovation in this empirical work was his use of tax returns, rather than household surveys, to measure inequality. Tax returns give a more accurate picture of inequality than household surveys, which frequently fail to capture what is going on at the top of the income distribution. Partly this is because of nonresponse bias (rich people are far less likely to participate in such surveys) and partly it is due to the practice of "top-coding," which caps the reported top incomes at a maximum value and thus prevents the exact amounts from being disclosed.

Piketty and Saez have demonstrated that while groups at the top of the income distribution have increasingly reaped disproportionately large economic rewards, in recent de cades it is those with incomes at the very top--the...