Thomas Piketty’s new book, Capital in the 21st Century, has created a lot of buzz in the economics blogosphere. Having not actually read the book, I’d still like to throw in my two cents on the problem with (what I understand as) its underlying thesis. The 20th century, according to Piketty, was anomalous in its low level of inequality because the rate of growth of the economy was greater than the rate of return on capital . In the past, and increasingly so in the present day, , in which case the holders of capital become increasingly rich compared to the rest of the populace.
The central issue I see with this thesis is neglecting the role of consumption, and the decreasing marginal utility thereof. It’s hard to deny that the West in the 20th century saw both a great diminishment in wealth inequality and a great increase in general well-being, but we shouldn’t leap to the conclusion that the one caused the other. Not all growth is created equal, and we need to separate growth that improves well-being from growth that simply increases consumption and even worse, tends to shifts the utility curve to the right so that more consumption is required.
On the one hand, we eliminated horrific diseases like polio and smallpox and introduced enormously beneficial technologies like computers and the Internet. The greatness of these advancements lie in their increasing marginal utility with small marginal costs: the more people get vaccinated against deadly diseases and the more people use information technology, the better and cheaper these things become.
On the other hand, two of the worst trends of the 20th century were the increase in the prices of housing and transportation, the two categories which currently lead consumer expenditures. I’m sure it was great to be the first person in town with a car or the first family on its block to have a big house with a big yard. Cars are fun to drive, and a big part of the early thrill must’ve been beating out the plebes traveling by foot or by horse, and similarly for big houses. But today, driving a car is not only not fun (who enjoys being stuck in traffic?), but is now essentially a requirement to live and work in many parts of the US. Yes, it’s true that 20th century growth transformed the automobile from a luxury item into a necessity. And that’s bad! Before this wonderful “growth,” the average American didn’t need to spend a huge percentage of their income on transportation. And similarly for housing: now that many places have written single-family dwellings with plenty of yard and plenty of parking into law, people have little choice but to spend a hefty chunk of income on these things.
Inequality shouldn’t just be about absolute wealth numbers. It should be about how many people can actually make a living. And because of much of that 20th-century growth, we’ve vastly increased the requirements for making a living. Imagine if instead of the automobilized sprawl we created, we had built efficient, walkable cities with excellent transit. Then most of the money people now put towards paying for housing and transportation could instead be saved and invested. And investing today is easier than ever! If everybody shares in capital, we shouldn’t be concerned by a high rate of capital returns. But instead, we’ve forced people into serfdom to pay for “necessities” like cars and homes.
I’m not a luddite, nor am I necessarily anti-materialist. But I’m frankly alarmed by what has, through a combination of legislative fiat and societal pressure, become the minimum standard of living. A lot more people could make ends meet if we didn’t place the ends so far apart in the first place! There’s no reason why, for instance, a single person shouldn’t be able to live in a small studio apartment in a city for a couple hundred dollars per month within easy walking or biking distance of their job. But this is quite frankly impossible: anywhere with cheap enough housing will probably not be walkable or bikeable, because walkable and bikeable places are in limited supply and high demand.
Instead of the power of growth, let’s focus on the power of thrift. The 20th century was an amazing time for thrift! Entire industries are now obsolete due to the rapid progress of technology (though some, like academia, have yet to admit it). Globalization has made basic necessities like food, clothing, and furniture incredibly cheap. Could a person at the dawn of the 20th century even imagine how much of that stuff we simply throw out because we have such an embarrassing oversupply? Surely we must live in paradise! But our problems lie in our built environment. We’ve given up control of that to the bureaucrats, and the result is predictably miserable. Thrift is nowhere to be seen, but neither is quality. The appetite for bigger homes, wider streets, MOAR PARKING grew and grew over the course of the 20th century, and we are hardly better off for it. Before we become alarmed at the impending infrastructure budget shortfall, we should take a step back. Growth is not always good. Sometimes the answer is not more, but less.