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Human Capital in the Twenty-First Century: Piketty, Progress and the Distribution of Wealth

Thomas Piketty’s magnum opus Capital in the Twenty-FIrst Century made huge splashes especially after the publication of its English translation last spring. The bombshell argument of the huge book, supported by a massive amount of data and analyses, is two-fold. First, income inequality is increasing. And second, this will propel the economy back to the patrimonial capitalism dominated by inherited wealth.

Piketty gave recently a wonderful talk at the London School of Economics about his book. One thing that struck me at the very beginning of the talk was that he emphasized his books reliance on history. While I cannot argue with Piketty’s economical argumentation, which I, along with many of his supporters, believe to be mostly correct, I do believe that its applicability is somewhat suspicious in the present day world. The reason to this is simple: progress.

I believe that using that fancy academic two word disclaimer, ceteris paribus, Piketty is correct. That is to say, all other things remaining the same, as income inequality grows, capital will be accumulated in clusters of already wealthy families and individuals. But I believe the situation is complex enough to warrant further scrutiny.

First, the global economy appears to be in a fluctuation, where structural changes happen faster and faster each year. The dispersion of information, and as its consequence the creation of new innovations (which in turn disperse information faster) creates a spiralling motion where the structure of supply and demand of goods keeps fluctuating faster and faster. Applying historical evidence in a world in such turmoil is perhaps not the best strategy. Modelling patrimonial capitalism of the 19th century may not be at all a viable way to describe the market, even if the capital itself was accumulated to the wealthy individuals. Having lots of money is not worth much, if most of it is tied in sinking assets.

Second, there is the question of whether income inequality is a bad thing. Of course, I would not argue against the massive amount of correlative evidence that goes to show that in countries with more dramatic income inequality also the general well-being of the people is worse. But there is more to well-being than just income.

Interestingly, while income inequality has grown in the last few decades, so has the general overall wealth of people. While capital has been accumulated to the most wealthy individuals, also absolute poverty has been halved from the situation twenty years ago. While the comparative wealth gap has grown, absolute wealth has also been distributed more widely.

I have been a big critic of Adam Smith’s idea of the invisible hand, but in a sense something like that is happening here. The reason, though, is not crumbs of capital falling from the super-rich to the poor, but once again in progress, and its consequent increase in efficiency in producing goods and services.

The luxury of yesterday is the norm of today. This applies as much to luxury goods like TV sets and computers as to basic everyday needs like food and clean water. Producing these goods and services is today far more efficient than it was twenty years ago, and the trend in becoming even more efficient looks good.

The third and what I believe to be the most important feature of progress is the increasing relevance of human capital. That is to say, understanding, knowledge, skills and creativity. Interestingly, with information moving faster and faster, with production efficiency growing, and with the availability of both knowledge and the means of production, the tables are turning.

The significance of monetary capital is becoming less important in a world, where you can build an app worth millions of dollars in a few months in your bedroom. Such leaps to success would not have been possible yet a hundred years ago, where owing to the market structure, just entering an existing market would have required tens or hundreds of thousands of dollars. Now it’s enough that you have a cheap laptop.

The true challenge in capital of the 21st century is, I believe, the equal distribution of human capital. That is to say, guaranteeing equal rights to education and to the knowledge bases we have available to us. While capital will continue to play a significant part in a capitalist market economy, I believe that with the continuing acceleration of both innovation and the market structure, it will be increasingly human capital that will differentiate the future successes from the failures.

The take home messages, I believe, are the following. First, we must take seriously the fact that the world of today is not the world of the past. And more so, the world of tomorrow will be something that no one of us understands perfectly well. So we need humility, and careful optimism in facing the future.

Second, given the increase in production efficiency, we should move from measuring monetary exchange to measuring actual well-being. With more efficient production better products are created at a fraction of the previous price. This will be reflected in slowing economic growth – but also in the increased well-being of the people consuming the better goods.

And finally, we should take seriously the fact that the capital of 21st century is not measured in dollars, but in ideas.

We are, indeed, moving towards a post-capitalist market economy, where true added value for commerce will arise from innovation, not from applied funds.

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One thought on “Human Capital in the Twenty-First Century: Piketty, Progress and the Distribution of Wealth

  1. Louis Chartrand says:

    What a weird post.

    1. You seem to suggest inequalities caused the wealth expansion which in turn has brought so many poor people out of poverty. The latter is debatable, but the former is false. Most economists seem to think it’s actually the opposite.

    2. “Luxury of yesterday is the norm of today”. Certainly. But the poor people of today have a cellphone out of necessity and a TV set because rich people give them away, but they have trouble feeding themselves and their children. They have clean water and moldless livings if their landlord is diligent, which they often aren’t when the laws lack teeths. And I’m talking about rich countries.
    Of course, 17th century peasants had it worse, and most people eat well, but a sizable share of the population having trouble feeding and housing themselves is a tragedy when it could be prevented. It’s also a loss of human capital, to use your expression – this kind of stress affects creative workers in a way it didn’t affect assembly line workers. It makes people unfit for the knowledge economy.

    3. There is a weird disconnect between capital and human capital. Ideas cost money to develop, nurture, transmit and realize. I can’t imagine how you could think otherwise.

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