Piketty and Marx

Issue: 143

Tomáš Tengely-Evans

A review of Thomas Piketty, Capital in the TwentyFirst Century (Harvard University Press, 2014), £29.95

In January, Oxfam’s “Working for the Few” report tore apart the idea that wealth “trickles down” and revealed that just 85 billionaires now own more than the poorest half of the world’s population. In the past year alone Britain’s 1,000 richest individuals have seen their wealth increase by
15 percent from £449 billion.1 While the talk is now of economic recovery and above inflation wage rises, such claims could not be further from workers’ actual experience. The British government has, for instance, imposed a 1 percent pay freeze on public sector workers, prolonging the longest wage squeeze since the first Great Depression in the 1870s.2 There are continued attacks on the “social wage” in the form of cuts to unemployment, disability and in-work benefits.

This helps explain why Capital in the TwentyFirst Century (henceforth, Capital 21), by the French economics professor Thomas Piketty, is topping book sales. It has been both lauded by liberals such as Paul Krugman, and attacked by the right wing and business press. Inequality has always been a significant topic of discussion for the left. But the impact of austerity, and the struggle against it, has pushed the issue into the mainstream. Inequality has also assumed particular importance in debates on the nature of “neoliberalism” and on the underlying causes of the global crisis of capitalism. One of the more significant responses to Piketty’s book from the right was that of Chris Giles, writing in the Financial Times, the British ruling class’s house journal, which alleged that he had made basic mistakes in transcribing and calculating data leading to inconsistencies. Piketty has since issued a detailed response that answered many of the questions.3

Piketty’s work is based on an impressive body of empirical research but also aims to provide “a new theoretical framework that affords a deeper understanding of the underlying mechanisms” behind the distribution of wealth and income. It is no coincidence that he provocatively named his study Capital in the TwentyFirst Century, its title echoing Karl Marx’s Capital. In reality, though, Piketty presents a radically different analysis to that of Marx. While there are, for Piketty, instances in which capitalism “automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based”, he argues that “there are nonetheless ways democracy can regain control over capitalism”.4 But Piketty does present a welcome break from mainstream economics, and an attempt to return to an earlier political economy (complete with literary references to works by Honoré de Balzac and Jane Austen). So Capital 21 avoids the reliance on abstract mathematical models that features in most contemporary economics. Piketty writes, “To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation,” which often comes at the expense of historical research.5

Piketty’s focus is not simply income inequality: but also wealth inequality. If private wealth is concentrated in the hands of a few capitalists, then that will influence income inequality. He writes that “income disparities are partly the result of unequal pay for work and partly of much larger inequalities of income from capital, which are themselves consequences of the extreme concentration of wealth”.6 He also dismisses the common idea that technology, combined with the expansion of further and higher education, gives rise to higher incomes, writing that “the very notion of ‘individual marginal productivity’ becomes hard to define” when it comes to top income earners and “becomes something close to an ideological construct on the basis of which a justification for higher status can be elaborated”.7

The two “fundamental laws”

Piketty’s Capital 21 is an important attempt to understand the processes, not just the policies, that cause inequality. A key concept in the book is the capital/income ratio, the ratio of capital stock to national income. This is used to measure total wealth as a proportion of national income. For example, if the capital/income ratio is 600 percent, then the total capital stock is worth six years of national income. Tracing the capital/income ratio, Piketty identifies a long-term U-shaped trend. In the period leading up to the First World War the ratio was 600 to 700 percent in Europe and 400 to 500 percent in the US. It fell sharply during the inter-war years and then returned to levels similar to the pre-First World War period from the late 1970s onwards.

Having defined this, his model is based on two “fundamental laws of capitalism”, which determine the structure of wealth and income inequality in society. The first law connects capital stock to the flow of income from capital. It is expressed algebraically as:

α = r x β

Where β is the capital/income ratio, which we have already encountered, α is the “share of income from capital in the national income” and r is the “rate of return on capital”. The expression is a simple accounting identity, which must be true by definition.8 Piketty’s more interesting second fundamental law is that the capital/income ratio (β) is equal to the savings rate (s) divided by the growth rate (g), expressed in the equation:

β = s / g

Thus if national income grows at an annual rate of 2 percent and 12 percent of this income is saved, then the capital/income ratio would be 600 percent; in other words, capital would have “accumulated” six years of national income.9 This means that the lower the growth rate and the higher the savings rate, the higher the capital/income ratio will be. For example, if the growth rate (g) was to fall to 1.5 percent, then β would rise in the long run to 800 percent, leading to the further concentration of private wealth.

Both the savings rate and the growth rate have two components. The savings rate is split between the savings of private individuals and the “retained earnings” of corporations, which is the portion of profits reinvested into expanding production; the growth rate is divided into demographic growth and per capita income growth.

To my mind, this is the fundamental law of capitalism for Piketty—it is the “dynamic law of accumulation” resulting from a “dynamic process” and is used to explain the long-term capital/income ratio trend.10 However, there are problems with the law. For one thing, it is a “long-term law” that tends towards the equilibrium β = s / g but is not necessarily applicable in the short and medium term. In addition, one of the assumptions that it is based on is that asset prices will evolve on average in the same way as consumer prices, making it vulnerable to asset price bubbles and shocks. What is more, Piketty argues that it “represents a state of equilibrium towards which an economy will tend if the savings rate is s and the growth rate g”, but he does concede that “the state of equilibrium is never perfectly realised in practice”.11

Piketty claims that we are witnessing a return to a low-growth regime in the 21st century—with potentially zero demographic growth—which could usher in the return of the old “patrimonial capitalism” of the 19th. This has a profound effect on wealth inequality, because “in stagnant societies, wealth accumulated in the past naturally takes on considerable importance”.12 But the law, which is “totally independent of the reasons why the residents of a country—or their government—accumulate wealth”,13 does not tell us what affects the growth rate or the savings rate. Piketty simply resorts to saying that capital accumulation takes place “for all sorts of reasons…to increase future consumption…or to amass or preserve wealth for the next generation, or again to acquire the power, security, or prestige that often come with wealth”.14 This gives us no explanation beyond personal or psychological factors as to why capital accumulation takes place under capitalism when, in fact, it is central to it.

The main thesis of Capital 21 is that when the rate of return on capital® is greater than the rate of growth, the capital/income ratio and wealth inequality will rise, but its major flaw is that it does not explain what determines this rate of return. Piketty says that the “central question” is how the rate of return on capital is determined,15 but does not provide an adequate answer, simply falling back on mainstream economics. He asserts that the average “r” was 5 to 6 percent in the 18th and 19th centuries, rose to between 7 and 8 percent in the mid-20th century, then fell again to 4 to 5 percent in the late 20th and early 21st centuries.16 In order to try to give his conclusion that there is a stable rate of return on capital a theoretical basis he says that “r” is equal to the “marginal productivity of capital”.17 But this relies on neoclassical theory that sees both capital and labour sitting side by side as factors of production. This ignores the fact, central to Marxist political economy, that the means of production were produced by labour in the past and do not in themselves generate any new value. That was why Marx termed them “dead labour”, as opposed to the “living labour” of workers.

Because Piketty’s account lacks an analysis of what drives capital accumulation, he sees “shocks”, such as the economic crisis, as exogenous, resulting from external forces, rather than from capitalism’s need to accumulate for accumulation’s sake. He also briefly accepts the “underconsumptionist” argument, that crises are a result of a lack of purchasing power in the system, though he adds that inequality is not the primary cause of the crisis, which could instead be put down to the capital/income ratio’s structural increase in Europe and international asset imbalances. Yet such insights are not an integral part of his model of capitalism. In the end it was “bubbles” in asset prices that caused the crisis, not inherent contradictions within capitalism.

Issues such have these have ensured that, as well as provoking opposition from the right, Piketty has also been subject to criticisms from the Marxist left. For instance, Andrew Kliman argues that Piketty’s definition of income does not take into account “transfer payments”, such as social security. Kliman claims that the income of the “99 percent” has not declined or risen insubstantially; rather, it has increased seven times more than Piketty estimates, “partly the result of things that are anathema to much of the right: family planning and government-provided benefits won through social struggle”.18 This forms part of Kliman’s broader argument against underconsumptionist explanations for the crisis, a view that would hold that wage stagnation underpins the massive debt build-up and the subsequent financial crisis. While the left critiques do not entirely invalidate Piketty’s Capital 21, which provides a useful bank of data on inequality, it is nonetheless important to state, as Kliman and others do, that inequality is not the main faultline in capitalism.

What is capital?

In seeking to demonstrate that there is nothing “natural” about the reduction in inequality in the post-war period, Piketty focuses on the impact of politics. The political dimension is indeed important but the reimplementation of free market reforms from the 1970s onwards cannot simply be put down to a political project—Ronald Reagan and Margaret Thatcher’s “conservative revolution”—considered in isolation from the needs of capital, and crucially its attempt to deal with a crisis of profitability. Thus in spite of Piketty’s attempt to return to political economy, there is a structural separation between politics and economics in Capital 21.

What underpins many of the problems with Capital 21, in a theoretical sense, is Piketty’s definition of capital: “National wealth or national capital as the total market value owned by the residents and government of a given country at a given point in time, provided that it can be traded on the market”.19 Here capital is simply conflated with wealth. This leads him to attach particular importance to housing as the main form capital takes in the 21st century, arguing that “it once was mainly land but has become primarily housing plus industrial and financial assets”.20 Piketty’s definition distorts his calculations when it comes to the rate of return on capital. Esteban Ezequiel Maito points out that when housing is deducted, the figures actually show a falling rate of profit in Britain and Germany, a Marxist prediction that Piketty claims has been empirically disproven.21

Why does Piketty’s definition of capital matter, beyond simply distorting figures regarding the rate of profit? Marx’s definition of capital puts exploitation of workers’ labour power at the heart of the capitalist system. In the third volume of Capital Marx writes: “The relation between capital and wage labour determines the whole character of the mode of production”, adding that “the capitalist and the wage labourer are, as such, embodiments and personifications of capital and wage labour—specific social characteristics that the social production process stamps on individuals, products of these specific social relations of production”.22 Capital is value accumulated through the exploitation of workers’ labour and then set in motion in order to expand through further exploitation.

Here both the method and the definition are important. Marx’s definition of capital allows us to link it to the production process, rather than assuming that any wealth acts as capital. But Piketty’s starting point is inequality, not exploitation or accumulation. However, inequality of wealth is not a specific feature of the capitalist mode of production; it is general to class society. To understand inequality today, how it arises and what perpetuates it, it is necessary to put it in the context of the social relations of production under capitalism. Marx, by contrast, allows us to understand not only inequality in relation to capitalist relations of production, but also capitalism’s inner dynamic. That is crucial to understanding the motive power in capitalism and so its periodic “shocks” such as war, crisis and so forth.

Piketty on Marx

Piketty claims that he has not read Marx’s Capital, maintaining that it had little influence on his own work.23 Despite this, Capital 21 is littered with comments aimed at brushing Marx aside. Most importantly, Piketty dismisses Marx’s “law of the tendency of the rate of profit to fall” as a notion that has been disproved by history. This is based on the incorrect assertion that Marx’s model rested on zero productivity growth.24 On the contrary, Marx acknowledged that capitalism was a dynamic social system that constantly needed to revolutionise the means of production. Indeed Marx specifically argues that the tendency for the rate of profit to fall is a consequence of rising productivity (ironically, David Ricardo, who appears to be favoured by Piketty, argued that decreasing “marginal productivity” would cause falling profit rates).

Marx understood that capitalism is a system characterised by competitive accumulation, and this typically takes the form of capitalists attempting to undercut their rivals by cheapening the commodities they produce. They will therefore seek to increase the productivity of labour. But they generally do so by raising their investment in dead labour (plant, machinery and so on) relative to that used to hire workers to perform living labour (wages). However, because only living labour can actually create new value, and thus surplus value, the source of profit, there will be a downward pressure on the rate of profit.

There are, of course, countervailing tendencies, which slow the fall in the rate of profit, but do not, in the long term, reverse it. This does not imply a “final crisis” of capitalism. The destruction or devaluation of large swathes of constant capital through a crisis can reduce the burden of dead labour on those capitalists who survive it, setting capitalism up for the next boom. If Piketty took Marx’s tendency of the rate of profit to fall seriously, he might have been able to link the changes described in his book to what was taking place within capitalism. One of his central predictions is that growth will be sluggish in the current period, but this conclusion would be strengthened if placed in the context of a declining rate of profit and the inability of the system to clear out enough capital in the previous crisis of the 1970s to restore it to higher levels.


Piketty is concerned about the growing importance of “inherited wealth” in the context of the low growth regime, which he argues could lead to a return to the capitalism of Marx’s day. In order to “regulate the patrimonial capitalism of the 21st century,” he argues, “the ideal tool would be a progressive tax on capital” with the largest fortunes taxed most heavily.25 What Piketty is concerned with here is the disproportionate power that those associated with one section of wealth could have and thus he tends to focus solely on the question of distribution. In this too he reflects some of the concerns of classical political economy. Ricardo, for instance, was concerned that landlords, due to the nature of rent prices, would become the dominant force in society; thus, in his On the Principles of Political Economy and Taxation he advocated a land tax to curb their power.26

Piketty demonstrates that we cannot look at just income inequality, which is affected by the level of wealth inequality, the extent to which private wealth is concentrated hands of a few, and attempts to explain the underlying processes that cause it. But because he does not fully break with neoclassical economics and because he defines capital merely as wealth, he is not able to grasp the underlying laws of motion of capitalism or the social relations underlying inequality. His policy recommendations remain more “Ricardo 21” than “Capital 21”, aiming to make capitalism work more efficiently and remedy high levels of inequality.

We should, despite its limitations and flaws, engage with Capital 21 seriously; it shows the audience for ideas that provide a radical critique of capitalism and can be turned towards a more rigorous Marxist critique.


1: Oxfam, 2014, p2; Kollewe, 2014.

2: Allen, 2013.

3: Go to http://blogs.ft.com/money-supply/2014/05/29/piketty-gives-detailed-response-to-ft-criticism/

4: Piketty, 2014, pp1, 2.

5: Piketty, 2014, p32.

6: Piketty, 2014, p51. Income from capital is here conceived as income gained simply by owning certain forms of wealth, such as profit, rent and dividends.

7: Piketty, 2014, pp330, 333.

8: Piketty, 2014, p52.

9: Piketty, 2014, p166.

10: Piketty, 2014, pp175, 169.

11: Piketty, 2014, p169.

12: Piketty, 2014, p166.

13: Piketty, 2014, p169.

14: Piketty, 2014, p169.

15: Piketty, 2014, p199.

16: Piketty, 2014, p200.

17: Piketty, 2014, p122.

18: Kliman, 2013. Chris Harman, while also identifying the importance of welfare in contemporary capitalism, suggests that the bulk of this is a consequence of redistribution of wealth within the working class (Harman, 2008, pp112-116).

19: Piketty, 2014, pp45-50.

20: Piketty, 2014, p120.

21: Maito, 2014.

22: Marx, 1991, pp1019-1020.

23: Chotiner, 2014.

24: Piketty, 2014, p27.

25: Piketty, 2014, pp515-517.

26: Ricardo, 2001.


Allen, Katie, 2013, “UK Workers’ Wage Squeeze is Longest Since the 1870s”, Guardian (16 July), www.theguardian.com/business/2013/jul/16/uk-workers-wage-squeeze-longest-since-1870s

Chotiner, Isaac, 2014, “Thomas Piketty: I Don’t Care for Marx”, New Republic (5 May),

Harman, Chris, 2008, “Theorising Neoliberalism”, International Socialism 117 (winter),

Kliman, Andrew, 2013, “’The 99%’ and ‘The 1%’…of What?”, With Sober Senses
(14 February), http://tinyurl.com/pf2osm4

Kollewe, Julia, 2014, “Wealth of Britain’s richest 1,000 people hits new high of £519bn”, Observer (18 May), www.theguardian.com/business/2014/may/18/wealth-britain-richest-1000-new-high-sunday-times-rich-list.

Maito, Esteban Ezeque, 2014, “Piketty Against Piketty: The Tendency of the Rate of Profit to Fall in United Kingdom and Germany Since XIX Century Confirmed by Piketty’s Data”, (9 May) http://ideas.repec.org/p/pra/mprapa/55839.html

Marx, Karl, 1991, Capital: A Critique of Political Economy, Volume 3 (Penguin Classics),

Oxfam, 2014, “Working for the Few: Political Capture and Economic Inequality”
(20 January), www.oxfam.org/en/policy/working-for-the-few-economic-inequality

Piketty, Thomas, 2014, Capital in the TwentyFirst Century (Harvard University Press).

Ricardo, David, 2001 [1817], On the Principles of Political Economy and Taxation (Batoche Books).