The last part of Chapter 1 discusses measuring national income and wealth, and differences among nations.

Thomas Piketty points out that measuring income and wealth was a political act.

The first attempts to measure national income and capital date back to the late seventeenth and early eighteenth century…It is worth noting that (the authors of these measurements) often had a political objective in mind, generally having to do with modernization of the tax system.  By calculating the nation’s income, they hoped to show the sovereign that it would be possible to raise tax receipts considerably while keeping tax rates relatively low, provided that all property and goods produced were subject to taxation and everyone was required to pay, including landlords of both aristocratic and common descent. (Page 56)

A cartoon from the time of the French Revolution.  The nobility and the clergy were exempt from taxation, so the entire cost of supporting the state was borne by the common people, leading to an enfeebled state and larger-scale poverty than there otherwise would have been.  The rough translation is “One can hope I’ll be done soon,” spoken by the commoner.

In my view, academia is inherently political, by virtue of what we choose to measure and consider “serious” versus frivolous.

I see it also as notable how these debates continue to this day, with “progressives” wanting to strengthen the state by providing it with resources to do more, while others claim poverty.  It echoes how often we are told that “America can’t afford” something at a time when we are richer than we have ever been.

Go below the fold for a graph and a table!
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Thomas Piketty describes the importance of the capital / income ratio, β.  “The capital/income ratio for a country as a whole tells is nothing about the inequalities within a country, but β does measure the overall importance of capital in a society, so analyzing this ratio is a necessary first step in the study of inequality.” (Page 51).

Note that income is measured in dollars (or euros) per year, while capital is measured in dollars.  (As an economist would say, income is a “flow” while capital is a “stock.”)

In most of Europe, β is between 5 and 6 these days.  It is a bit under 5 in the United States, and a bit over 6 in Japan and Italy.  (We’ll see later in the book that this ratio is heavily influenced by population growth.  Thus, the faster-growing United States has a lower ratio, while Italy and Japan have among the lowest birthrates.)

The First Fundamental Law of Capitalism:  α = r × β 

α is the share of the nation’s income that comes from capital (a.k.a. property), as opposed to from labor.

r is the average rate of return on capital.

β is the Capital / Income ratio.

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In case you missed it, here are all reviews of the book done to date.

Capital in the 21^st Century Review:  Chapter 1 “Income and Output”

Chapter 1 consists of three parts.

Part 1 outlines the conflict between “capital and labor” and defines capital and wealth.
Part 2 defines the “First Fundamental Law of Capitalism:

α = r × β and briefly explores its implications.

Part 3 Focuses on national income, including how it is measured, and inequality among (as opposed to within) nations

I’ll be reviewing each section at a rate of 1/day, starting today.

Part 1 starts with a tragedy that happened in 2012 in South Africa, reminiscent of events in the United States 100 years ago, in which 34 miners striking for higher wages were killed by police shooting live ammunition. Thomas Piketty cites other 19^th Century events in the United States and France as similar.  He then asks whether conflict between labor and capital is inevitable, or a historical artifact.

Continuing on, he points out that the real issue is inequality rather than labor vs. capital per se:

In any case, the Marikana miners were striking not only against what they took to be (The company) Lonmin’s excessive profits but also against the apparently fabulous salary awarded to the mine’s managers and the differences between his compesation and theirs.  Indeed, if capital ownership were equally distributed and each worker received an equal share of profits in addition to his or her wages, virtually no one would be interested in the division of earnings between profits and wages.  If the capital-labor split gives rise to so many conflicts, it is due first and foremost to the extreme concentration of the ownership of capital.  Inequality of wealth—and the consequent income from capital—is in fact always much greater than inequality of income from labor.  (Page 40)

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The final part of the Introduction starts with a bit about the scope of the book:  1800 to the present, limited mostly to Westernized countries, particularly France, the United States, and England.  Thomas Piketty justifies this because of when and where modern tax data started to be collected and recorded, it being absent from everywhere before around 1800, and continuing to be absent in the Third World to this day.  Also, looking at the most economically developed countries may give a clue about where the rest of the world is heading (as much of the world modernizes its economy).

Piketty gives three justifications (apart from patriotism) for focusing so much on France:

One is that the French were the first to institute a modern system of taxation, so French records go back further than those of any other modern economy.

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Part 3 of the introduction starts with a few pages about methodology.  The short version is that the best read on incomes comes from income tax data, and on wealth from estate tax data.  Most modern industrialized countries have had income taxes for about a century, and estate taxes for longer than that.  France in particular has kept wealth and estate tax data since the 1789 Revolution.  This data, as well as other data on incomes, are kept in publicly-accessible databases.  Thomas Piketty concludes the section with a bit about how much easier it is to obtain and process large amounts of data with the benefit of computers and the internet—something his predecessors lacked.

Next, the main conclusions of the book:  One is that the reduction of inequality between 1910 and 1950 was a direct effect of two world wars and policies adopted to cope with them.  The other conclusion is that “there are powerful mechanisms pushing alternatively toward  convergence (less inequality) and divergence (more inequality).  Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.”

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