Why Thomas Piketty’s “Capital” Could Revolutionize Economics

Almost anyone with access to media has by now heard of Thomas Piketty’s “Capital in the 21^st Century” – a book that is already being hailed as possibly the most important work of economics of the decade.

The book looks at 200 years of economic data and argues that free markets lead to growing economic inequality in the long run. It has made headlines for its main argument, and for its call for a global wealth tax to combat inequality. But just as importantly, it marks the return of history in economic analysis. This is a very, very big deal.

For the last few decades, mainstream economic thought has existed in a sort of timeless vacuum. Millions of college students, me included, read textbooks that presented macroeconomic laws as eternal truths, impervious to historical change: output always returns to its fixed, natural equilibrium; government intervention only ever affects prices in the long run; economic crises always solve themselves by lowering labor costs. These “laws”, textbooks imply, were as true in 1914 as in 2014.

Economics wasn’t always this ahistorical. In the 19^th and early 20^th century, leading economists like David Ricardo, Karl Marx and Joseph Schumpeter all analyzed economics within a larger historical trajectory, and their theories centered on change over time.

But the rise of neo-liberal economic thought has pushed history out of the profession. Modern economists, beginning with Alfred Marshall in the late 19^th century but really taking off at the University of Chicago in the 1950s and 60s, have sought to turn economics into a science, with fixed laws based on math. If the laws of physics and chemistry don’t change over time, their thinking went, why should economic laws?

It’s not that these economists never referred to history to support their claims, but their theories still ended up being completely ahistorical.

While neo-liberal economic theories are far from universally accepted, they have succeeded in transforming the profession from a social science into a want-to-be natural science.

The main problem with this approach is that many of these scientific models in economics are based on unrealistic assumptions – perfect competition, completely rational actors and equal access to information, to name just a few – and therefore hardly ever work in reality.

Following the 2008 financial crisis, economists who take a less natural-science based approach to economics and base their theories on the recognition that markets aren’t perfect and actors not always rational have received more attention. The buzz surrounding Piketty’s book is the culmination of that trend.

Bringing history back into the study of economics may cost the discipline its scientific veneer, but it also offers a better understanding of how economic forces truly work, and how they change over time. As Piketty put it in his introduction to “Capital in the 21^st Century”:

“To put it bluntly, the discipline of economics has yet to get over its childish passion for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. (…) This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”