Reading Piketty's 'Capital in the Twenty-First Century' Will Change a Salaryman's Outlook on Life

Thomas Piketty's 'Capital in the Twenty-First Century' is a book that unravels the inequalities of capitalism, and it significantly changed my outlook on life.

When I understood how the simple inequality 'r > g' presented in this book creates a gap between those who have assets and those who do not, it created anxiety about a life relying solely on labor.

In this article, I will explain Piketty's theory in a way that is easy for beginners to understand, and share the reasons why I started investing and its importance.

For those interested in asset formation or those who want to reduce future economic anxiety, this is a must-read.

After reading it, you will surely want to pick up this book yourself.

What is Piketty's 'Capital in the Twenty-First Century'?

Thomas Piketty's 'Capital in the Twenty-First Century' is a book that analyzes the inequality of income and wealth brought about by capitalism.

In this book, Piketty uses economic data spanning over the past 300 years to reveal how the structure of inequality has evolved.

Of particular note is the inequality Piketty presents: 'Return on capital (r) > Economic growth rate (g)'.

It becomes clear that under current capitalism, people who possess capital have built a mechanism to increase their wealth faster than workers.

At the time (around 2015), the reason I picked up this book was out of curiosity, wanting to know the problems of capitalism.

However, as I read on, my outlook on life changed significantly, and it became the catalyst for me to actually start investing.

The mechanism of inequality in 'Capital in the Twenty-First Century'

According to Piketty's analysis, it is normal for the return on capital to exceed the economic growth rate, and a world where those with capital can easily concentrate wealth has already been created.

This structural mechanism is the background to today's unequal society.

For example, people who own assets such as real estate or stocks can increase their assets further if they reinvest the returns.

On the other hand, people who rely solely on labor income are busy with daily living expenses and have no room for asset formation.

The 'r > g' inequality shown by Piketty is a simple yet extremely powerful formula.

In modern society, there is a high probability that the return on capital will exceed labor income, so the expansion of inequality under capitalism occurs as a natural result.

When I understood this idea, I felt that I too must possess capital, and I decided to take the first step into investing.

I started investing about 10 years ago, and little by little, my capital gains have been increasing.

What is 'r > g'?

The inequality 'r > g' presented by Piketty concisely expresses the mechanism by which inequality naturally widens in capitalism.

First, I will explain in simple terms what this inequality means.

r: Rate of return on capital
This represents the profit earned from capital, that is, money or assets. For example, if you invest 1 million yen and earn 50,000 yen in profit per year, the rate of return on capital (r) is 5%.

g: Economic growth rate
This is the rate representing how fast the economy as a whole is growing. For example, if the entire economy grows by 2% every year, g is 2%.

This inequality 'r > g' shows that when the rate of return generated by capital (money or real estate) exceeds the growth rate of the economy as a whole, those who possess capital can increase their wealth more than those who do not.

And, the current world is built on this inequality.

Thinking with a concrete example

For instance, let's assume Person A has 10 million yen in assets.

If they manage these assets to earn a 5% annual return (r = 5%), they will generate 500,000 yen in profit in one year.

In contrast, if the economic growth rate of the entire economy is only 2% per year (g = 2%), it can be said that the profit Person A earns increases at a faster speed than the income of a general worker.

On the other hand, Person B, who does not possess capital, is only affected by the 2% economic growth rate even if their labor income increases, so their income growth is naturally slower compared to Person A.

In other words, because the returns of those who possess capital exceed the income of workers, the gap between the wealthy and general workers widens year by year.

The reason why the gap widens

As this inequality shows, the accumulation of capital is advantageous for the wealthy.

A cycle exists where capital begets capital, and this accelerates the concentration of wealth.

Especially in the modern era, due to the evolution of technology and globalization, the accumulation of capital has become easier than ever before.

I strongly felt that in order to counter this concentration of capital, one must stand on the side that possesses capital as soon as possible.

Also, if the wealthy reinvest their assets, they can continue to increase their assets even further.

However, the reality is that because workers spend most of their income on living expenses and the like, it is difficult for them to increase their assets.

Due to this cycle of 'capital begetting capital,' the wealthy become even wealthier, and the gap between them and workers continues to widen.

I realized once again that as a salaryman, no matter how hard you work, your assets will not increase and understood it anew.

The significance of starting to invest

When I read 'Capital in the Twenty-First Century' and understood this mechanism, I felt that I, too, must possess capital.

This is becausestanding on the side that possesses capital can be a means of protecting oneself from the widening gap of inequality.

I thought that even if starting with a small amount, if I could benefit from the rate of return on capital by beginning to invest, it would likely increase the possibility of leading to future economic stability.

In other words, when you understand the concept of 'r > g,' you can see that possessing capital is not just an issue for the wealthy, but an important means for individuals to aim for economic stability.

Even with a small amount, if you possess and manage capital, it can be said that it is worth investing in your own future.

By the way,depositing money in a bank is saving, not investing.

Therefore, it does not qualify as asset formation.

The lessons of 'Capital in the Twenty-First Century' that change one's outlook on life

What I felt most strongly after reading this book is the importance of asset formation.

Previously,I thought that 'if you work hard, you will be rewarded', but I think that was wrong.

Through Piketty's analysis, I realized the strength of possessing capital.

So, I decided to start stock investing, even if it was just a small amount to begin with.

By possessing assets, I became able to secure income sources other than labor income, and my economic anxiety has eased somewhat.

Knowing the structural problems of capitalism

If you read 'Capital in the Twenty-First Century,' you can learn about the structural problems that modern capitalism faces.

I felt once again that it is necessary for us to understand not just effort, but the mechanism of the entire economy.

I remember realizing that asset formation is not just a choice, but a means to secure future economic stability.

At the time, I was a bank employee with a decent income, but I had the feeling that if I just stayed there, I would never become one of those who 'own capital'.

How can one apply Piketty's theory?

For the average worker to make use of Piketty's theory, the first thing to tackle is the start of asset formation.

This is because understanding that the inequality 'return on capital (r) > economic growth rate (g)' shown by Piketty is a factor that widens the gap in reality is the most realistic way for me to stand on the side of those who own capital.

Below, I will introduce the steps I am practicing.

1. Understand your current income and expenditure

First, you need funds to start investing.

To that end, I check my current income and expenses to confirm how much surplus funds can be allocated to investment.

I start by reviewing my monthly expenses using household account apps and the like. By cutting unnecessary spending, it becomes possible to create money that can be put into investments.

2. Start small-scale investing

Asset formation does not need to be started with a large amount of money all at once.

It is important to start investing even with small amounts.

For example, you can use investment trusts that allow for installment investments in 1,000-yen increments, or services that allow you to invest in stocks with small amounts (such as robo-advisors or index investments).

These investment methods are suitable for increasing assets little by little while diversifying risk.

3. Think from a long-term perspective

Piketty's theory also focuses on the fact that capital tends to grow easily over the long term.

For workers to own assets, it is important to be conscious of long-term investment rather than short-term profits.

If you engage in installment-type investment trusts or stock investments, you can expect your assets to grow over time.

In particular, by utilizing the power of compound interest, you can get the effect of assets increasing as time passes, so I think it is important to continue steadily without rushing.

4. Improve financial literacy

When starting to invest, it is also important to acquire basic financial knowledge.

By understanding methods of asset management, risk management, and the basic movements of the economy, you will be able to build assets more effectively.

Let's learn the basics of investing by utilizing books, websites, and online courses.

5. Utilize tax-saving measures

In Japan, there are tax-advantaged systems such as NISA and iDeCo.

By utilizing these systems, you can reduce the taxes on profits from investments and build assets more efficiently.

These tax-saving measures are especially effective if you are considering long-term investment.

Summary

Thomas Piketty's 'Capital in the Twenty-First Century' is a book that greatly changed my outlook on life.

Understanding the structure of inequality inherent in capitalism and starting to build assets has broadened my perspective on the future.

I truly feel that reading this book was a great catalyst for me to start investing.

I hope you will also engage with Piketty's theories and think about the economic choices in your own life.

Thank you for reading until the end.
I would be very happy if you could follow me.
I also look forward to your comments.