Piketty’s Capital: Another good book ruined by politics
You couldn’t call it a hatchet job. Chris Giles, the FT’s Economics editor, has spent a not inconsiderable time decoding Thomas Piketty’s spreadsheets, and has drawn attention to a few errors and points where clarification is needed in the French economist’s work.
The main effect of the article is to cast doubt on Piketty’s book Capital, and to further politicise a book that has become an ideological two-by-four.
Piketty’s arguments probably survive the FT’s criticisms, but it looks like another good book has been ruined by politics.
Which is why it’s tricky even for a respectable newspaper staffed with clever people to get stuck into academic debates that have an awful lot of moving parts.
In the long run, it can be hoped, the merits and demerits of a work will win out. If Piketty’s errors damn Capital, it’ll join the ranks of Spencerian eugenics and Taylorian stop-watch management – ideas with significant social impact, but which have been rendered obsolescent by better research.
But is Piketty right?
The FT says Piketty’s data doesn’t support the conclusion that wealth inequalty is rising in the US and Britain. This would matter if true, because Piketty’s theory says that wealth inequality will rise when the rate of return on capital exceeds the rate of growth, and he says that this has happened in the developed world since the 1970s. So if wealth inequality hasn’t risen, this would contradict one empirical implication of Piketty’s theory.
The FT piece ignores Piketty’s hesitance on this point – “Nothing is certain: inequality can move in either direction” – while underplaying the difficulty of working with a variety of fragmentary and occasionally contradictory primary sources, and not commenting on later studies that, using different methods, have also found evidence for rising wealth inequality.
Besides, wealth inequality probably has risen: income inequality certainly has. Income inequality intuitively leads to greater wealth inequality. When you have spare money, it’s easier to hoover up assets.
How much spare money the rich have, and how many assets they can hoover up, depends on their saving rates, and the rates of return of those assets. It may be that those on high wages save a smaller proportion than those on low incomes, and earn comparatively lower rates of return. Without looking at the evidence on saving rates, we don’t know.
We also have evidence of the growth of wealth inequality. As Paul Krugman points out, the share of income from capital – earnings from hoovered assets – has become less equally distributed. This doesn’t necessarily mean that asset ownership itself has become less equally distributed, but that would be the simplest explanation. Besides, a paper from Emmanuael Saez and Gabriel Zucman finds direct evidence of wealth inequality’s growth.
So the FT’s argument isn’t a smoking gun. It might show that two of Piketty’s data series don’t conclusively support one of his theory’s empirical implications. But there’s reason to think that this is supported by other evidence anyway.
There may be other issues with Piketty’s book, but things quickly start to get arcane.
Larry Summers, in his review of Capital, reckons that the rates of return on the savings of the rich may well not be that considerably larger than those at the bottom end of the spectrum due to diminishing returns. Trillionaires run out of productive places to park their capital; when uninspired, they opt for safe, low-interest Treasury bonds.
The upshot of which is that capital accumulation won’t proceed automatically and indefinitely, pace Piketty. Piketty needs capital to produce large returns even when you already have a lot of it, but Summers doubts that this is the case. Piketty thinks it’s plausible that the rate of return decreases only slowly when you have a lot of capital. This, as UC Berkeley economist Brad DeLong points out, is an open, empirical question.
Summers also thinks that low rates of reinvestment among the very rich may also slow the concentration of wealth in fewer hands. The rich may choose to burn their cash during retirement, and will probably save less than the poor – thus reducing the amount of capital they keep. This too is an open question.
The economy is complex: Summers may have a point. DeLong, who offers a magisterial interpretation of Piketty’s theory in the language of mathematical economics, gives us another way to think about it.
Taxes, asset value destruction through economic error and culpable cupidity, and eccentric consumption and saving patterns all affect how much profit gets turned into accumulated wealth – he introduces the variable w to represent these factors. High w implies low rates of capital accumulation, and vice versa.
A key insight of DeLong’s reading of Piketty is that this changes over time. Trends in regulation are an important part of the story. w goes up when Social Democrats are elected, and down when civil servants become converts to neo- and ordo-liberalism.
The influence of ideas on history and political economy also appears to matter. It seems clear that the Great Depression, the Second World War, and the stagflation of the 1970s – the failure of Bretton Woods, and the rise of Opec – all played important roles in reconfiguring the ideas of politicians, who introduced the New Deal, the Marshall Plan, the welfare state, and privatisations to cope.
Whether Thatcher, Reagan and Hawke tapped into a zeitgeist or invented it, their decisions had a major effect on the world’s institutions – and on individual bank accounts. Periods when w is high may best be explained by changes in the ideas in politicians’ heads. This, in part, is why Piketty pleads for wealth taxation and crackdowns on tax havens – w can be altered by human agency, despite what Piketty sees as forces propagating inequality in the long run.
The FT’s claims don’t affect any of this. Piketty’s explanatory story about the forces leading to capital accumulation, how these change in the long run, and the moral implications thereof, remain untouched.
Some ideas have their time: and the convulsions of 2008 left a large part of the world angry, confused, and looking for answers. Piketty’s work offered diagnosis, prognosis and cure – and hit the big time, financially and intellectually.
But with mass exposure come the vagaries of mass opinion, where politics and attitudes meld to generate ideas that may or may not have anything to do with what’s really happening in the world.
Sadly, whether we’d like to admit it or not, few of us can be disinterested on matters of ideology: the tendency to view new information in light of our predispositions is a deeply ingrained feature of human beings. It is hard to be confronted by a stream of articles pro- and anti- without wondering what on earth you should think. And at this point, prejudice kicks in.
Humans respond to cues: the authority of a source, the extent to which new information coheres with existing prejudices, the depth and breadth of one’s preexisting ideas on a topic.
“Bad data or no, I completely agree with Piketty,” one FT user wrote under Chris Giles’s article.
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Published: May 26, 2014 04:00 AM