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What Piketty Gets Wrong
In this week’s edition of my column for Defining Ideas at the Hoover Institution, I look at Capitalism in the Twenty-First Century, the new volume by French economist Thomas Piketty laying out the evils of income inequality.
Many critics of Piketty’s book have rightly pointed to the economic destruction that would result from his proposed regime of heavily progressive taxation. Piketty also suffers, however, from a deeper analytical failing: a misunderstanding of the significance of inequality. As I note:
One of the most striking defects of the Piketty analysis is its flawed understanding of the relationship between social wealth and income inequality. The initial point goes to the question of how ordinary people ought to regard the accumulation of vast stores of wealth by the few, much of which gets passed on by inheritance to other people. For Piketty, their greater wealth leaves (all else being equal) poorer people worse off because of their apparent loss of political influence to the great and mighty.
Not so fast. First, as an economic matter, the increase of the wealth of some without a decline of wealth in others counts as a Pareto improvement, which is in general to be welcomed, even if it increases overall levels of inequality. But to egalitarians like Piketty, the increased wealth inequality is bad in itself, as their objective is to minimize differences in wealth and income, rather than to increase their overall totals. Piketty’s assumptions lead to the conclusion that a world in which the rich average 1,000 and the poor average 10 is less desirable than a world in which the rich average 300 and the poor average 5, given that the absolute and relative differences in wealth are lower in the second state of the world than the first.
There’s also another mistake at work here: Piketty’s failure to account for non-monetary measures of well-being:
Unfortunately, the fixation with economic wealth and income also leads Piketty and other egalitarians to overlook many key social trends of enormous importance. Theoretically, measures of wealth are convenient ways to attack the inequality of individual well-being. Though they are relevant to that question, they are far from the only measure of individual well-being. There are all sorts of other indicators that are distinct from income and wealth, including many measures of the length and quality of life. Piketty does note the dramatic increase in life expectancy throughout the developed world in the modern era, but, oddly enough, he does this only to rebut the point that longer life expectancies reduce the danger of inherited wealth.
What he should have done is exactly the opposite. There is no way that overall social gains on matters of life expectancy and health can be concentrated in the top one percent of society. To be sure, it is worth noting that infant mortality has always been inversely correlated with wealth. The children of richer people do better than those of poorer people. But look next at the actual numbers. By one British study, infant mortality ranged in 1901 from 247 per 1,000 live births in the poorest group to 94 per 1,000 in the highest group, the so-called “servant-keeping class.” One hundred years later, those numbers dropped to 3.7 per 1000 for the first group and 8.1 per 1000 for the second.
Read the whole thing here.
Published in General
I came across this article in the Times this morning:
“Why Piketty’s Book Is a Bigger Deal in America Than in France”
The short answer is: they tried his ideas in France, and they haven’t worked. (Shocking, I know…) They’re now trying to undo the damage:
“During an hour-long television interview marking the second anniversary of his election, Mr. Hollande said he regretted not moving faster with some measures and not alerting French people to the gravity of France’s problems. He said France must quickly implement tax cuts for business as this is the only way to boost jobs.
“”We must go faster still because it is unbearable for French people,” Mr. Hollande said.”
The Economist notes the same:
“A more serious explanation could be that Mr Piketty was too closely linked to a proposal by François Hollande, France’s Socialist president, during his 2012 election campaign to introduce a now-discredited 75% top income-tax rate. The 75% tax rate sent an important message, Mr Piketty said approvingly at the time, and “lots of other countries will inevitably follow this route”. In fact, the millionaire tax was denounced by one of Mr Hollande’s own advisers as “Cuba without the sun”, ruled unconstitutional by the French constitutional court, and was hastily watered down.”
Like.
Quoting a great point in Richard’s column:
[…]
On the other end of the scale, there are many more poor than wealthy, with many more votes, and the poor tend to vote in a block.
With government programs to aid the poor, they have a substantial short term incentive to vote in a block. (And a long term disincentive.) And this is especially evidenced in urban areas.
Heck, we wouldn’t have progressive income taxes if the poor didn’t vote in a block.
Let us also sit back for a moment and admire how a Marxist can become wealthy by selling a book condemning capitalism at a healthy profit.
I would edit the last paragraph of your post.
“By one British study, infant mortality ranged in 1901 from 247 per 1,000 live births in the poorest group to 94 per 1,000 in the highest group, the so-called “servant-keeping class.” One hundred years later, those numbers dropped to 3.7 per 1000 for the first group and 8.1 per 1000 for the second.”
This seems to imply that the infant mortality rate among the “poorest” had dropped to 3.7 per 1000 while the “servant keeping class” had an infant mortality of 8.1 per thousand. The study actually says, “In England and Wales infant mortality in 2000 was 3.7 per 1,000 among infants born to fathers in the top social class and 8.1 among those born into the bottom class.”
It seems to me that, among others, Piketty’s basic argument has a couple of fundamental flaws
1) His entire argument is predicated on these rentiers reinvesting all of their returns and living in relative squalor for generations. We know, in fact, that after a while, rich people start squandering their wealth on yachts and huge houses and, for many, charity. And their heirs do so at an accelerated rate, Shirtsleeves to shirtsleeves in three generations.
2) Related, If you accept his core argument, then anyone can ensure their progeny will be wealthy by spending less than they earn and investing the difference. So, there is absolutely nothing preventing anyone from being rich, and the reason some people aren’t is that they don’t (see item 1).
At the end of the day, Piketty hates that some people spend less they earn. I disagree completely.
Or, we could raise interest rates.
I’m sure all the profits to the proletariat.
I hate to focus on the trivial, but the first indication that Piketty is not to be taken seriously is the way he wears his shirt unbuttoned.
The New Marxist dream: A little place in the ‘burbs surrounded by a little white Piketty fence to keep the riff-raff off the lawn.
My favorite response to Piketty:
Nice article. It basically matches what Megan McArdle said
That is, the “rich” is anyone that makes more than he does, and they keep buying up all the good apartments, so rather than work harder and create more wealth for society, benefiting everyone, I will just advocate a scheme to punish the “evil rich” (again, defined as anyone that makes more than me, wholly ignorant that to 95% of the population, Piketty himself is part of the “evil rich”).
I get really tired of people in the top 1% income level of all humans that have ever lived complaining about not being in the top 0.001%.
Isn’t it though? I’ve been dying for an opportunity to post that quote in front of the liberals on Facebook, but I fear that their little heads would explode.
You know, I’d love to be in the top 0.001%, too. The difference between them and us is that we don’t wish to destroy others’ prosperity just because it isn’t ours. Envy is a singularly unpleasant sin, worse than covetousness. If you covet something you wish that you had it, like or perhaps instead of the other person. If you envy it, you wish that they didn’t have it, regardless of whether you get it or not.