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Is Thomas Piketty’s sprawling best-seller, Capital in the Twenty-First Century, really just a bit of dystopian, neo-Marxist, speculative fiction tarted up with dodgy math? Some free-market types who disagree with the French economist’s controversial analysis and policy prescriptions might like to think so.
But this would be a more reasonable and fair take: extraordinary claims require extraordinary evidence. And Piketty, at the very least, makes a bold claim when he asserts discovery of powerful forces inherent to capitalism driving an “endless inegalitarian spiral” of ever-greater wealth concentration. And he offers mounds of data as support.
Previous critiques have questioned his interpretation of the evidence. But the Financial Times now questions the evidence itself. As reporter Chris Giles see it, various data-entry and methodological errors undermine the book’s central findings. This is perhaps the most serious possible mistake: Giles says that Piketty, as the Washington Post puts it, “mixed up different sources on British wealth the last few decades, and overestimated their inequality.”
So Giles inserts the, as he sees it, corrected UK data and uses a population-weighted “European average” of Britain, France and Sweden rather than a simple average as Piketty does. The results, Giles finds:
… show that while “wealth inequality fell after the First World War and that this fall levelled off after 1980 … there is no sign that wealth inequality in Europe is rising again. … The finding that wealth inequality has not been rising in the last 30 years in Europe is a fundamental challenge to Prof. Piketty’s thesis that all advanced economies have been witnessing a turnround in a long historic trend of falling wealth inequality after 1980. The data does not suggest that is true.
When you make a universal claim about modern capitalism that may not hold for a large, advanced economy like Europe’s, then that is, in the words of economist Tyler Cowen, “a serious problem.” Other analysts don’t think so. Ryan Avent of The Economist argues that the differences in wealth inequality numbers are relatively minor — the 1% still have the lion’s share — and that forthcoming research will back up Piketty.
Which leaves policymakers where, exactly? Piketty’s advocacy of ultra-high tax rates on income and wealth are non-starters, at least for the near future–not to mention economically injurious ideas. Left-center economist Larry Summers suggests focusing on raising middle-class incomes, increasing social mobility, and making it “more difficult to accumulate great fortunes without requiring great social contributions in return.” My take: fight crony capitalism, boost mass capitalism.
Summers offers a number of suggestions, including loosening intellectual property protections and encouraging profit-sharing plans. And especially this: “Probably the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity, and an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.”