Contributor Post Created with Sketch. Has Piketty’s Soft Marxism Run Afoul of Hard Math?

 

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.”

There are 7 comments.

  1. Tuck Inactive

    “Some free-market types…”? Odd choice of terminology…

    “My take: fight crony capitalism, boost mass capitalism.”

    So you must be one of those free-market types! It’s hard to tell, though.

    • #1
    • May 27, 2014, at 1:04 PM PDT
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  2. AIG Inactive
    AIG

    James Pethokoukis: And he offers mounds of data as support.

     Well, here’s the problem: he doesn’t. Whether the way he aggregates his data or adjusts is right or wrong, is a secondary issue.

    The main issue is that all he does is provide some time-series data, which in themselves can never provide “support” for any causality arguments, let alone some as complex as those related to wealth and income in an economy. 

    So there was never any reason to take what he says so seriouslly: he’s not doing “economics”. He’s writing a policy book for policy people. 

    To make arguments that x is causing y, you need a bit more than just a graph of x or y over time.

    • #2
    • May 27, 2014, at 3:39 PM PDT
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  3. Rachel Lu Contributor

    Those sound like great suggestions, and the land-use restriction issue could get some political traction too perhaps. Especially now that telecommuting etc has made it possible to do many jobs remotely.

    • #3
    • May 27, 2014, at 3:45 PM PDT
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  4. oddhan Inactive
    oddhan Joined in the first year of Ricochet Ricochet Charter Member

    I have not read Piketty, but arguing that capital ownership prevents social mobility is just bunk in the face of history. My favorite example of how pointless it is to worry about the existence of people poorer than rich people is Weyerhaeuser. Here’s a guy working a minimum wage job, who realizes he’s got to do something with his life. Before he dies he’s the biggest private land owner ( by acreage ) in the US. Sure he was a 1%er but he wasn’t born that way. And owning all of that capital (land) hasn’t destroyed the lives of the American people.

    More importantly, capitalism ( as opposed to socialism ) is not static. Go back thirty years, how many big companies of that era remain? If it was a toy or game company it was probably bought by Hasbro. If it was a defense contractor it was probably bought by Boeing or Martin. If it was a food company, it was probably bought by ConAgra. If it was tech…..well, it’s probably history.

    Piketty needs to live life outside the academic bubble.

    • #4
    • May 28, 2014, at 10:11 AM PDT
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  5. Nat Brooks Inactive

    The concentration of wealth that Lefties worry so much about is much less concerning than the concentration of power. The crony capitalism of European nations, and increasingly the US, is a much bigger problem. If a freer market led to greater wealth for the 1%, I could care less. But when this money leads to or enables rent-seeking, “cooperative regulation” and other “consensus schemes” to save the 99% from this trouble or that, then the invisible hand withers and falls off. Not good!

    • #5
    • May 28, 2014, at 11:56 AM PDT
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  6. barbara lydick Coolidge

    oddhan: If it was a defense contractor it was probably bought by Boeing or Martin.

     And that (in the early 1990s) was government directed. Known as the Last Supper, then Defense Sec’y Les Aspin summoned the chief executive officers of the nation’s 15 biggest defense contractors to the Pentagon and bluntly told them they needed to start consolidating. (Rumor has it that Norm Augustine, then Chm, Martin Marietta*, was on his phone before the meeting ended.) Within a few years, roughly 40 major players had shrunk to about 6.

    That picture is reversed today. A few years ago, Ashton Carter, the Pentagon’s top acquisitions official cautioned that the department would take steps to prevent mergers and acquisitions within the ranks of major defense contractors like Raytheon and Boeing.

    *He orchestrated the Lockheed Martin merger and became CEO.

    • #6
    • May 28, 2014, at 12:13 PM PDT
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  7. AIG Inactive
    AIG

    Here is an excellent post from Marginal Revolution: http://marginalrevolution.com/marginalrevolution/2014/05/is-pikettys-second-law-of-capitalism-fundamental.html

    It kind of follows my arguments: this isn’t an issue of “errors” in formulas or ways of aggregating data or which data-set to use. Those are all secondary issues.

    The issue is more fundamental.

    • #7
    • May 28, 2014, at 3:18 PM PDT
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