reviews and thoughts on Piketty's Capital in the 21st Century

I don't have any plans to read Thomas Piketty's famous/infamous book. It's 700 pages long and I've just read another book on a similar topic that was dear to a friend/colleague of mine. I have read a bunch of reviews on the book-- and those have ratified by sense of the book, that it is not worth my time. 

Here's what I know: By all appearances, the book is on a topic that is over-rated in both its consequences and purported causes-- and it relies on a basic approach that is vastly over-sold (the measurements of income inequality and wealth inequality are somewhere between suspect and narrowly/conveniently-cited). If you want an ok data book on the narrow topic, check out my review of Wilkinson and Pickett. If you're interested in the broader topic, I would recommend Tyler Cowen's Average is Over or especially, Charles Murray's Coming Apart.  

Since I have not read the book, of course, I cannot strongly recommend reading it-- or not reading it. (Ahh, that reminds me of a funny story about my brother and Dietrich Bonhoeffer's The Cost of Discipleship!) So, why blog on it? What do I have to add? A few comments here and there-- but mostly, I want to provide a one-stop-shop blog-post for those who want all of these reviews in one place. (If I find more useful reviews, I may post updates. Here's an excellent summary review from Jonah Goldberg of what I have below-- and more. Update: Cato now has a book that summarizes the arguments.)

1.) Concerns about his data:
a.) Piketty follows the well-worn path of many on the Left-- in using certain (convenient?) inequality numbers out of ignorance or bias. Here's Abby McCloskey: "Piketty examines pretax, pretransfer incomes over the past several decades, a time during which the US has massively expanded its transfer programs...When assessing incomes in the US on a post-tax, post-transfer basis, income inequality is much less severe than the levels identified by Piketty. When assessing inequality on the basis of consumption, it is even less pronounced. However, Piketty does not examine consumption inequality. By focusing on only part of the overall story, capitalism appears to be unstable, whereas the political process has produced fairly stable consumption shares through expanded transfers." UPDATE: For an update on terrific data in this regard, see: this.)

b.) Beyond the general over-reach of these statistics, there are questions about whether Piketty fudged his data (see: here and here-- vs. here for a critique of the Giles' piece).

c.) Then there's Piketty's apparent ignorance of the impact of 1980s tax reform on earned, measured, and reported income. The reduction in the top marginal tax rate from 70% to 50% to 28% dramatically increased the after-tax share that owners of taxable capital income could keep (2.4 times higher!). From Martin Feldstein: This "provided a strong incentive to shift assets from low-yielding, tax-exempt investments like municipal bonds to higher yielding taxable investments." Beyond that, the tax reduction greatly encouraged 1.) more work; 2.) more income to be paid as taxable salaries (vs. fringe benefits and deferred compensation); and 3.) reduced the use of deductions and exclusions ("tax avoidance"-- or its illegal cousin, "tax evasion"). The 1986 tax reform also repealed the General Utilities doctrine, a provision that had encouraged high-income individuals to run their business and professional activities as Subchapter C corporations, which were taxed at a lower rate than their personal income. (This "did not appear in the income-tax data that Mr. Piketty studied.") The punchline: "The tax data therefore signaled an increase in measured income inequality even though there was no change in real inequality." I don't know the literature to go that far, but I can tell you that Piketty's data doesn't take him where he thinks/wants.

d.) Apparently, Piketty uses "great literature" to great effect. Unfortunately, his reading of literature is selective. Check out this awesome piece by Salim Furth. Furth cites "One Thousand and One Nights", "Little Women" and "Around the World in 80 Days" to make his point, before concluding: "The writers of the past are equally valuable for illuminating the astounding progress of economic growth in the past two hundred years, a fact Piketty acknowledges but to which he devotes little ink...He reports most statistics as percentages of national income. But when per-person national income was doubling every generation, it was surely a more noticeable phenomenon than a few percentage points of national wealth more or less in the portfolios of the top centile."

e.) Stan Veuger also has some fun with history and pop culture-- following Piketty in referencing "The Titanic" to make a similar point about Piketty's selective literary bias and the fact that he (largely or completely?!) ignores income mobility: Piketty "takes the total wealth of the richest people in 1987, compares it to the richest people today, and finds that they have gotten richer, at an annual rate of almost 7 percent net of inflation...He compares people in 1987 who were rich at the time to an almost entirely different group today. In Piketty’s world, of course, the super wealthy only become more super wealthy because the returns on capital are super high and they rule the universe, so you would expect this group not to change much. In the actual world we live in, things are very different. To show you this, I decided to use the same source Piketty uses: the Forbes ranking." Veuger finds almost complete turnover in the Top 10 (except for WalMart) and calculates that their wealth increased by 0.5% per year-- not exactly "the 7% propagated by Piketty". Punchline: "If it weren’t for Wal-Mart, the wealthiest people in the world would actually have lost about half of their wealth in the last 25 years. That doesn’t sound like patrimonial capitalism to me, and it goes to show how deeply misleading arguments can be that are developed while one is blinded by fury over false accusations of necklace theft."

f.) Various observations from Guy Sorman: 1.) As above, "Piketty’s statistics are superficially impressive, but they can’t be taken at face value. His gross income figures, for instance, exclude redistribution and social programs. The inequality figures he cites would be much less striking if he computed them—as is commonly done—based on net income after redistribution. Not doing so seriously distorts economic conditions." 2.) "Piketty seems unwilling to concede that income alone, however calculated, does not account for all social reality: we all benefit from progress in multiple areas—health, transportation, consumer technologies—regardless of income." 3.) Piketty "writes that the current divergence was initiated by the policies of Ronald Reagan and Margaret Thatcher, who 'scrapped taxes on the wealthy.' The inadequacy of his framework is powerfully illustrated by the example of France, where the gap between the so-called 99% and the 1% became wider under a socialist government during the 1980s...This contradiction between ideological judgments and objective data is the book’s fundamental flaw. The emergence of a super-wealthy minority has likely occurred for different reasons in different countries. For instance, the new oligarchies in Russia, Nigeria, or China can’t be explained as a consequence of the free market...entrepreneurs like Bill Gates or large hedge fund managers operate in a worldwide market, gaining unprecedented profits. Their riches may be considered excessive or unfair—but that would be a moral judgment, not an economic one."

g.) Fun with the same sort of approach to the data-- from Stephen Moore and Richard Vedder-- at the state level... 

h.) A good summary piece on many of these points-- and some others. For a really nice discussion of all of the above (and more), check out this set of articles from AEI.

2.) A range of specific theoretical concerns:
a.) Piketty implicitly assumes that people live forever. Feldstein: "But they don't. Individuals save during their working years and spend most of their accumulated assets during retirement. They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests. The result is that total wealth grows over time roughly in proportion to total income."

b.) Beyond the fact that wealth inequality is a largely useless measure, Piketty is schizophrenic about whether accumulating/spending wealth is a good or bad thing. Andrew Biggs: "Pretty much every economics textbook will tell you that r is greater than g, but none of the textbook models take from this that the capital stock will rise endlessly relative to the economy. Most of them hold that it stays pretty constant, and the historical evidence supports that view. The reason is that accumulated wealth is usually spent...But what if people don’t spend down their savings? That seems to be Piketty’s assumption, at least for the very rich: they build more and more wealth which they don’t spend, and that wealth generates capital income, which they also don’t spend, and so on. If that happens, then the capital-output ratio does keep rising. But this also means that Piketty’s rich-get-ever-richer projection can happen only if the rich don’t live like rich people, that is, that they don’t spend their wealth or the income generated by their wealth. All those savings just sit there making the economy more productive and, in the process, raising wages for the proletariat while the top 1% don’t actually consume any of the returns on those savings. Piketty’s scenario is close to Charles Murray’s desire that the rich live a little less ostentatiously...In other words, for Piketty’s prediction to come about you need a top 1% that doesn’t live like the top 1%." Building on that, something from Anthony de Jasay...

c.) Piketty (and Krugman) are mysteriously selective in their concerns about the Laffer Curve's recognition that incentives matter in macroeconomics and tax rates.

d.) Likewise, Allan Carlson argues that Piketty has "ghosts in his attic"-- Polanyi, Schumpeter, and most interestingly, Chesterton and Belloc (in ways that should be provocative to conservatives and libertarians).

e.) From AEI's Kevin Hassett (h/t: Abby McCloskey): "Piketty’s argument rests on the assumption that the elasticity of substitution between capital and labor is greater than 1, which is to say that capital and labor can be easily substituted...[But] the elasticities in the economics literature are much lower than Piketty needs to support his story, and even these estimates are high because they exclude [housing] from the analysis, something Piketty includes. In plain English: if you cannot make a hamburger with a building, then capital and labor cannot easily be substituted for each other, and the collapse of capitalism that Piketty predicts does not occur...Indeed, if housing is excluded, the sharp increase in capital is almost eliminated..." (See also: George Priest at AEI and Garett Jones at Reason.) UPDATE: This work by Rognlie has been a recent smash.) 

f.) Piketty largely ignores the importance of information in markets and the role of entrepreneurs. Don Boudreaux: "The entire tenor of Piketty’s volume suggests that he thinks capital reproduces itself, both from the perspective of its individual owners and from the perspective of society at large. The creativity and fortitude of entrepreneurs, the skillful risk-taking by investors and the insight and effort of managers are all strangely absent throughout Piketty’s performance. These very fonts of modern prosperity are at best assumed to play uninterestingly routine and unseen roles backstage. Onstage, capital—the stuff that is in fact created and skillfully steered by flesh-and-blood entrepreneurs, investors and managers—appears to grow spontaneously, without human involvement."

g.) Lawrence Summers' review of Piketty is quite helpful. Alex Adrianson quotes him in part, noting Summers' critique of Piketty: that he a.) "misreads the literature by conflating gross and net returns to capital"; b.) ignores owner-occupied housing; and c.) ignores income mobility. R.R. Reno notes that "Technology and globalization significantly shift the competitive advantages for certain kind of talent, labor, and expertise...Globalization has put vastly more resources at the finger-tips of the so-called creative class." He cites an example given by Summers in support: “Think about the contrast between George Eastman, who pioneered fundamental innovations in photography, and Steve Jobs. Jobs has an immediate global market, and the immediate capacity to implement his innovations at very low cost, so he was able to capture a far larger share of their value than Eastman. Correspondingly, while Eastman’s innovations and their dissemination through the Eastman Kodak Co provided a foundation for a prosperous middle class in Rochester for generations, no comparable impact has been created by Job’s innovations."(In another essay in FT, Reno compares Piketty to Paul Ehrlich's The Population Bomb-- both of which argues that "the past devours the future". This view is interesting for people who are big fans of govt deficit spending.)

g.) Various observations from Guy Sorman: Piketty "attacks economists for 'relying too much on mathematical models and not understanding the deep structures of capital and inequality.' He thus ignores the fact that economists whom he dislikes have identified the actual factors of growth—such as property rights and the rule of law—based on empirical observation." Piketty never asks if "billionaires, through philanthropy or by financing new economic activity, might spread their wealth more effectively than the government does by confiscating it. Philanthropy is non-existent in France, and it goes entirely unexplored by Piketty."

h.) Update (June 2015): A terrific review by Casey Mulligan in The Independent Review... and another by Juan Ramon Rollo in IIR in 2018.

3.) On the normative side of things...
Kevin Vallier, a political philosopher, reviews the normative claims made by Piketty-- in an introduction to a five-part blog post-- and then, so far, in part 2. For what it's worth, he thinks the book "is better than most of its critics think and worse than most its supporters think."

Vallier wants to subject its "normative claims...to critical scrutiny: noting that few reviews "have addressed his normative claims, and fewer still have said anything in much detail." He assumes "for the sake of argument, that all of his theoretical and empirical claims hold" and is "interested only in the following question: supposing that Piketty is right about the nature of capitalism, what are the normative implications?"

Vallier concludes that they are "far less clear than Piketty thinks. If you want to draw normative conclusions from Capital then you will have to significantly reconstruct his arguments...Piketty is probably right that income and wealth inequality have been increasing in developed countries over the past several decades, he is probably wrong that this is explained best by r greater than g...and he is very likely wrong to think that capitalism is normatively defective in the ways he describes and that a global wealth tax is a normatively acceptable solution."

In Part 2, Vallier discusses what seem to be key points for Piketty: that wealth inequality will lead to social instability and that a progressive, global capital tax will reduce wealth inequality and increase stability. Vallier agrees with Piketty that a margin of wealth or income inequality exists that would be unstable. But Vallier concludes "I don’t think we have any good reason to think we’re in danger of instability-generating levels of wealth inequality any time soon. Most people don’t really care that, say, Bill Gates is wealthy. They largely care about the wealth levels of their next door neighbors. I’m sure if Bill Gates owned three-quarters of the globe that people would care, but why think we’re anywhere near that level? Piketty owes us an argument."

Vallier argues that absolute well-being also matters-- a point ignored by Piketty. (Revolution is more likely if people are starving vs. comfortable, whatever the amount of inequality. Here is a Piketty-like analysis applied to weight inequality.) And he notes that it is difficult/impossible to know the specific margin (probabilistically, what is the magic number or range?) This reminds me of the concerns about the federal debt: one can say that it's not morally justified on various grounds. But practically, no one knows if we're near the cliff. The best we can say, confidently, is that we're driving toward the cliff quickly. A related question is whether we would reach that cliff soon. (If not, it doesn't make sense to embrace the RX soon). And Vallier questions whether the global tax is ethical and especially, whether it would work in practice. Apparently, none of these vital questions is addressed in the book.


4.) On policy...
Vallier notes that Piketty's pronouncements and prophecies are vague (smart move), whereas his policy prescriptions are quite aggressive and lacking humility. (This pairing is the opposite of the Wilkinson and Pickett book!) Here's Clive Crook on the same theme: "There's a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he's all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable."

The funny thing is that I share many of Piketty's concerns about income inequality-- or more particularly, poverty. But there is the reality of that state; the varied causes for the effect; and ethical and practical solutions to the problem. 


One more review essay from FT.