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Riketty Piketty

John Rentoul

pikettydwuk Riketty Piketty If Thomas Piketty’s thesis is that rich countries are moving inevitably and imminently to Victorian levels of inequality, it is not supported by the evidence he adduces for the UK.

I haven’t read much of the book yet, but I am suspicious of it, because it seems to be telling wide-eyed anti-capitalists what they want to hear.

I agree with them and with him that too much inequality is a bad thing. But you cannot begin to do something about it unless you understand it, and that includes knowing whether inequality today is remotely comparable to that of the cusp of the 19th and 20th centuries.

My complaint about many of the readings of Piketty’s book is that they are liable to induce fatalism (if rising inequality is as “inevitable” as Pikettists seem to think it is) or extremism (such as Piketty’s support for an 80 per cent rate of income tax).

Fortunately, the backlash against Piketty is beginning. David Smith has made his article in The Sunday Times free to read:

The criticisms are starting to mount, even from some who might be expected to be sympathetic to Piketty. Tyler Cowen, the well-regarded professor of economics at George Mason University and co-author of the hugely popular Marginal Revolution website, finds serious flaws.

“Overall, the main argument is based on two false claims,” he wrote recently. “Firstly, that capital returns will be high and non-diminishing … Second, that this can happen without significant increases in real wages … I’m not convinced by the main arguments and the positive reviews I have read worsen rather than alleviate my anxieties.”

James K Galbraith, son of the legendary Keynesian economist J.K. Galbraith, and like Cowen an economist who has done a lot of work on wages and income distribution, has been even more critical. Writing in Dissent, a quarterly journal, Galbraith accuses Piketty of a “terrible confusion” between physical capital – the plant, machinery and buildings needed to make things – and financial wealth.

In straightforward terms, leaving aside academic niceties, Galbraith accuses Piketty of getting his understanding, and his facts, wrong. “In global comparison, there is a good deal of evidence, and (so far as I know) none of it supports Piketty’s claim that US income today is more unequal than in the major developing countries,” he writes. Branko Milanović identifies South Africa and Brazil as having the highest inequalities. New work from the Luxembourg Income Study (LIS) places Indian income inequality well above that in the United States.”
Piketty does not, he concludes, “provide a very sound guide to policy” and the book “is not the accomplished work of high theory that its title, length and reception (so far) suggest.”

Economists are meant to disagree and, though nobody would accuse Cowen and Galbraith of it, Piketty’s success is provoking more than a little professional jealousy. That said, there are three important flaws in the book. The first is that the idea that the rate of return will always exceed the economy’s growth rate is assertion, and most likely incorrect assertion, rather than fact. The period leading up the financial crisis of 2007-9, indeed the prime cause of the crisis, was the quest for a higher rate of return – the search for yield – in a world of low returns. That led to the taking of big and in the end highly destructive risks.

The second flaw is that Piketty is guessing. He is assuming, because it happened in the 18th and 19th centuries, and has been happening in the past three decades, that rising inequality is the new norm. Nobody knows whether that is the case or not. Inequality is diminishing between countries, thanks to the rise of economies like China and India, which is raising living standards in those countries. Inequality is rising in those countries, as happened in Britain, France and America after their industrial revolutions. But you would expect inequality to diminish in these countries, as Kuznets recorded in America, not least because mass production requires a mass of consumers.

The third flaw, as even Krugman concedes, is that Piketty’s model might explain why plutocrats are getting ever wealthier but does not explain the phenomenon of the past three decades, the rise of top salaries. Chief executives, in banks elsewhere, are paid sums relative to the average worker that their predecessors could only dream of. That reflects their bargaining power and persuading enough people – maybe in some cases wrongly – that their talent is in short supply and has to command premium international rates. You do not need three centuries of data, Austen and Balzac to explain it. And already there are signs of a self-generated backlash against some of these boardroom excesses.

The data for Piketty’s book are here.

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  • newfriendofed

    It seems very likely that Piketty is, indeed, right. If so, it creates a serious problem for New Labour, circa Mendelson. As such, it is inevitable that J. R. would oppose him. I think what is most relevant is that Piketty has discovered a law. What he predicts is not imminent but it will happen unless we bite the bullet and return to pre-Blairite levels of taxation. A Nobel for Piketty and eating of hat for J.R.!

  • Pacificweather

    Think of this as a public service. JR is disseminating information to a wider public. Some of us are too cheap to pay for the Sunday Times, don’t visit the site and may therefore miss an article that is free. Personally, I am grateful for such public service blogging. When I visit the Sunday Times, as a result of this encouragement, the author and the advertisers will be pleased. Nobody loses – everybody gains. Especially me.

  • Pacificweather

    Other people’s money. That’s the reason executive pay has risen. Fund managers have a vested interest in raising the level of executive pay to justify raising their own. If we all bought our own shares and turned up to the AGM it might be a different story.

    The reason for the drop between 1910 and 1970 is two world wars. The death of the first, second or even the third son destroyed many wealthy families, particularly those whose wealth was in land, coal, slate etc. followed by steel and ship building. The Great War, in particular, was a very egalitarian war.

    None of this is some sort of mysterious new economic discovery. The rich get richer and the poor get relatively poorer (sometimes actually poorer) unless events conspire to upset the apple cart. Capitalism would not work if that was not the case because that is how capital is acquired. If one of those events is a shortage of workers causing wages to rise there are a world of workers only too happy to drive down the wages of the working class. If you are fortunate enough to live in times of rising wages save your money in property because sure as eggs is eggs it ain’t going to last.

  • Paetchee

    Obviously he hasn’t read the part where Piketty talks about high executive salaries. Their rise is explained independently of capital accumulation.
    I do value blogging, but please check if the information you disseminate is correct.

  • MrHarryLime

    Well, the graph at the top of the article shows that inequality began to widen again in the 1970s and has continued pretty steadily on that trend for the last 40 years. As I understand it, that supports Piketty’s argument.

    Rentoul’s suggestion that Piketty is ‘guessing’ is something that could be said about any projection into the future. All you can do is look at trends and interpret how they will go in the future, and give your reasons why. And your opponents will always say you’re ‘guessing’, just as the opponents of climate change say there’s no proof that the world will get warmer.

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