Monday, December 29, 2014

As the Year Comes to an End, Another Take Down of Thomas Piketty's "Capital in the Twenty-First Century"

 Clive Crook hits the sweet spot:
Last month the Financial Times chose Thomas Piketty's "Capital in the Twenty-First Century," a study of the underlying dynamics of inequality, as its Business Book of the Year. The honor rather understates the book's impact. Forget "business book." "Capital" was the non-fiction publishing sensation of the year, and maybe of the decade or more. When has a work of its kind ever been so rapturously received?

Yet what a perplexing phenomenon this was. Now that the acclaim and the subsequent backlash have subsided, the Year of Piketty seems worth another moment's reflection.

Let me say at the outset, I wasn't among the book's admirers. I found it mostly infuriating...

Regarding the theory, Piketty is fond of stating "laws" of economics. He emphasizes throughout a "fundamental logical contradiction" in capitalism, arising from the fact that the rate of return on capital, r, is greater than the rate of economic growth, g. The fact that r is greater than g, he says, tends to give owners of capital an increasing share of national income; unless this is offset, by global warfare or other interruptions, it serves to widen inequality.

One problem with this, as Acemoglu and Robinson explain, is that g and r aren't independent, as Piketty's reasoning requires. Piketty's view about the future gap between r and g is a conjecture not a deduction, and one that's at odds with most of the empirical evidence. Even if r did perpetually exceed g, many other factors -- including a relatively modest amount of social mobility -- would be capable of offsetting the effect on income inequality.

Income inequality

The point is, what Piketty calls laws of economics aren't, in fact, laws. They aren't even well-established empirical regularities. Acemoglu and Robinson:

The reader may come away from these data presented at length in Piketty's book with the impression that the evidence supporting his proposed laws of capitalism is overwhelming. However, Piketty does not present even basic correlations between r-g and changes in inequality, much less any explicit evidence of a causal effect. Therefore, as a first step we show that the data provide little support for the general laws of capitalism he advances...

The signs, though, are that being wrong won't subtract much from the esteem accorded to the author and his book. Even critics of "Capital" -- including Acemoglu and Robinson -- are generous in praising Piketty for his industry and especially his ambition. Attention, social scientists. Don't worry about being wrong, just be wrong in a big way. Be wrong because you over-reach. Be wrong the way Marx was wrong (but maybe hope for less collateral damage).

Above all, admirers and critics alike pay tribute to "Capital" for drawing attention to inequality. I hadn't noticed that it was lacking attention to begin with. The American left pays attention to little else. It was really the reverse: The obsession with inequality demanded, so to speak, an academic testament, and that's what "Capital" provided. Piketty's economics leaves a lot to be desired, but his timing was fantastic.

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