Saturday, November 22, 2014

Piketty and the Zeitgeist

PRINCETON – I get the same question these days wherever I go and from whomever I meet: What do you think of Thomas Piketty? It’s really two questions in one: What do you think of Piketty the book, and what do you think of Piketty the phenomenon?

The first question is much easier to answer. By sheer luck, I was among the earliest readers of the English-language version of Capital in the Twenty-First Century. Piketty’s publisher, Harvard University Press, had sent me the pre-publication galleys, hoping that I would contribute a blurb for the back cover. I did so happily, as I found the scope, depth, and ambition of the book impressive.

I was of course familiar with Piketty’s empirical work on income distribution, carried out jointly with Emmanuel Saez, Anthony Atkinson, and others. This research had already produced startling new findings on the rise of the incomes of the super-rich. It had shown that inequality in many advanced economies has reached levels not seen since the early part of the twentieth century. It was a tour de force on its own.

But the book goes far beyond the empirical work, and narrates an intriguing cautionary tale about the dynamics of wealth under capitalism. Piketty warns us not to be fooled by the apparent stability and prosperity that was the common experience of the advanced economies during a few decades in the second half of the twentieth century. In his story, it is the un-equalizing, destabilizing forces that may be dominant within capitalism.

Perhaps more than the argument itself, what makes Capital in the Twenty-First Century a great read is the sense of witnessing a superb mind grapple with the big questions of our time. Piketty’s emphasis on the political nature of the distribution of income; his subtle back-and-forth between the general laws of capitalism and the role played by contingency; and his willingness to offer bold (if, to many, impractical) remedies to save capitalism from itself are as refreshing as they are rare for an economist.

So I would have liked to claim that I was prescient in foreseeing the huge academic and popular success that the book would have upon publication. In truth, the book’s reception has been a big surprise.

For one thing, the book is hardly an easy read. It is almost 700 pages long (including the notes), and, though Piketty does not spend much time on formal theory, he is not beyond sprinkling an occasional equation or Greek letters throughout the text. Reviewers have made much of Piketty’s references to Honoré de Balzac and Jane Austen; yet the fact is that the reader will encounter mainly an economist’s dry prose and statistics, while the literary allusions are few and far between.

The economics profession’s response has not been uniformly positive. The book’s argument revolves around a number of accounting identities that relate saving, growth, and the return to capital to the distribution of wealth in a society. Piketty is very good at bringing these abstract relations to life by hanging real numbers on them and tracing their evolution over history. Nevertheless, these are relationships that are well known to economists.

Piketty’s pessimistic prognosis rests on a slight extension of this accounting framework. Under plausible assumptions – namely that the wealthy save enough – the ratio of inherited wealth to income (or wages) continues to increase as long as r, the average rate of return to capital, exceeds g, the growth rate of the economy as a whole. Piketty argues that this has been the historical norm, except during the tumultuous first half of the twentieth century. If that is what the future looks like, we are facing a dystopia in which inequality will rise to levels never before experienced.

Yet extrapolation is dangerous in economics, and the evidence that Piketty adduces to support his argument is hardly conclusive. As many have argued, the return to capital, r, may well start to decline if the economy becomes too rich in capital relative to labor and other resources and the rate of innovation slows down. Alternatively, as others have pointed out, the global economy may pick up speed, buoyed by developments in the emerging and developing world. Piketty’s vision needs to be taken seriously, but it is hardly an iron law.

Perhaps the source of the book’s success should be sought in the zeitgeist. It is difficult to believe that it would have had the same impact ten or even five years ago, in the immediate aftermath of the global financial crisis, even though identical arguments and evidence could have been marshaled then. Unease about growing inequality has been building up for quite some time in the United States. Middle-class incomes have continued to stagnate or decline, despite the economy’s recovery. It appears that it is now acceptable to talk about inequality in America as the central issue facing the country. This might explain why Piketty’s book has received greater attention in the US than in his native France.

Capital in the Twenty-First Century has reignited economists’ interest in the dynamics of wealth and its distribution – a topic that preoccupied classical economists such as Adam Smith, David Ricardo, and Karl Marx. It has brought to public debate crucial empirical detail and a simple but useful analytical framework. Whatever the reasons for its success, it has already made an undeniable contribution both to the economics profession and to public discourse.

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    1. Commentedsilvio starosta

      I think that we can have all kind of discussions, from here to eternity.
      And maybe some charts may suggest doubts or interpretations, but.. there is one fact that is ,lets call that is absolute and nothing relative.
      The extreme poverty, the extreme inequality and the time of injustice we are having at the present world, is no matter of discussion, other thing is that there are many people looking to the other side.
      Taking this into account, I really don't care about "certain doubts".
      Piketty is not a terrorist or a comunist or brother of Osama bin laden. He is an economist , so lets open our eyes to reality.
      Under the present circunstances we are going on a wrong direction
      The "markets", not Piketty, are destroying the capitalism.
      In the other side Google is worthy than General Motors.
      What we will find at the end of this road ??

    2. Portrait of Michael Heller

      CommentedMichael Heller

      I cannot resist the temptation...

      Now that Chris Giles the excellent Economics Editor of the Financial Times has found the Piketty findings are “undercut by errors” we may assume the coming of a fun Data Deluge.

      Piketty’s Rogoff Moment has begun. I predict the next Project Syndicate piece on Piketty may legitimately be called Le Piketty Dénouement, or Piketty’s Sehr Short Zeitgeist.

      Alternatively, just Piketty and Schadenfreude.
      Heller Economic History Entertainments

    3. CommentedG. A. Pakela

      If Piketty were really right, our world would be dominated by the Astors, Rockefellers, Kennedys, Fords and other heirs of great fortunes. Instead, we have Bill Gates, Mark Zuckerberg (who apparently doesn't even own a suit) and Warren Buffett. Two decades from now there will be another crop of ultra rich, and that will be based on some as yet unknown entrepreneurs who strike on a great idea and make a fortune.

    4. CommentedJames Edwards

      Piketty's book provided interesting evidence of the dynamics of the inequality however has pointed the need for the wealth tax simply because the political system is being bought by the wealthy with vested interest in legislation that would benefit their businesses.

    5. CommentedWilliam Wallace

      Indeed, the rise of a strong middle class, and broader distribution of wealth, coincided with key historical variables in labor supply and demand, and level of technology. Mass employment of semi-skilled and skilled labor was possible during that window of opportunity, but the core industrial production left after advanced mechanization is too small to create broad employment opportunities.

      The middle classes in China and India may have even shorter shelf-lives, as already slight rises in manufacturing salaries are giving way to robotization and elimination of jobs.

      While true that emerging and new technologies provide new forms of work, it cannot be said with any confidence that skill sets may be made broadly available. IOW, there are large segments of the population who may never quite qualify for intense knowledge-based work, regardless of educational efforts.

      We are for all intents and purposes now returning to the historical norm of great imbalance between labor and capital. What we need to address is what sort of working model can we come up with that neither discourages initiative nor leaves the general population unprotected.

    6. Commentedphilip meguire

      The Depression and WWII gave rise to confiscatory progressive income tax systems. For example, during 1946-63, the USA taxed incomes over about 3M/year in current dollars, at a 91% marginal rate. The result was that all salaries and bonuses exceeding about 500K/year disappeared. Thatcher, Reagan and Roger Douglas put an end to this confiscatory regime, very high salaries soon emerged, and income Ginis fell throughout the OECD. While the share of income going to the top 1% rose, so did the share of total income taxes paid by this group. It is likely that a return to the income tax parameters of the 1950s and 60s would require that the middle and working class pay higher effective tax rates, or a contraction of the public sector. This is not to argue that prevailing tax systems are necessarily ideal. I advocate further reductions in the tax liabilities of the bottom 50%, and getting the top 1-5% to pay more income tax. Just how to do this is a matter of trial and error.

      There is no good data on the size distribution of household wealth in any G7 country, mainly because wealth is easy to conceal and financial wealth is untaxed. Closely held firms are very hard to value. But I submit that wealth does not matter as long as the income streams generated by wealth are fairly taxed.

      The link below is to a WSJ oped by Martin Feldstein, an authority on public finance. I warmly endorse every objection Feldstein raises to Piketty's handling of the data and understanding of the institutional realities.

      If the world worked as Piketty thinks it does, household net worth would grow faster than personal income. In fact, the difference between the two annual growth rates, USA 1946-96, was only 0.1%. 1996-2013, personal income grew 0.8%/year more than HH net worth, thanks to the 17% decline in net worth during 2008. HH net worth includes the capitalised value of DB pensions, but not the capitalised value of Social Security benefits, a major form of wealth for the bottom 60-80% of households.

      The way forward is blunting the hard edge of poverty, not confiscating the wealthy.

        CommentedJames Edwards

        The way forward is blunting the hard edge of poverty, not confiscating the wealthy.

        I'm going to have to disagree with your assessment of confiscating the wealthy because the wealthy will find ways to make money regardless of the tax rate imposed. We did have wealthy people in the years after 1946 and before.

    7. Commentedfatih kök

      Mr. Rodrik, Turkey's crony capitalısm killed more than three hundred people ın Soma Manisa as you know from latest news.
      what ı request from you is to write a concise article about this phenomenon in Turkey economy

    8. Commentedhari naidu

      Dani has the right background and academic experience to understand the internal (dynamic) contradictions of Capitalism.

      Karl Marx ventured to conjecture that internal contradictions will ultimately undo Capitalism – as he witnessed it in Ruhr Valley (Germany).

      Piketty is going a step further to find empirical evidence to challenge the central thesis of Capitalism a la America.

      In contrast, EU, under Lisbon Treaty, underwrites an Industrial Policy based on a social matrix (incl. VAT). In other words, what the German’s call, “social ekonomie” based on safety net.

      Now, witness modern developments in subcontinent of India and mainland China, inequality is dangerously dividing the social cohesion and fabric of society and its political process.

      My take on the French economist is simple because Marxist thinking has always been a part and parcel of French intellectual (academic) life for a long time.

      American's – on the right - will find his conclusions as a critique of their infantile social system and its political economy.

    9. CommentedProcyon Mukherjee

      I am curiously attracted to Ernst Engel’s First Law, “The poorer a family, greater the proportion of its expenditure that must be devoted to the provision for food”, or to put it differently greater the income, smaller the relative percentage of outlay for subsistence.

      This is no earth shattering discovery, but it is at the core of Piketty’s observation that when low and middle-income earners have a stagnating prospect of income growth, their consumption propensity, that which drives the base of the economy in terms of goods and services, would fall, impacting g, while r which comes from inheritance, would continue to grow unabated.

      But as Rodrik is right, extrapolation is dangerous, and there must be a point of inflection.

    10. CommentedYoshimichi Moriyama

      The Zeitgeist today is that exclusive or almost exclusive pursuit of economic interest will almost automatically lead us to good society and that texts of economics provide us with the key for arriving at that earthly paradise. We have elevated economics, without the awareness of elevating blindly, to that status afforded to Newton's and Einstein's physics.

      I must admit that economis today has becom such a highly sophisticated discipline beyond a layman to make an adequate comment, but economics does not stand above time and place. It can be best interpreted in a historical context; John Locke, Adam Smith, Malthus, Ricardo, Say, Keynes, etc., cannot stand aloof above their times. It is time we should underappreciate our mythical faith in economics and tame and bring economics to its proper place.

    11. CommentedZsolt Hermann

      I think the unprecedented response to Piketty's book is based on its scope and fundamental research, from how many sides he is supporting his conclusions, in short this is the hardest evidence to ignore or hide from regarding the self-destructing nature of our present human system and lifestyle.

      We have many facts, proof all over the place but unconsciously we still avoid putting the whole picture together as looking at the whole picture, the whole unnatural and unsustainable system we built in total incompatibility compared to the strict natural system we exist in, would force us to change, and we do not want to change.

      Instead we choose to fight, ignore facts even if they are the clearest, most obvious, or even if we agree there is a problem we "kick the can" or hope for some miracle.

      So Piketty's strength is in the systemic approach, putting a whole picture together which is hard to ignore or refute.

      The weakness of the book is its focus on economy, trying to find an economic solution to a problem that is much deeper.
      It is of course not the author's fault, he is a specialist looking at his field.

      But his work is similar to a skin doctor who wants to treat specific skin changes with his ointments, when the skin changes are simply symptoms of a cancer breaking out.

      Economics and trade is simply the external representation of the inter-relationships in between human beings.
      Banking systems, political governance is simply facilitating institutions for the economy and trade to maintain its function.

      The root, the main driver is human nature, which influences how we relate to each other.
      And our untamed, inherent human nature is self-preserving, self-calculating, egocentric, viewing others as enemies and competitors.

      Thus regardless of the initial idea, good intentions this inherent nature of ours will corrupt the system regardless of what and how we try.
      This nature brought down all previous, glorious civilizations, corrupted Marx's ideas, and finally corrupted modern democracy and freedom, and the promising, free-market capitalistic system.

      So Piketty's depression is spot on in a way that unless we first correct, re-route our human nature, allowing it to build mutually complementing, and cooperating human relationships, shifting from competition to collaboration, from self-calculations to primary collective calculations, it does not matter what structure, ideology, political, economical, financial system we try, we will fail again and again.

      So what we all need to work out as soon as possible how to introduce a new education system, and how to change the values of society so we treat the real problem and not the superficial symptoms.