Piketty and The Elephant
February 15, 2015 § 1 Comment
The Blind Men and the Elephant
The academic, political, journalistic and intellectual gadfly (like me) reaction to Thomas Piketty’s book, Capital in the Twenty-First Century is like the story we imported from India about the blind men’s first encounter with an elephant. Here is an English language 19th century version: Story. The final verse describes many of those Piketty reactions:
And so these men of Indostan
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!
In the following essay I will try to correct and expand the last post on this blog in which I wrote my own reaction to Piketty’s book. I will discuss Piketty’s review of his book. I will also comment on some of the reactions of others to his book.
Here is a link to Professor Piketty’s review of his book: Review. [The entire article is available as a pdf file by clicking on the “full text” button.]
He complains that both his admirers and critics have oversimplified his thesis by narrowly focusing on the relation between return on capital and total growth of the system, expressed symbolically r>g. He acknowledges that this relationship is an important part of his argument, but he cites other parts of his book that discuss other factors he considers equally, if not more important than the r>g ratio.
He states his purpose was to establish, based on data gleaned from three centuries, that democratic government in developed nations is losing a battle to regulate and control capitalism’s tendency toward increasing degrees of wealth and income inequality. Given that purpose, his book did not limit its argument to wealth inequality. It was equally concerned with income inequality, a problem related only incidentally to the r>g ratio. With that in mind, his book includes extensive analysis of institutional characteristics that contribute to income inequality as well as wealth inequality.
For example, the book analyzes significant financial barriers that limit access to higher education in the United States: High tuition resulting in steadily increasing student debt. As technological innovation requires increasing degrees of intellectual skill and learning, these financial demands narrow the gateways to colleges and universities. The book cites data to show that most students attending top tier universities come from families in top tiers of economic wealth: Another factor, along with inheritance, tending toward progressively increasing wealth and income inequality.
Piketty’s review of his book emphatically insists he did not intend to portray capitalism as a system that inevitably results in a plutocratic oligarchy. I think this was the main error in my previous commentary on his book. I now realize that his main purpose was, on the contrary, to demonstrate that capitalism could be preserved, but only by making the political and institutional changes necessary for a course correction. Piketty’s above-cited article elaborates on the destructive forces he believes must be attenuated if capitalism is to survive.
Piketty’s used many references to popular novels and TV programs to illustrate his thesis that cultural attitudes and belief systems were both the result and contributing causes for the evolving reactions to wealth and income inequality. He made plain his preference for this kind of analysis instead of theoretical analysis based on mathematical models. He referred to the latter techniques as unrelated to the “real world”.
His book discusses various cultural ideas that affect the concept of property ownership. Slavery, for example, was part of that concept in this country until abolished by the Civil War, so a large stock of “capital” was rendered valueless by the Emancipation Proclamation.
Piketty’s book plots the dividing line between public ownership and private ownership and how that line is moving in our culture. He observes that ownership of the air, the sea, historical monuments and other commonly owned property is now thought by some to be fit for private ownership.
He also discusses the difference between accepted principles of corporate ownership in our country and Germany. In Germany corporate governing boards commonly include representatives of affected labor unions, non-government organizations and other stake-holders. As a result the total share value of German corporations is typically lower than U. S. corporations, but Piketty observes that this difference has no apparent effect on the financial profitability of German corporations.
Ownership of oil is another factor Piketty discusses in his book, along with the cultural attitude toward its ownership compared to the attitude toward other property owned domestically but located in other countries. The history of oil ownership includes military intervention to protect it as well as intervention in the governments of countries where it is found. He regards these attitudes as significant factors affecting the ability of democratic government to control capitalism.
A country’s history of colonialism also affects these attitudes and that, in turn, affects the political effort to control capitalism’s tendency toward wealth inequality.
He traces the way political forces affect attitudes toward wealth inequality. For example, he describes how the U.S. attitude toward wealth inequality changed dramatically from the five decades beginning in 1940, to the present attitude that began to prevail in 1980.
Piketty’s review highlights his book’s data and discussion of skyrocketing corporate salaries in the U.S.. He cites data to discredit the idea that they are the result of a meritocracy. This factor contributes significantly to income inequality, but has little relationship to r>g. I mentioned this in my earlier post, but failed to distinguish it from wealth inequality.
I described my reading of Piketty’s book as similar to taking courses from an exceptional professor. When I read his review article I realized that, at best, he had given me a C+. I didn’t get his ideas wrong. But I failed to recognize their true breadth. I now understand that I picked what I thought was the theme of his book, based on my college learning of Keynes theory,which involved simple equations involving saving, investment and propensity to consume. So I didn’t realize all of the factual consequences of Piketty’s far broader canvas than Keynes used to paint his picture. Keynes was prescribing government policy to be implemented in days or months. Piketty was predicting problems and prescribing solutions in terms of decades or centuries.
This is the second draft of this effort. I scrapped the first one because it had too much verbal thrashing around and bored me. I have tried to tighten this up with fewer words while still conveying a few accurate descriptions of Piketty’s review. I’ll close with my own take on three of Piketty’s critics.
Capitalism is Too Complicated to be Analyzed
Daron Ocemoglu of MIT and James A. Robinson of Harvard University contributed an article to the same journal issue in which Piketty’s review appears. Here is a link to their article: Ocemoglu [A pdf version of the entire article is available by clicking on the “full text” button.]
They argued that Piketty had merely fallen into the same trap as Adam Smith, Malthus, Ricardo, Marx and Keynes: He foolishly tried to establish general principles to explain the way capitalism works. They compared the extent of wealth inequality in South Africa and Sweden based on data covering the period from 1910 to 2010. Their data showed that graphs plotting the extent of inequality during that time period was similar for those two countries. Their conclusion was that this proved that very different institutional environments (before and after apartheid in South Africa and during political changes in democratic Sweden) could produce similar progressions of inequality. Therefore, they argued that any effort to generalize about capitalism’s effect on inequality was fallacious.
Now I confess that I tried, but was unable to read all of this article. Here is an example of the problem I had: This is part of their explanation of their method of comparing data from two extremely disparate countries during a time period when those countries were experiencing fundamental changes in their political and cultural environments:
“Table 1 reports regressions using three different measures of r − g. First, we
assume that all capital markets are open and all of the countries in the sample have the same (possibly time-varying) interest rate. Under this assumption, cross-country variation in r − g will arise only because of variation in the growth rate, g. The first three columns in panel A of this table then simply exploit variation in g using annualdata (that is, we set r − g = −g by normalizing r = 0). Throughout, the standard errors are corrected for arbitrary heteroskedasticity and serial correlation at the country level; and because the number of countries is small (varying between 18 and 28), they are computed using the pairs-cluster bootstrap procedure proposed by Cameron, Gelbach, and Miller (2008), which has better finite-sample properties than the commonly used clustered standard errors. (The same results with “traditional”standard errors that assume no heteroskedasticity and residual serial correlation are reported in Appendix Table A1 and show very similar patterns.) In column 1, we look at the relationship between annual top 1 percent share and annual growth in a specification that includes a full set of year dummies and country dummies—so that the
pure time-series variation at the world level is purged by year dummies and none of the results rely on cross-country comparisons.” By the way, neither I nor Google could divine the meaning of heteroskedasticity. ”
In Piketty’s article he responds to these guys and I’m sure he understood their argument better than I could. His main reaction was that the time period they analyzed was too small to be dispositive of the issue they were trying to prove. But his main rejoinder was that their criticism of his book was mistaken because he fully agreed that institutional changes were important factors in his analysis of wealth and income inequality. His point was that, regardless of institutional changes, his data from three centuries showed a drift toward wealth inequality.
An Intelligent Review
The March 31, 2014 issue of the New Yorker had a long review of Piketty’s book by John Cassidy. Here is a link: New Yorker
This is a reasonable and intelligent review of the book. Cassidy expresses doubts about Piketty’s predictions of the future, but he expresses admiration for his analysis of the past. This is long article and I mention it and add a link in case you want to learn more about the book from the typewriter of a gifted writer who is not out either to canonize or demonize Piketty. He raises an interesting question: The outcome of r>g will be substantially affected if the growth rate of the economy significantly increases. Cassidy observes that, on a worldwide basis, that is happening, partly because of developments in Asia and India. He wrote about a year ago. Since then, there are reports that China’s growth rate is declining, although it is still increasing. He cites technological innovation as a probable stimulus for growth expansion. Populations in the undeveloped and developing world are gaining more access to knowledge and world markets.
I can imagine alternate results: Either deflation of wage rates in the developed world due to competition with workers in the developing world; or increased wage rates and diminished poverty in the developing world due to access to more productive agricultural techniques and to more markets for exportable goods.
Piketty has stated that he intends to keep expanding his data mining and revising his conclusions and predictions based on what he finds.
Regardless of these issues, Cassidy credits Piketty with significantly establishing the agenda for economic policy discussion by focusing attention on wealth and income inequality. That can only be a positive development.
Several apologists for financial oligarchy have tried to discredit Piketty. Of course, the Wall Street Journal gets the prize for the most transparently dishonest example. Here is a link to their article submitted by our own Phil Gramm who, along with his wife, did what he could to enable Wall Street to profit from fraudulent marketing of derivative bundles of residential mortgages, wrapped in phony AAA ratings from stock rating agencies
When Gramm was in Congress he co-authored the Gramm-Leach-Bliley Act that ended the separation of Commercial banking from Investment banking. His wife, Wendy, as head of the Commodity Futures Trading Commission, issued an order ending regulation of derivative marketing. [I wrote about their destructive careers in a previous post “The Bankinstein Fiends”]
Gramm was, in other words, on WSJ’s speed dial when they needed an author for an article to discredit an economist who published data from three centuries showing an outrageous degree of wealth inequality in developed industrial countries.
Here is a link to Gramm’s response: Gramm
He couldn’t deny the data cited in Piketty’s book, so he cited other data, based on other criteria to demonstrate that members of the working class in America only imagines that they have seen their standard of living decline while incomes of the top centile and top decile have skyrocketed. Gramm retorts, “Quit whining. You’re getting Social Security, EIC money and medicare. You should be ashamed for engaging in the ‘politics of envy’. If you want to be rich, go out there and start a new company!” “So what if you can’t send your kids to college; let ’em get a loan or go to work at McDonalds” “If you can’t afford to go to a doctor or the hospital, blame Obama; don’t expect rich people to go without their jet airplanes and 200 foot yachts just so you can feel better.”
You can read this stuff for yourself if you want to clear out your sinuses. The amazing thing is that so many Americans swallow this garbage.
This will not be the last time I try to absorb Piketty’s message. I believe he will continue to compile data and to publish the results. I hope his ideas will become the basis for a more just and equitable division of the wealth created by capitalist nations.