Live-Blogging Piketty: Reading the Book (Pt. 1)

More at The Real News

 

Above is a half-hour-long video from The Real News Network of an interview our friend and TRNN producer Lynn Fries conducted with Thomas Piketty in Paris recently.  Below is our book reviewer Steven Pressman’s fourth post on Piketty, and part one of his “live-blogging” while actually reading the book (also in Paris–oh la la!).  Find Steve’s earlier posts on Piketty (the first three are reviews of the reviews) here, here, and here. –Chris Sturr

Capital in the Twenty-First Century: Part One

WOW!!

That one word best sums up my impression of this book so far. Piketty is absolutely charming and, whether or not you agree with everything he has to say, you cannot deny that he has something to say and that this message is important. But, of course, I am slightly biased since the book is about a topic that I have spent a good deal of my professional career studying— the inequality of income and wealth.

I made it through the Introduction and Part One (100 pages of around 600 pages of text, excluding notes and references) on my trip to Paris from New Jersey and I am very impressed. The book is beautifully written (as many reviewers have noted) and Piketty is very clever. He has a unique story to tell about the historical evolution of capitalism and he is aware that most economists as well as the majority of the general public are not going to like the story and are going to be resistant to hearing it. The writing style helps put readers at ease in the hope that they will get the main message.

Here are a few of my favorite lines from early in the book, just to provide an example what readers can expect to encounter.

Writing about arguments among economists concerning inequality (p. 3), Piketty notes that this is a “dialog of the deaf, in which each camp justifies its own intellectual laziness by pointing to the laziness of the other”. John Kenneth Galbraith couldn’t have said it any better!

One more really good line, poking fun at economists and again very Galbrathian (p. 32): “the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences”.

Besides the wonderful writing style, which feels as though Piketty is having a conversation with you, there is the great breadth of his knowledge. Many reviewers have remarked on the literary references to Balzac and Austin; but this actually understates things. There are many more literary references in the book; Austin and Balzac, however, seem to be Piketty’s favorites. Furthermore, unlike most economists, Piketty has read and understands the history of his discipline. He knows, makes reference to, and is clearly responding to the giants who came before him– David Ricardo, Thomas Malthus, Karl Marx and, perhaps most important of all, Simon Kuznets. Piketty also knows his history, making frequent references to important historical events. I was impressed with his references to the South African government intervening in the Marikana platinum mine labor dispute in August 2012, to the Haymarket Square tragedy of May 1886, and with his attempts to relate these events.

Piketty starts by providing a short history of national income accounting and connecting his work to the pioneering work by Simon Kuznets. This is not the sort of thing that usually makes for fun reading. Usually it is regarded as a good cure for insomnia; but this historical background is absolutely necessary. Piketty does it well and makes it clear why national income accounting is so important. Overall, he takes great care in explaining the numbers that he will be talking about—where they come from, their limitations as well as what they tell us about the economic world. And he uses literature (here is where Austin and Balzac come in) as well as history to reinforce the story told by the numbers. In the long history of economics, William Petty, Simon Kuznets and Wasilly Leontief are the only other major figures I can think of who were as sensitive to data and empirics. Piketty needs to be thought of in this tradition. But none of these other major figures in economics reinforced their numbers with literature or with history. Without doubt, there needs to be much more of this in the economics profession.

Part I essentially lays out the key numbers and the key argument of the book. These have been summarized well in the vast majority of reviews of Capital. The important historical fact is that throughout most of modern history economic growth has lagged behind the rate of return on capital (or, in fancy mathematical terminology, g<r).

Piketty then explains the key implication of this—inequality will increase over time because the ownership of capital is not evenly distributed. Those who own more capital (here Piketty means forms of wealth that generate income, and so includes the ownership of land, government bonds, stocks, etc.) will see their incomes grow by more than those who live mainly or primarily on their labor income. Income inequality and wealthy inequality will therefore rise. And it will continue to rise unless or until something is done to bring it under control. These forces could be wars (which destroy wealth), government policy (which taxes capital) or social upheaval.

This is one place that Piketty does not drive home his point home quite as well or as clearly I wish he had, so I am going to take a stab at this here.

At many points in the book, Piketty relates economic ideas to a single individual—making his points more concrete as well as more personal. When it comes to g<r, however, he succumbs to the standard practice among the econ of just resorting to numbers and to averages. But this point can be made simply in individual terms.

Think about yourself. You have been left an inheritance (capital) of $100,000 by your parents and you make $100,000 a year. Potentially, you can consume both your current income and from the returns to your wealth. To keep things simple, suppose both numbers grow at the same rate— say 1% each year. Essentially, economic growth of 1% gives you more labor income each year and capital income also grows at 1% annually. If you just spend your current labor income, then both your capital and your labor income will grow in tandem over time.

But now imagine what happens if your capital income grows at a faster rate—say 5% per year. Then the story becomes very different. After 35 years, a typical working life, my labor income (or wages) would grow to around $140,000 but my capital would grow to well over half a million dollars. At a 5% rate of return on this money, I can consume these returns ($25,000) in addition to my income. This raises my standard of living nearly 20% and still leaves my wealth intact. Or, I can consumer only 4% and let my wealth grow at the same 1% rate that my income grows.

After several generations, or around 100 years, the divergence between my income and wealth is even greater. My great grandchild (assuming their labor income grows 1%) would be making $268,000 but have $12.5 million in capital assets. At a 5% rate of return, their $600,000+ capital income would dwarf their labor income. My grandchild probably wouldn’t need to work. Certainly, he or she would care a whole lot less about their labor income than I care about mine. After all, I need to try to survive on my labor income and preserve my capital. My grandchild has few such worries.

Piketty’s story is that what happens above for one person or one family is what happens to developed capitalist economies over time– barring a few exceptions (like wartime, which destroys the value of capital). Over time, wealth or capital income (Piketty uses these terms interchangeably and I will also) has become a larger share of national income, and it will become more and more important in the future because of the fact that returns to capital exceed economic growth. One person does not have wealth income and labor income that are relatively equal. Rather, some very rich people have lots of wealth and their income is likely to grow at a faster rate than the rest of the population whose income from labor grows more slowly.

Another key point, and another key way that the aggregate story differs from the individual story, is that over time capital income grows for some people but not for others– since the distribution of capital income is much more skewed than the distribution of labor or wage income. In the US, the bottom half of the wealth distribution effectively have no wealth. The little bit that they do have is sitting in checking and saving accounts for emergency purposes, and earns very little or nothing. The next 40% in the wealth distribution have small amounts of capital, and most of that capital consists of home ownership. The richest 10% have 80% of national wealth. Even in the top 10%, most wealth sits with the top 1% or really the top .1% or top .2%. There are very few haves and very many have-nots when it comes to wealth.

And this, Piketty thinks, is a matter of concern for many reasons. It hurts economic growth; it counters our notions of fairness; and it he worries about the political influence of those people with so much money. Is democracy at stake? Can capitalism and democracy survive together? These are surely big questions.

–Steven Pressman

Live-Blogging Piketty: Review of Reviews, Pt. 3

My last post summarized the positive reviews of Piketty and focused on some of the best of these. This post looks at the negative reviews. The silly ones tend to come from the far right and were discussed in my first review of reviews of Capital in the Twenty-First Century. The more serious critiques come from the left of Piketty and make three points. First, following Solow (see my previous post), a number of reviewers take Piketty to task for expecting that the rate of return to capital will always exceed the economic growth rate based on the fact that it has done so in the past. Second, many reviewers criticize the policy proposals put forth at the end of the book. They claim either that the main proposal– a universal wealth tax– is politically unrealistic and that there are other policies, ignored by Piketty, that can help reduce inequality. Finally, several critics on the left express unhappiness with the fact that Piketty relies on a neoclassical economic model when doing his analysis and drawing out his policy conclusions. This is problematic both because of the so-called Cambridge Controversy (more on this below) and because the neoclassical model (which favors the free market) was at least partially responsible for the Great Recession.

One of the best critical reviews of Capital comes from Tom Palley. As far as I know it has not been published in print; however, this does not matter, since it appears on his blog. Some of Palley’s points seem to me on the mark and some seem off the mark. But it is a thoughtful and scholarly reflection on Piketty, and the issues raised are worth thinking about seriously.

In his blog post Palley downplays the empirical results in Capital, contending they are “not revolutionary”. This remark immediately made me pause for some serious reflection. I was not quite sure exactly what Palley was getting at and what he would count as a revolutionary empirical result. In one sense he is correct– some of the data in the book, from what I can tell from the reviews and from skimming the diagrams, have been out for some time and are well known by now. Many figures are available on the World Top Incomes Database created by Piketty. They show the rise in total income received by the 1% and especially the top .1%. Anyone who has paid careful attention to this knows that rising income inequality over the past several decades has been due to the gains going to those at the very top of the distribution. A lot of the other results (on the distribution of wealth) have been known for some time due to the work of Edward Wolff at NYU.

Unfortunately, however, many have not read the prior work of Piketty or the work of Wolff. Making these results better known may not be revolutionary, but they may affect how people think about income inequality. In addition, whether or not the numbers in the book are truly revolutionary, there is no denying the efforts of Piketty are responsible for us knowing that inequality has been increasing because of what was going on at the tippy top of the income distribution. Most distribution data ignores the very wealthy because it is so hard to get good data. The Current Population Report (CPR), the standard data source for income and income distribution in the US, is top coded; so we can’t even know about the top incomes from this source. And many of the very rich won’t answer surveys like the CPR; or, if they do answer surveys, don’t provide accurate responses concerning their income. Similarly, the Survey of Consumer Finances, produced every three years by the Federal Reserve, doesn’t survey the Fortune 400 for reasons of privacy (a point made by Doug Henwood in his review in Bookforum). Piketty went to the one source with reasonably good data on the income of the rich—income tax returns. Moreover, this data is available in many developed nations for around 100 years, enabling us to get a longer term perspective on the very wealthy. In contrast, survey data is of more recent origin (the end of World War II).

So, Palley is correct  in one sense—some of Piketty’s empirical findings substantiate what was already known about rising inequality over the past several decades. They are not revolutionary. But, the book seems to do more than just repeat previous results. Many reviews have made clear that a major focus of the book is not income but capital or wealth. Changes in the capital stock of different countries over long period of time, as well as the ratio of wealth to income, and what this implies for inequality, strike me as new insights– maybe not “revolutionary” but certainly new. And as Paul Krugman points out, one main contribution of Capital (see my previous post) is showing that capital income rather than labor income (i.e., inherited wealth rather than insanely high CEO salaries) has been the driving force behind rising inequality of late.

Palley also criticizes Piketty for being politically naïve. This is a criticism made by many reviewers of Capital, and this objection seems to me (again, before having read the book) to be on target. If wealth continues to be concentrated in the hands of a very few, and if this wealth is able to purchase political outcomes and political power (for more on this see Jacob Hacker and Paul Pierson’s Winner-Take-All Politics and my review of this book in the September/October 2011 issue of Dollars & Sense), then we are going to experience widening income inequality and rising political impotence for those without wealth; any hope that a wealth tax will solve our inequality problems does appear to be wishful thinking to a large extent.

Jamie Galbraith provides another critique from the left. His review, published in Dissent, complains that Piketty ignores the Cambridge Controversy. For those not familiar with this dispute, briefly, it involves whether or not we can measure capital (without using its rate of return) in order to determine its rate of return. Cambridge UK critics of mainstream economics pointed out that since capital was such a diverse amalgamation of different things (hammers, computer software, coffee-making machines at Starbucks, and large factories) it is impossible to add these things up to get something called “capital”. The only way to add up different types of capital involves using the return on capital assets; but this puts us in a vicious circle—we use rates of return to measure capital and then try to use this quantity of capital to determine rates of return to do economic theory. Cambridge US (Paul Samuelson and Robert Solow at MIT) argued that you needed amorphous capital to do economic analysis and that pragmatically it was necessary to keep the fiction alive that you could add up very different types of capital. (For more detail on this debate, see Joan Robinson and Piero Sraffa in my book Fifty Major Economists).

This is important, according to Galbraith, because the crux of Piketty’s argument seems to be that inequality will continue to rise over the next century since the return on capital typically exceeds the growth rate of the economy. As a result, those who own lots of capital will make more than those who do not own any capital (the poor) and those who own very little (the middle classes and poorer quarters of the affluent).

Having not yet read Capital, I am not certain if the Capital Controversy is relevant here. My gut instinct is that it is a red herring. The Cambridge Controversy was a debate about economic theory and its logical consistency. Piketty does not seem to really care about this; instead he is concerned about real world income and wealth inequality. Here we do not need to worry about how to measure the quantity of capital independent of its rate of return, so that we can then analyze its rate of return. We can measure the financial value of capital (the value of stocks and bonds and other assets, as given by the market), and its annual gains or relationship to national income, without having to worry about adding up physical capital. Likewise, we can conclude from historical data that the growth of wealth exceeds economic growth over a certain time period without getting embroiled in the Cambridge Controversy.

Finally, several critical reviews focus a great deal on the policy conclusions of Capital.

Robert Kuttner, writing in The American Prospect,  praises Piketty for demolishing conservative arguments against progressive taxation, but criticizes him for not recognizing the broader role that government can play in promoting equality. Similarly, Doug Henwood (in Bookforum; you can listen to him read the review here) criticizes Piketty for disavowing Marx and ignoring political confrontation as a means to generate policies that improve the lives of average citizens. As Kuttner points out, during the golden age between 1941 and 1973 equality rose in all major Western nations. A large part of the reason for this was the role of government policy. Education spending, minimum wages, support for unions, Keynesian macroeconomic policies that promoted full employment all lead to greater economic growth and lower returns to capital income. The implication is that if this was done in the past, it can be done again in the future.

Similarly, Mike Konczal, writing in The Boston Review, criticizes Piketty for believing the return on capital is fixed and independent of institutional forces other than taxes. As a result, the state and state policy on health, education and income security become irrelevant. Campaign finance reform doesn’t matter. Nor does the size of the financial sector. Finally, as Konczal points out, and as Kuttner pointed out, labor unions are irrelevant as far as income distribution goes, according to Piketty. It is all about taxation. Everything else is ignored.

I think I am ready to tackle Capital in the Twenty-First Century. At the very least, I now know what to think about and look for while reading the book. Despite the positive reviews and my high expectations, I will try to approach this with an open mind. But in the interest of openness and honesty, I cannot remember the last time I looked forward to reading a book quite so much. Even better, I get to take Capital with me and read it while I am in Paris—the city of love and the city of Piketty.