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.

Live-blogging Piketty: Review of Reviews, Pt. 2


This is the third of our book reviewer Steve Pressman’s live-blogging posts on Thomas Piketty’s Capital in the 21st Century. His first post appears here.  

My first stab at examining the reviews of Piketty took cuts at those who failed to read the book but felt they had the right to express an opinion about it. Today I look at positive reviews of Capital in the Twenty-First Century.

In general, the book has garnered critical acclaim. Most of the early reviews were glowing. Reviewers were virtually unanimous in praising the book for being so well written and well translated. They also wrote about Piketty’s careful collection of economic data, from numerous countries, going back in time for a century or more, and for his clear presentation of historical trends. Finally, reviewers admired Piketty’s breadth and erudition. Many noted, approvingly, references to Jane Austin and Balzac’s Père Goriot, something atypical for an economist. How could anyone not want to read Piketty’s new book after reading comments like this?

A few reviewers provided a bit more idiosyncratic reasons for liking Capitalism in the Twenty-First Century. Lynn Parramore, writing at Alternet, praises Piketty for giving “right-wingers in America the willies”. And Steven Erlanger, writing in the New York Times on April 19th, praises the book for daring to ask big questions and for questioning the conventional wisdom concerning income inequality.

Of the many positive reviews, three stand out as being the most informative and useful. These reviews (by Paul Krugman, by Branko Milanovic, and by Robert Solow) are worth reading– whether or not you take the plunge and read Piketty. All provide clear summaries of the book and highlight what makes it so important.

Krugman, as is his style, minces few words in his May 8th New York Review of Books article (Why We’re in a New Gilded Age). He contends that the book will “change both the way we think about society and the way we do economics” and then points out several ways that the book advances our knowledge of income inequality. First, and most important for Krugman, Piketty shows that the very wealthy (the top .1%) have for the most part not earned their income. They tend to be rentiers—they have inherited their wealth. Their income mainly comes from owning capital rather than working. Having a very high income is therefore not the result of great effort or smarts—unless, somehow, it took effort or smarts to be born to affluent parents.

This fact about inequality naturally leads to Piketty’s main policy solution—higher income taxes on the very wealthy and a wealth tax. If high incomes are not earned, if they are the result of luck or getting a large inheritance, then high tax rates on income are less objectionable because they don’t distort economic incentives very much. On the other hand, they will have many positive effects if they succeed in reducing inequality. And if wealth inequality has negative economic and social effects, a case exists for a wealth tax.

Milanovic has written a lengthy and brilliant review of Piketty that will appear in the June 2014 issue of the Journal of Economic Literature, one of the premier journals in economics. It is published by the American Economic Association, and it publishes literature surveys and long reviews of books that the editors regard as especially important. For those unable to wait until June, and for those who do not subscribe to the Journal of Economic Literature, an early draft of this review is available here.

Milanovic calls Capital in the Twenty-First Century “one of the watershed books in economic thinking”. He then goes on to explain why.

His review demonstrates both a careful reading of Capital and a detailed knowledge of Piketty’s previous work. It explains that the value added by Capital is a “general theory of capitalism”. In brief, Piketty shows that annual returns to capital income (which mainly go to the very wealthiest households) have been relatively constant at 4%-5% over long historical stretches and have exceeded the annual rate of economic growth, whose gains go to average households. The result must be greater inequality, as more income gains go to the wealthy than go to other families.

There are few notable exceptions to this trend—wars leading to the destruction of capital and high tax rates in order to finance the fighting, and periods of hyperinflation that destroy wealth. During the Golden Era, the post-war decades, high taxes on high incomes and wealth reduced income equality and led to a rising middle class.

But such brief historical epochs are aberrations according to Piketty; the dynamics of capitalism tend to return to long-term trends. Rising inequality is inevitable due to the math of returns to capital that exceed economic growth rates.

As a further benefit, Milanovic’s review compares Piketty and the views of other top economist who have recently written about broad historical trends in growth and inequality. While others see the past century “as the dawn of even better days to come” and history as leading to economic gains for average families, Piketty sees the advances made during post-war decades as temporary and unlikely to return. Piketty stands virtually alone in seeing capitalism an economic system that generates widening income inequality; as a result, most families can look forward to income stagnation as gains from economic growth go primarily to the filthy rich.

Solow has written a wonderful review of Piketty in The New Republic (Piketty Is Right) that was published on April 22nd. It focuses to a large extent on the data that Piketty has collected and the claim (based on this data) that inequality has an inexorable tendency to rise in capitalism. Solow praises Piketty for having gathered important economic data stretching back many centuries; however, he is highly critical of the claim that inequality must rise under capitalism. His main point is that Piketty has provided historical evidence about past trends but, as mutual funds all warn, there is no guarantee that past results will continue into the future. For this, a theory about returns to capital is necessary.

Following along the lines of his theoretical work on economic growth, which earned him a Nobel Prize, Solow claims that diminishing returns to capital should reduce the returns to rentiers over time and counter any tendency for inequality to rise under capitalism. In contrast to Piketty, Solow sees things returning naturally to a somewhat steady state, where the distribution of income between capital and labor remains relatively constant over time.

My next post will consider some other critiques of Piketty’s book and its bleak prognosis.