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

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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.

Live-Blogging Piketty: Review of Reviews, Pt 1

This is the second in our book reviewer Steve Pressman’s series of posts on Thomas Piketty’s Capital in the 21st Century

Piketty pandemonium continues, relatively unabated. Capital in the 21st Century reigns on Amazon, holding either the #1 or #2 spot most of the time. Everyone seems to want on the Piketty bandwagon. People are talking about the book and everyone seems to feel compelled to say something about it. I feel rather privileged to now be part of this phenomenon. For the first time in my life I think am beginning to understand what Beatlemania was all about in the 1960s.

Before reading Piketty’s book carefully, I thought it would be worthwhile to summarize and synthesize some early reviews. For those interested in more of this, and in getting a different take on these early reviews, Brad Delong has been summarizing and critiquing reviews on his website (http://delong.typepad.com/). Unfortunately, as far as I can see, there is no single place on Brad’s website to find all his reviews of the Piketty reviews.

Roughly, the reviews fall into four main groups—(1) critics who come at Piketty from the right, (2) critics who come at Piketty from the left, (3) reviewers who heap a great deal of praise and mainly praise on the book, and last as well as least, (4) reviewers who have not read the book. These categories do overlap. Many praising the book overall alsofound quite a lot to criticize, just as some critics found quite a lot to praise. But the largest overlap seems to be between the critics on the right and those reviewers who did not read the book.

I begin with the reviewers that do not seem to have read the book since these are the most fun to refute and to mock. Part 2 of my review of reviews will discuss the positive reviews, and should appear in a few days. Part 3 will focus on some of the more critical reviews of Piketty from the left.

Hands down, the award for the best review of Piketty’s book by someone who didn’t take the time to read it must go to Megan McArdle of Bloomberg View. McArdle is the clear winner because she begins her review by admitting that she didn’t read the book. Certainly, she gets lots of points for honesty but she gets no points for writing a good review. After summarizing a few opinions from other reviews, McArdle goes on to talk about what she wants to talk about—the hell with Piketty and his book.

McArdle’s main criticism of Piketty is that his policy solutions “won’t help the middle class”. She takes Piketty’s policy solutions to be the government “writing checks” to middle-class households and putting the middle class “into government make-work programs”. My guess (from having read lots of reviews and also some early work by Piketty) is that this is not what Piketty advocates at the end of his book.

More damning, and contradicting what McArdle contends, my work on the middle class has shown that both across countries and in one country over time, progressive income taxes and a wealth tax (policy solutions pushed at the end of the book, according to many reviews) would help the middle class. Progressive taxation is one main reason the Nordic countries have a large middle class and the US has such a small middle class. Moreover, despite the complaints of many (see below) a progressive income tax is not socialism; even Milton Friedman favored a progressive negative income tax. And a progressive income tax does not necessarily mean taxing away all the income of the rich; it only means that the rich (who can afford to pay more) are subject to higher tax rates than the poor and middle class. Furthermore, given that most other taxes are regressive in nature (they tax lower income households at higher effective rates), a progressive income tax is necessary if we are to have something resembling proportional taxation in the United States.

Like McArdle, many critics of Piketty from the right also seem to have not read his book. Ross Douthat, in his op-ed column in the New York Times, even hints that he and other conservatives attacking the book have not really read it. Yet, he still thinks he understands the argument well enough to proclaim that “Karl Marx is back from the dead”. Likewise, James Pethokoukis in The National Review proclaims that Piketty is some sort of Marxist.

These are people who do not seem to understand either Marx or Piketty. Yes, there is a superficial similarity—both Marx and Piketty see problems with capitalism. But who doesn’t see problems with capitalism after the Great Recession? Using this criterion, almost everyone is a Marxist or some sort of Marxist. As Jedediah Purdy writes in theLos Angeles Times of April 24th, what Piketty has done is to show that the problems with capitalism that Marx identified have not disappeared; they remain and they must be addressed. The important questions are the causes, consequences and solutions to these problems. They are among the most important questions of our day. On these issues Marx and Piketty differ substantially.

At a less superficial level, Piketty does not seem to hold a labor theory of value, one central doctrine of Marx. But problems run even deeper with the Marxist name calling. There are important substantive issues that divide Marx and Piketty; these concern what causes problems under capitalism, how serious these problems are, and whether the problems can be remedied. Marx identified the problems with capitalism as stemming from employment relationships, and as serious because they run counter to what it means to be human and because wages would always be forced to bare subsistence levels while competition forces down the rate of profit forcing firms to increase their exploitation workers. Moreover, Marx did not think that the government policies could resolve these problems because they were inherent in capitalism and would inevitably lead to its demise. In contrast, for Piketty our main economic problems come from the arena of finance (which generates higher returns than the growth of the real economy) rather than production relationships, and he sees this problem as less serious than the problems Marx identifies since Piketty thinks real wages can continue to rise as the relative wages of average workers declines. Finally, as many reviewers have pointed out, the last section of Piketty’s book talks about how to resolve the problem of rising inequality. So, unlike Marx, Piketty doesn’t see rising inequality as an inevitable economic problem or a problem that will lead to the overthrow of capitalism.

Three strikes and you should be outed—Piketty is no Marxist and these reviewers don’t seem to have read Piketty.

Many reviews on Amazon.com also fit into the category of reviewing a book you have not read. People seem to have heard that Piketty complains about rising inequality and wants to raise taxes on the rich, so they lash out immediately. Some of these one-star Amazon reviews were reprinted in the New York Times on May 4th in a failed attempt at being humorous.

Several reviews on the Amazon webpage for Piketty’s book called it “socialist garbage” or something similar, but did not go beyond name calling. Many reviews lambasted Piketty as a hypocrite for not giving his book away for free. One Amazon review (giving the book 3 stars out of a possible 5 stars) complained about the kindle edition being hard to read; another reviewer gave the book 1 star and complained about the kindle price for the book. One of my favorite reviewers on Amazon gave the book 3 stars; the reviewer noted that they had not yet read the book, but probably would read it soon. Is this Andrea McArdle taking yet another shot at Piketty? One really strange review gave the book 1 star claiming it was “banker propaganda” because it did not advocate a 100% reserve requirement for banks. From what I have read of the reviews, Piketty is not a friend of affluent bankers by any stretch of the imagination. He recognizes that they their pay is not market determined, but determined by their friends who get appointed to the bank compensation committee. Capitalism in the Twenty-First Century does not seem to be banker propaganda.

Despite such negative reaction from the right, the book has done rather well on Amazon, averaging 3.5 stars (based on 323 customer reviews). To provide some perspective, 3.5 stars is the average rating on Amazon for Jami Attenberg’s much heralded The Middlesteins (see my previous post on Piketty’s book); but it is below her best-rated book, Instant Love, which has averaged 4 stars. John Kenneth Galbraith’s The Affluent Society has an average rating of four stars. Paul Krugman’s popular books generally get an Amazon rating of 4 stars. Freakonomics, another popular book dealing with economics comes in at 4 stars on Amazon. Free to Choose and Capitalism and Freedom by Milton Friedman both average 4.5 stars. One of the ratings winners in economics, I am proud to say, is my book Fifty Major Economists, which has an average close to 5 stars. I really hope that I have not just jinxed myself by mentioning this!