Thomas Piketty and Detractors

May 11, 2014

As it is hoped everyone now knows, the US has risen from an egalitarian country in the 1940s to 1960s, to one of the most unequal, rising steadily in inequality since around 1970.

Inequality is a subject around which there is heated debate. Most agree incentives are important for motivation and for progress–we want to reward those who succeed, so that they can count on the financial motivation for their hard work and risk in doing so. I vote for that. My life is benefitted by the advances of Amazon and Google, and I love my all-electric car.  The people who provide me these benefits deserve to be rewarded. But most of us do not want to see high unemployment, stagnant wages for the middle class, increased poverty, and for public services such as schools and roads to further deteriorate. We don’t want to see homelessness increasing on our streets. We certainly don’t want inequality to get worse, if there is any reasonable action we can take to prevent that.  The debate has come to involve whether government has a role, or whether everything should be left to the free market.

And, it ends up revolving around a word which has taken on a negative meaning, hardly ever being used by a politician on either side of the spectrum–“redistribution.”

I’ve been reading Thomas Piketty’s new book Capitalism in the Twenty-First Century, now a best seller and the subject of lots of op-eds, blogs, articles, reviews, talk shows and the like. I like it and I am impressed by his scholarship and his fair and objective manner, constantly reminding his reader that his work is not perfect–nothing is in economics.

Piketty provides a readable summary of years of analysis of tax records in a number of countries, along with his own forecast of the future based on history and what he finds as the factors driving inequality over time, and then makes suggestions for how to better equalize the world.

So far, even the harshest critics pour abundant praise on his research and historical findings.

Then, the criticism begins.  Much of the criticism is unfair, in my opinion. Here’s why:

One broad area of criticism argues that when he sets about to forecast in his second section, he’s venturing into the unknown. Arguments remind that seldom are forecasts accurate, that one really can’t know the critical variables of the future, likely different from those of the past, that forecasting is not the stuff of real economists. Essentially, economists should not forecast.  I’m still looking for critics who will reveal different forecasts, thus subjecting themselves to the same criticism, but haven’t found those yet. I’m sure eventually they will emerge, but the delay may be due to the sheer depth of Piketty’s well defended forecasts–a high bar to exceed.

In his book, Piketty repeatedly makes it understood by his readers that he is venturing into the unknown, that too much reliance should not be placed on his specifics, so the above criticism is one he has already cautioned about. But, I would ask those who take this position–are you saying you never use forecasts–in business, in investing, in sports, in personal affairs…?  Whether explicitly stated or simply intuitive, we are all using forecasts all the time. And, yes, they are often wrong, but often they are right, at least of a sufficient frequency and magnitude to make the end result reasonably successful.  When Apple launched the iPhone, they had some kind of forecast–and if they hadn’t, we’d be pretty amazed and the Board certainly wouldn’t have approved the investment. And, the forecast was probably wrong in the end, but certainly right to a sufficient magnitude. I’d be shocked to learn those forecasts were done without the input of any economics.

Most large businesses employ economists, and indeed the leaders do look to them to forecast the future, as best they can, with the usual caveats. In fact, they are hired to forecast various elements of the economy as these might affect the products and services the company is offering. Like it or not, economists do forecast. So, I discount this broad criticism and wait for those who want to provide their own forecasts and defend them half as thoroughly as Piketty has done his.

Maybe the real reason to discount economists’ forecasts is that the critics don’t like the Piketty forecast. Piketty forecasts that inequality will worsen if we don’t do something about it. There are still some who think it’s either ok if it gets worse, or that natural factors will reverse it–a set of theories popularized by Simon Kuznets in the 1950s, in which Piketty (and most other economists) find no merit.

The other major objection relates to policy suggestions from Piketty. These are his ideas of the very best ways to reduce inequality, to improve the nature of the world. Piketty’s first suggestion is a global tax on wealth. Detractors point out this is impractical, will never happen, politically impossible. This is tiring, because Piketty says the same thing, several times, thus there is no new insight from his critics on this point.

So, why is Piketty even bothering to provide such a policy prescription if it’s virtually impossible?  To me, the answer is perfectly clear.  It’s because this would be the fairest and best way to solve the problem–it goes directly to the essence of the cause and arrests its growth. The primary cause of the rising forecast is that returns to capital are likely to exceed the rate of economic growth–meaning that those with wealth today can expect it to grow, and those without will be left farther behind. Any other types of measures suffer from one or more flaws of being indirect, with side effects or other consequences which are less than ideal.  And, Piketty does address other measures–a critical one being assuring education of similar quality for wealthy and poor.

The Economist, a conservative publication, raises both of these criticisms in the current issue (http://www.economist.com/news/leaders/21601512-thomas-pikettys-blockbuster-book-great-piece-scholarship-poor-guide-policy): The Economist wants to know why Piketty didn’t focus prescriptions on increasing the rate of economic growth, so that wealth accumulation (capital) would be exceeded by economic growth. This is entirely unfair, as Piketty devotes a huge part of the impressive work to a study of the rate of economic growth, concluding that it’s highly likely to end up well below the rate of capital growth for most of the twenty-first century. I urge The Economist to provide or direct us to an equally well done study of capital growth, with prescriptions for getting even faster growh, and especially demonstrations of how that benefits all in a fair manner.

The neo-liberal suggestion to just focus on growth and that will solve all problems addresses inequality with the “trickle down” theory–sure, the rich get richer, but everyone else also gets a little richer as well. That has been the mainstream neo-liberal doctrine of the US and many other countries (China, for example) for the last 30 years, and that’s what got us to the high levels of inequality we are now experiencing. Why should we expect more of the same to resolve the problem?

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