PHILOSOPHY, POLITICS, & ECONOMICS 160

Piketty on Inequality

Piketty’s project is to document the trajectory of what he calls patrimonial capitalism, a system in which “large fortunes reflect inherited wealth more than … entrepreneurial mettle” (Kunkel 2014). Piketty believes that the “arbitrary and unsustainable inequalities” characteristic of this system will “radically undermine the meritocratic values on which democratic societies are based” (Piketty 2014, 1).

In short, while this is a book written by an economist, it relies very heavily on political and philosophical assumptions about what level of inequality is “sustainable” in a democracy and the value of meritocracy.

What is so great about the book, aside from the elegant writing? It’s the data. Previous studies of inequality have either been conjectural or based on a very limited data set. Prior to the work done by Piketty and his collaborators, the best data was assembled by Kuznets. But Kuznets’s data concerned a period in history that Piketty believes was unusual: the US between 1913 and 1948 (Piketty 2014, 11).

On the basis of his historical evidence, Piketty believes that, absent political action, the levels of inequality are going to revert to historical norms.

Some specifics

We mostly had a presentation from Prof. Brown. The slides she used are available on Sakai. A couple of things are worth noting here.

First, the term “capital” refers to wealth and not just the means of production. And “wealth” is just wealth, not simply inherited wealth.

Second, the theory is that the historically normal return to capital (r) is 4.5% while the historically normal rate of growth (g) for the economy as a whole is between 2-3%. As long as r > g, those who have capital will gain more wealth than those whose wealth rises with the general economy. So if we return to historical norms, inequality will grow.

Observed inequality vs conjectured inequality

Piketty presents graphs showing U-shaped curves, where inequality was very high, dropped sharply around 1940, stayed at that lower level, and then headed back up starting in the late 1970s.

There are two things about those graphs that I want to emphasize here.

First, the graphs with the U-shaped curves are all from English-speaking countries: the US, UK, Canada, and Australia. By contrast, graphs from European countries and Japan do not have the same U pattern. The suggestion is that the difference is political: taxes went up everywhere to pay for WWII and they stayed high until the US and UK cut taxes on the upper classes sharply at the end of the 1970s while, presumably, the other countries did not. (It would be nice to know what happened in Canada and Australia.)

Second, the observed inequality is due to wages for labor. It is not due to an especially high return on capital investments. Specifically, some people have been able to command extraordinarily high compensation and that is why the lines in Piketty’s graphs go up sharply on the right side (for the US and UK).

In other words, what we are observing is not “patrimonial capitalism,” much less the effects of the historical trend to r > g. I gather that what Piketty worries about is that the levels of inequality that we have observed are going to lead to patrimonial capitalism, with all of its attendant social ills.

Some good reviews of Piketty

As Prof. Brown said, the Piketty book is as prominent in the culture at large as an academic book gets, especially one with charts and math.

Here’s a tip with books. You can learn a surprising amount by reading reviews even if you haven’t read the whole thing. (This is an excellent way of putting your annotated bibliography together, by the way. If you find a book that looks interesting, read a few reviews to get the gist of its main claims before investing your time in the book itself.)

Anyway, here are some reviews of Piketty that are highly regarded and that I enjoyed reading (which isn’t to say they are right, mind you).

Dierdre McCloskey has written a very long critique of Piketty (McCloskey 2014). In a nutshell, her view is that capitalism has made everyone vastly better off and its virtues swamp its vices. She has a shorter interview in which, among other things, she blames the rise of inequality on government intervention in the economy in the US and UK.

Eric Posner, Glenn Weyl, and Lawrence Summers all argue that the rise in inequality is due to labor markets rather than inheritance (Posner and Weyl 2014; Summers 2014). Posner and Weyl think that it would be better to aim the tax code at socially unproductive activity rather than the rich. They also argue that families do not work the way they did in the nineteenth century so they suspect unequal societies in the future will resemble those described in the novels Piketty refers to. Summers has a lot about the role of technology in causing inequality. (They all make other points as well; those are just the ones I remember.)

Benjamin Kunkel has a criticism from the left, the specifics of which have completely flown my mind (Kunkel 2014).

Finally, Robert Solow’s review is titled “Thomas Piketty is Right” (Solow 2014). That tells you where he is coming from!

Update on the Census Report

Prof. Brown gave us a sheet from the most recently released Census Bureau report on income distribution. Matthew Yglesias, a philosophy major in college who has achieved modest fame and fortune by writing about politics and economics (get it?) has a discussion of the data in that report and how it might be better.

In a nutshell, the report probably underestimates the good news.

References

Kunkel, Benjamin. 2014. “Paupers and Richlings.” London Review of Books 36 (13). http://www.lrb.co.uk/v36/n13/benjamin-kunkel/paupers-and-richlings.

McCloskey, Dierdre N. 2014. “Measured, Unmeasured, Mismeasured, and Unjustified Pessimism: A Review Essay of Thomas Piketty’s Capital in the Twenty-First Century.” Erasmus Journal for Philosophy and Economics 7 (2): 73–115. http://ejpe.org/pdf/7-2-art-4.pdf.

Piketty, Thomas. 2014. Capital in the Twenty-First Century. Translated by Arthur Goldhammer. Cambridge: Harvard University Press.

Posner, Eric A., and Glen Weyl. 2014. “Thomas Piketty Is Wrong: America Will Never Look Like a Jane Austen Novel.” The New Republic, July. http://www.newrepublic.com/article/118925/pikettys-capital-theory-misunderstands-inherited-wealth-today.

Solow, Robert M. 2014. “Thomas Piketty Is Right.” The New Republic, April. http://www.newrepublic.com/article/117429/capital-twenty-first-century-thomas-piketty-reviewed.

Summers, Lawrence H. 2014. “The Inequality Puzzle.” Democracy, no. 32. http://www.democracyjournal.org/32/the-inequality-puzzle.php?page=all.