Freedom, Markets, and Well-being Fall 2019

Piketty on Inequality

Overview

Professor Brown presented two slide decks (these are both on Sakai). The one titled “Distribution of Wealth, US 1989–2013” was on the effects of recessions on different quintiles and the other was an overview of Thomas Piketty’s Capital in the Twenty-first Century.

The upshot of the first set of slides is that people at the bottom of the income distribution suffered more in the 2008 recession than their counterparts had in earlier recessions. This is especially curious because we thought the 2008 recession was due to a collapse in housing prices and the people at the bottom don’t generally own real estate. So the collapse in the value of that kind of asset should not have had that large an impact on their wealth. What we are learning is that they were carrying a lot of non-housing debt. When credit seized up and there was a spike in unemployment, they either couldn’t roll over their loans or they lost the ability to pay them back.

The slides about Piketty begin with Thomas Malthus (1766-1834), David Ricardo (1772-1823), and Karl Marx (1818-1883). They all tried to use economic theorizing to make predictions about the broad course of society. While theoretically elegant, none of their theories was backed by decent empirical evidence.

By contrast, Simon Kuznets (1901-1985) had terrific data. But it only covered a period in history when inequality was abnormally low.

Piketty has the same theoretical ambitions as Malthus, Ricardo, and Marx. But he also has data that both similar in quality to Kuznets’s and also vastly more extensive. Kuznets had data on the US for part of the twentieth century. Piketty has data for hundreds of years covering a number of countries. It is the combination of theoretical ambition, stellar data, and the importance of its topic that makes this book so remarkable.

Our discussion

Alexa asked whether technology might give us reason to think that the past patterns won’t repeat themselves in the twenty-first century. Maybe! One thing I will say next time is that I think they make a big difference for what it is like to live in an unequal society. In the nineteenth-century, you needed servants to wash your clothes, clean your house, and cook your food. So you needed an income that was multiple times higher than the incomes of the people who you might hire to do these things for you. Now, you just need to buy a washing machine, dish washer, vacuum cleaner, and microwave. Relatively speaking, they’re cheap.

Professor Brown explained what a Gini coefficient is.

She also noted that Piketty cares the most about the distribution of income at the top. She compared him with Rawls, who is most concerned with the distribution of income at the bottom.

I asked why we care about inequality. For instance, if the Gini coefficient is increasing but so are absolute standards of living, as in China, that might be considered a good thing, on balance. Equality in poverty is worse than inequality with vastly reduced poverty.

Jonathan said that one reason to care about inequality is its effects on mobility. Stay tuned for our discussion of Corak’s paper!

What’s Up Next?

Piketty’s theory is that inequality in the wealthy countries is returning to its historical norms after a period when it was unusually low between World War II and the 1980s. This is certainly interesting. But it isn’t necessarily bad.

Here is why Piketty thinks it matters.

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. (Piketty 2014, 1)

There are two questions about this.

First, Piketty’s theory is that the historical rates of inequality happened because the returns to capital exceed the growth of the economy: r > g. But the rise in inequality that we have seen since 1980 is due to wages, not returns on capital. Some people are earning extraordinarily high compensation for their labor; they aren’t getting rich by investing capital. So why think we are going back to historical norms if the cause of inequality in our society is abnormal?

Second, Piketty’s introduction does not really explain what he means by calling inequalities “arbitrary” and “unsustainable.” Nor does he go into what he means by “meritocratic values” or explain why inequality undermines them and democracy. (This isn’t a criticism; there is only so much one can do in an introduction.)

Chapter 11, on inheritance, should address both points. We will talk about that next time.

References

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