December 18, 2014

Piketty Reviews: the year in review

Thomas Piketty's book "Capital in the Twenty-first Century" became quite the phenomenon this year. Originally published in French, it was translated into English in 2014 and has since elicited a large amount of feedback. I have collected a series of book reviews over the course of this year that provide a bit of perspective on the book. This could either prove to be prophetic, or another "End of History and the Last Man". The diversity of responses presented here suggests that the relationship between inequality and economic growth will become a defining social issue in years to come.

Even at 696 pages and a large number of graphs, it is quite a captivating read. Piketty synthesizes data from multiple sources and arrives at a fundamental set of relationships between concentrations of capital (e.g. inherited wealth) and economic growth (e.g. the diffusion of capital into the broader economy). Based on this intellectual synthesis, Piketty's presents two laws of inequality [1, 2]. These laws are drawn from the cross-national and historical data analyses. In particular, the second law serves as shorthand for the book's main thesis. While people might debate how exactly to define "wealth" and "growth" or how well this framework describes the macroeconomic present, Piketty's book gives us the conceptual tools to discuss these issues more clearly.

Piketty's insight is quite simple: there is a proportional and often unbalanced relationship between wealth and growth that transcends both nation and historical era. When the returns on inherited wealth exceeds income growth generated by resource exploitation, entrepreneurship, or innovation, high degrees of social and economic inequality result (W > G -- see Figure 1). This often occurs when growth is slow or nonexistant, and the rate of return on inherited capital exceeds growth by default. In terms of social relations, the W > G scenario allows for inherited wealth to triumph over social mobility and new wealth creation. By limiting social mobility, a host of related factors act to reinforce income inequality [3]. Yet this relationship does not always hold. For example, historical periods during which opportunities for economic expansion and social mobility exceed the power of inherited wealth (such as the latter half of the 20th century) tend to be characterized by high rates of conventional growth (e.g. increases in GDP). While the power of inherited wealth is curbed by growth, it might also be curbed by taxation policy. In any case, the second half of the 20th century scenario can be formulated as G > W, or growth exceeding wealth.

Figure 1. Extreme inequality, shown in both artistic and symbolic logical form.

Piketty arrives at this conclusion by using historical data. These data suggest that the slow growth and high levels of inequality which characteerize the early 21st century will recapitulate a pattern typical of the 19th century or even the European middle ages. The predominance of rentier behavior amongst the 21st century elite is indeed reminiscent of the medivel era, where the primary source of wealth generation came from rents paid to a landed gentry [4]. While the mode of wealth generating is variable from century to century, the basic tension between inherited versus newly-generated wealth is predicted to govern economic dynamics. And in this context, inequality can inflence a host of societal characteristics, from social stratification to technological innovation [5].

Perhaps these consequences of inequality are simply a consequence of an over-domineering financial industry, which provides massive returns to investment income relative to labor productivity. In this sense, history is more contextual than cyclical. But history can also parallel broadly-stated theoretical predictions. This state of affairs can be compared with the prediction made by Karl Marx with respect to the end of capitalism itself [6]. As capitalism matures (so-called "late stage" capitalism), we can expect most forms of labor to become devalued. While this is not something that Piketty predicts for the future, this devaluation is due to both various resource consolidations promulgated by the owners of capital and a by-product of technological innnovation (particularly automation -- see [7]). Piketty's solution to countering this type of structural inequality is wealth redistribution, which is something America pioneered [8], but is needed on a global scale to avoid the predicted negative consequences of economic growth stagnation [9].

Here is my collection of Piketty reviews

Introducing Piketty:
Galbraith, J.K.   Kapital for the Twenty-first Century? Institute for New Economic Thinking blog, March 31 (2014).

Frankel, J.   Piketty's Fence. Jeffrey Frankel's blog, September 22 (2014).

Yglesias, M.   The Short Guide to Capital in the 21rst Century. Vox blog, April 8 (2014).

Dorman, P.   Piketty for Dummies. EconoSpeak blog, April 26 (2014).

Wolf, M.   "Capital in the Twenty-first Century", by Thomas Piketty., April 15 (2014).

R.A.   Thomas Piketty's "Capital", summarized in four paragraphs. Economist, May 4 (2014).

Cowen, T. and de Rugy, V.   Why Piketty's Book Is a Bigger Deal in America Than in France. NYTimes The Upshot, April 29 (2014).

Eakin, E.   Capital Man. Chronicle of Higher Education, April 17 (2014).

Broader Economic Implications:
An Interview with Adair Turner: "Which Capitalism for the 21rst Century?". Institute for New Economic Thinking blog, November 12 (2013).

Hutton, W.   Capitalism simply isn't working and here are the reason why. The Guardian, April 12 (2014).

Boucoyannis, D.   Adam Smith is not the antidote to Thomas Piketty. WaPo Monkey Cage blog, April 22 (2014).

Cassidy, J.   Forces of Divergence: is surging inequality endemic to capitalism? The New Yorker, March 31 (2014).

Krugman, P.   Why we're in a New Gilded Age. New York Review of Books, April 10 (2014).

Shenk, T.   Thomas Piketty and Millenial Marxists on the Scourge of Inequality. The Nation, April 14 (2014).

Faux, J.   Thomas Piketty Undermines the Hallowed Tenets of the Capitalist Catechism. The Nation, April 18 (2014).

Rosenberg, P.   Thomas Piketty terrifies Paul Ryan: Behind the right’s desperate, laughable need to destroy an economist. Salon, April 30 (2014).

Ritholtz, B.   Piketty vs John Stuart Mill’s Marketplace of Ideas. The Big Picture blog, May 1 (2014).

Kaminska, I.   Inequality and Hyperinflation. Dizzynomics blog, April 25 (2014).

Criticisms: In May, there was a post on the Financial Times' Money Supply blog that claimed to find flaws in Piketty's data analyses and basic aproach to studying inequality. The following articles are a rebuttal to these claims.

Piketty, T.   Appendix to Chapter 10. Inequality of capital ownership. Addendum: response to FT. May 28 (2014).

Buchanan, M.   Economists, Show your Assumptions. Bloomberg View, May 6 (2014).

Irwin, N.   Everything You Need to Know About Thomas Piketty vs. The Financial Times. NY Times The Upshot, May 30 (2014).

Winship, S.   Financial Times vs. Piketty on US. Smoke, No Fire. Forbes, June 2 (2014).

Return to an Ancien Regime?
So is growth truly over? Or are we transitioning to a new mode of production? Perhaps it is not the nature of growth that guides thinking about this but the existential need for a powerful ruling class. Such a desire for oligarchy mirrors many popular interpretations of Piketty's main thesis, but in a more fatalistic manner. This hidden cultural theme might explain the recent (and disturbing) trend towards neo-reactionary thought amongst certain segments of Western society [10, 11]. So-called neo-reactionary thinking involves a combination of radical libertarianism with dictatorship. In and of itself, this would be a fairly predictable reaction to a period of great social and economic change. Yet this movement even has legions in the technology industry, a social milieu that a) represents the "new" economy and a prime source of future economic growth, and b) represents an industry that could help us overcome the limitations of traditional growth. This might reflect an inability to think innovatively about social and cultural change, or perhaps it shows how inerred we truly are to old ideas.

[1] Galbraith, J.K.   Unpacking the First Fundamental Law. Economist's View blog, May 25 (2014). AND Krussell, P. and Smith, T.   Is Piketty's "Second Law of Capitalism" Fundamental? Vox blog, June 1 (2014).

[2] von Schaik, T.   Piketty's laws with investment replacement and depreciation. Vox blog, July 6 (2014).

[3] Krugman, P.   Piketty Day Notes. Conscience of a Liberal blog, April 16 (2014).

[4] Kaminska, I.   The Tyrrany of Land. Dizzynomics blog, February 5 (2014).

[5] Hanlon, M.   Why has human progress ground to a halt? Aeon Magazine, December 3 (2014).

[6] Jeffries, S.   Karl Marx's guide to the end of capitalism: a primer. The Guardian, October 20 (2008).

[7] Gordon, R.J.   Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds. NBER Working Paper No. 18315 (2012).

[8] Geier, K.   Taking Aim at Inequality. Blog of the Century, March 12 (2014) AND Yglesias, M.   If growth is dead, we need radical redistribution. Moneybox blog, October 7 (2013).

[9] Cowen, T.   "Unified Growth Theory" by Oded Galor. Marginal Revolution blog, June 9 (2011) AND Kuznets Curve. Wikipedia. December 30 (2013).

[10] Pein, C.   Mouthbreathing Machiavellians Dream of a Silicon Reich. The Baffler, May 19 (2014).

[11] Brin, D.   "Neo-Reactionaries" drop all pretense: End democracy and bring back lords! Contrary Brin blog, November 26 (2013).

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