Can anybody give me a good reason to read “Capital in the 21st Century” by Thomas Piketty rather than, for example, Das Kapital by Karl Marx? At least Karl has a theory of financial crisis. Here is a roundup of comments by economists I know:
Allan Meltzer points out that Piketty leaves out migration. For the US, and Canada it is the path to the middle class. In China, it is migration from rural to urban. For countries like France, there is a loss of young to London and Berlin in search of better opportunities. For Italy, the out-migration in the early 20th century was very large. The narrowing of income differentials between the early 20th century to the 1970s and the growth of the middle class were in large part a result of working to acquire new skills and higher productivity. Arguably, teaching people to live on government handouts increases the share of the top income brackets by skewing incentives to acquire productive skills. Critics of modern capitalism do not pay sufficient attention to the value of human capital, innovation, education and an environment that encourages entrepeneurship. At the global level, hundreds of millions have been moved out of poverty, reducing global differentials.
Kenneth Rogoff concurs: “The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor.”
In accepting Piketty’s premise that inequality matters more than growth, one needs to remember, says Rogoff, that many developing-country citizens rely on rich-country growth to help them escape poverty. The first problem of the twenty-first century remains to help the dire poor in Africa and elsewhere. By all means, the elite 0.1% should pay much more in taxes, but let us not forget that when it comes to reducing global inequality, the capitalist system has had an impressive three decades.
Meanwhile, Martin Feldstein in the Wall Street Journal destroys the evidence as well as theory on which Pikkety’s thesis is based. Piketty assumes that people live for ever. In reality, they die and pass on bequests to children and grandchildren:
“But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests.”
Also, Piketty wrongly uses tax returns without adjusting for changes in tax rules: Yet the changes in tax rules since 1980 create a false impression of rising inequality.
“These changes in taxpayer behaviour substantially increased the amount of income included on the returns of high-income individuals. This creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income.”
The problem with the distribution of income in the US is not that some people earn high incomes. The problem is the persistence of poverty. The best way to reduce that is by stronger economic growth and a different approach to education and training, not confiscatory taxes on income and wealth.
If you still hope stubbornly to hang onto the shreds of Piketty’s thesis, don’t read Mervyn King’s review in the Telegraph of May 10th. After some conventional polite remarks, he circles for the kill. It is not surprising that a growing portion of the rewards in many fields of endeavour is harvested by a few people. The fall in travel costs and the advent of global television coverage have extended the status of stardom from film stars to a much broader group. Returns go to the winners of the tournament, whether in tennis, finance, law, computing, advertising or other occupations. The “winner takes all” mentality has invaded many walks of life, although the identity of the winner changes over time.
Piketty argues that “the central contradiction of capitalism” is the fact that the average rate of return on capital, r, normally exceeds the rate of output growth, g. So capital reproduces itself faster than output increases. But the fact that the rate of return exceeds the rate of growth is simply a necessary condition for an efficient allocation of capital and is consistent with any pattern of inequality.
Mervyn King says it is “silly” to describe an accounting identity (an equality that holds firm whatever the actual numbers) as a “fundamental law of capitalism”. Equally, the risk premium, which constitutes a large part of the rate of return on capital, “reflects the huge uncertainty about a recurrence of major shocks that have occurred in the past, and could do so again”
He points out that the financial crisis showed that periods of apparent stability can be followed by destructive shocks. In short, Pikkety’s predictions are “little more than speculation”.
It gets worse. According to Chris Giles in the FT today, “the data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings.”
From the Left, in an interview in The Chronicle of Higher Education the Marxist David Harvey is equally sceptical:
“..you could read that (Piketty’s) book and have no idea what happened in 2007 and 2008—why Lehman Brothers went bankrupt, where crises come from,” he says. “What I tried to show in Seventeen Contradictions is that capital is a multifaceted system, with interlocking contradictions that are very rich.”
So, deep breath, if his evidence does not support his thesis, and if his economics is lousy, his conclusions prejudice masquerading as science, and some of his data dubious (to say the least), whence the Piketty thing? (“Capital” sold 80,000 in the first two months, not counting e-books, and is expected to sell well over 200,000).
Blame Paul Krigman and his disciples
Harvard University Press (HUP) Market rep John Eklund has part of the answer: good peer reviews, marketing and Krugman. By the time the spring 2014 list was shared with reps in a launch meeting at the press last September, enthusiasm was “high and unanimous”. It was made the lead title: “The ace marketing team was mobilized, an ad campaign designed, and an author tour planned.”
Field reps hit the road to bookstores brimming with commitment. During sales meetings, Eklund talked about the timeliness of the issue, about Piketty’s star economist stature, about the outstanding scholarship. He reminded people that Harvard’s big, serious lead titles often outsell expectations. He noted that the French edition hovered in the top five of the French bestseller list among various editions of Cinquante nuances de grey.
“Once the phenomenon was clearly underway- which I trace to Paul Krugman’s first call out, in which he christened Capital the “book of the decade”- the booksellers responded with equal aplomb. “Booksellers are great at selling what’s selling.” In short, Piketty didn’t happen spontaneously. The very talented HUP marketing and publicity team worked night and day, before during and after publication, to spark and then extend the media blitz. This was a marketing campaign for the record books.
But there’s more to it than slick marketing. Like David Graeber’s astonishingly successful blockbuster, “Debt”, “Capitalism” recognises our deep awareness that something is basically wrong with the system. These two books happen to appeal to the prejudices of the Old Left. What we need is a treatment from an advocate of free markets that carries the same punch and recognises the political hunger for something more than merely a repetition of the old liberal mantras.
Indeed, that is what I tried to offer in The Money Trap. Under the Ikon, money itself rises in real value with the growth of capital accumulation and rise in productivity. That means everybody shares in progress.
Why read Piketty?
Picking holes in the blockbuster
Can anybody give me a good reason to read “Capital in the 21st Century” by Thomas Piketty rather than, for example, Das Kapital by Karl Marx? At least Karl has a theory of financial crisis. Here is a roundup of comments by economists I know:
Allan Meltzer points out that Piketty leaves out migration. For the US, and Canada it is the path to the middle class. In China, it is migration from rural to urban. For countries like France, there is a loss of young to London and Berlin in search of better opportunities. For Italy, the out-migration in the early 20th century was very large. The narrowing of income differentials between the early 20th century to the 1970s and the growth of the middle class were in large part a result of working to acquire new skills and higher productivity. Arguably, teaching people to live on government handouts increases the share of the top income brackets by skewing incentives to acquire productive skills. Critics of modern capitalism do not pay sufficient attention to the value of human capital, innovation, education and an environment that encourages entrepeneurship. At the global level, hundreds of millions have been moved out of poverty, reducing global differentials.
Kenneth Rogoff concurs: “The same machine that has increased inequality in rich countries has leveled the playing field globally for billions. Looking from afar, and giving, say, an Indian the same weight as an American or a Frenchman, the last 30 years have been among the greatest in human history for improving the lot of the poor.”
In accepting Piketty’s premise that inequality matters more than growth, one needs to remember, says Rogoff, that many developing-country citizens rely on rich-country growth to help them escape poverty. The first problem of the twenty-first century remains to help the dire poor in Africa and elsewhere. By all means, the elite 0.1% should pay much more in taxes, but let us not forget that when it comes to reducing global inequality, the capitalist system has had an impressive three decades.
Meanwhile, Martin Feldstein in the Wall Street Journal destroys the evidence as well as theory on which Pikkety’s thesis is based. Piketty assumes that people live for ever. In reality, they die and pass on bequests to children and grandchildren:
“But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests.”
Also, Piketty wrongly uses tax returns without adjusting for changes in tax rules: Yet the changes in tax rules since 1980 create a false impression of rising inequality.
“These changes in taxpayer behaviour substantially increased the amount of income included on the returns of high-income individuals. This creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income.”
The problem with the distribution of income in the US is not that some people earn high incomes. The problem is the persistence of poverty. The best way to reduce that is by stronger economic growth and a different approach to education and training, not confiscatory taxes on income and wealth.
If you still hope stubbornly to hang onto the shreds of Piketty’s thesis, don’t read Mervyn King’s review in the Telegraph of May 10th. After some conventional polite remarks, he circles for the kill. It is not surprising that a growing portion of the rewards in many fields of endeavour is harvested by a few people. The fall in travel costs and the advent of global television coverage have extended the status of stardom from film stars to a much broader group. Returns go to the winners of the tournament, whether in tennis, finance, law, computing, advertising or other occupations. The “winner takes all” mentality has invaded many walks of life, although the identity of the winner changes over time.
Piketty argues that “the central contradiction of capitalism” is the fact that the average rate of return on capital, r, normally exceeds the rate of output growth, g. So capital reproduces itself faster than output increases. But the fact that the rate of return exceeds the rate of growth is simply a necessary condition for an efficient allocation of capital and is consistent with any pattern of inequality.
Mervyn King says it is “silly” to describe an accounting identity (an equality that holds firm whatever the actual numbers) as a “fundamental law of capitalism”. Equally, the risk premium, which constitutes a large part of the rate of return on capital, “reflects the huge uncertainty about a recurrence of major shocks that have occurred in the past, and could do so again”
He points out that the financial crisis showed that periods of apparent stability can be followed by destructive shocks. In short, Pikkety’s predictions are “little more than speculation”.
It gets worse. According to Chris Giles in the FT today, “the data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings.”
From the Left, in an interview in The Chronicle of Higher Education the Marxist David Harvey is equally sceptical:
“..you could read that (Piketty’s) book and have no idea what happened in 2007 and 2008—why Lehman Brothers went bankrupt, where crises come from,” he says. “What I tried to show in Seventeen Contradictions is that capital is a multifaceted system, with interlocking contradictions that are very rich.”
So, deep breath, if his evidence does not support his thesis, and if his economics is lousy, his conclusions prejudice masquerading as science, and some of his data dubious (to say the least), whence the Piketty thing? (“Capital” sold 80,000 in the first two months, not counting e-books, and is expected to sell well over 200,000).
Blame Paul Krigman and his disciples
Harvard University Press (HUP) Market rep John Eklund has part of the answer: good peer reviews, marketing and Krugman. By the time the spring 2014 list was shared with reps in a launch meeting at the press last September, enthusiasm was “high and unanimous”. It was made the lead title: “The ace marketing team was mobilized, an ad campaign designed, and an author tour planned.”
Field reps hit the road to bookstores brimming with commitment. During sales meetings, Eklund talked about the timeliness of the issue, about Piketty’s star economist stature, about the outstanding scholarship. He reminded people that Harvard’s big, serious lead titles often outsell expectations. He noted that the French edition hovered in the top five of the French bestseller list among various editions of Cinquante nuances de grey.
“Once the phenomenon was clearly underway- which I trace to Paul Krugman’s first call out, in which he christened Capital the “book of the decade”- the booksellers responded with equal aplomb. “Booksellers are great at selling what’s selling.” In short, Piketty didn’t happen spontaneously. The very talented HUP marketing and publicity team worked night and day, before during and after publication, to spark and then extend the media blitz. This was a marketing campaign for the record books.
But there’s more to it than slick marketing. Like David Graeber’s astonishingly successful blockbuster, “Debt”, “Capitalism” recognises our deep awareness that something is basically wrong with the system. These two books happen to appeal to the prejudices of the Old Left. What we need is a treatment from an advocate of free markets that carries the same punch and recognises the political hunger for something more than merely a repetition of the old liberal mantras.
Indeed, that is what I tried to offer in The Money Trap. Under the Ikon, money itself rises in real value with the growth of capital accumulation and rise in productivity. That means everybody shares in progress.
Written on May 23, 2014 at 8:40 pm, by robert
Categories: Homepage, News and Comment, RP's Diary | Tags: King, Pikkety, Rogoff