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Inequality and Data
FT Doubling Down Against Piketty

In case you missed it, right before the long Memorial Day weekend the Financial Times came out swinging against Professor Thomas Piketty’s much discussed book on inequality, Capital in the 21st Century, claiming that the data don’t show what Piketty claims they do. Today, the editorial board has doubled down on the criticisms:

The FT’s discovery of problems with Prof Piketty’s data undermines his thesis that capitalism has a natural tendency for wealth to become ever more concentrated in the hands of the rich.

Data on the distribution of wealth are notoriously unreliable, so any comparisons with more than 100 years ago must also be looked at with scepticism. Even if Prof Piketty’s figures were flawless—something which he too accepts is impossible—wealth inequalities would still be much lower than in the early 20th century. Modern America and Europe are nothing like Downton Abbey.

Other conclusions from the best-seller are also unconvincing. The FT has found grounds to question the finding that the holding of wealth by the rich in Europe has increased since 1980. Without that result, there cannot be an iron law of capitalism that leads to ever rising inequality.

The theoretical argument that wealth inequalities are likely to rise if growth rates are weak is also dubious. As Prof Lawrence Summers has argued, there are deep questions regarding the likely return to capital in coming decades and whether it will be reinvested to provide a rentier income.

Some lefties may think that of course this is what the FT would do. But in fact the newspaper is anything but a doctrinaire mouthpiece for the right. That an institution this august is going to the mat on this line suggests that the FT‘s editors have a lot of confidence in the conclusions they published over the weekend.

As for us, we’re waiting for the controversy to shake itself out before drawing our own conclusions.

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  • Andrew Allison

    ” . . . Even if Prof Piketty’s figures were flawless—something which he too accepts is impossible—wealth inequalities would still be much lower than in the early 20th century. Modern America and Europe are nothing like Downton Abbey.” What more do you need to know?

  • Boritz

    The Pols know what they want to do. A tome with numbers and formulas that seems to support their predetermined course of action is always welcome and a cause for fame and acclaim for the author and celebration by those whose policies are offered the supporting cover of science or economics or whatever discipline is respected by the public because of what it used to represent.

  • Corlyss

    “But in fact the newspaper is anything but a doctrinaire mouthpiece for the right.”
    I’ll say! It’s literally pink for a reason. That they would come out against Piketty is surprising. “Makes me doubt my perceptions of reality.” – Chris Stevens, playing Maurice Minnifield’s bully henchman in the “Founding of Cicely” episode.

  • Anthony

    “The FT’s discovery…That an institution this august is going to the mat….” Now, who really finds FT’s attempt at contravention odd/surprising.

  • stevewfromford

    How can income from accumulated capital possibly have grown faster than GDP for hundreds of years, as Piketty claims without the owners of capital owning literally everything by now? Compounding capital income for hundreds of years at a rate greater than GDP growth would lead to GDP being ALL capital income far sooner than today and that obviously has not happened. It appears to me that Piketty has ignored the fact that capital is lost as well as gained and that the losses can be spectacularly large at times.

    • Breif2

      Or as I put it last time:

      “His main contention is that over the centuries since the emergence of capitalism, return on capital has tended to be [significantly] greater than the growth of the economy.”

      Unless we accept the ridiculous proposition that the none-rich have been growing steadily poorer in absolute terms, I don’t understand how this can be true.

      • Curious Mayhem

        Of course it doesn’t make sense. Piketty’s book is larded with such absurd claims, as if capital isn’t subject to both gains and losses, both microeconomic (gains and losses on individual firms or households) and macroeconomic (inflations, deflations, bubbles, crashes, wars, revolutions, etc.).

        Parts can’t grow faster than wholes, at least not for very long. It’s an arithmetic absurdity.

        However, what Piketty has done is to retroject, on to all previous history, the present era of asset inflation induced by central bank and government policies. In the last 20 years, we have seen stretches of time where capital, in its financial or nominal-money form, has been inflated by excess leverage (debt used to chase up asset prices) and run up faster than economic growth can justify. By the same token, however, we’ve also seen two major asset crashes in the last generation that set the books straight. We’re almost certainly about to see a third asset crash.

        Another fallacy in Piketty’s book is his mishandling of the two largest factors in income and wealth inequality, namely, geography and age. For example, older people have more assets and, if they’re still working, typically higher income. As a society ages, inequality by age will necessarily grow — it’s just arithmetic. If younger people have taken on significant student debt, say, then the inequality of net worth will be even more extreme.

        The most frustrating thing about this is that the VERY PEOPLE in charge of our government and the central banks have pursued PRECISELY the policies that landed us here in the first place. They bear a lot of the blame for this situation; yet they swoon when presented with such empty arguments.

        • Breif2

          “Parts can’t grow faster than wholes, at least not for very long. It’s an arithmetic absurdity.”

          Perfectly put. (I’ll claim that I might have put it that way myself had I not been so dumbfounded by the original thesis. 🙂 )

    • Government Drone

      If I remember right, Picketty did qualify his thesis by saying that capital accumulates faster in times of *peace*; for instance, I don’t think a German or Polish investor earned much on national securities during 1939-45.
      This might imply that a good hard war will help reduce income inequality (i.e., WWII & its aftermath), but in a more serious vein, I think the better way to state it is that if capital is allowed to accumulate without *disruption* of any kind, whether in politics (war), or technology (e.g., the telephone disrupting the income streams of telegraph companies, or how the Internet affects brick & mortar retailers).
      This gives us another possible way (besides punitive taxes) to keeping wealth inequality under control, if we deem it necessary & desireable: allow for the easy disruption of established industries via innovation. It would certainly be less stultifying to society than a massive regime of regulation & taxation.

  • stan

    Piketty’s book is no different than Mann’s hockey stick, the Boston Fed study or Monnett’s polar bear joke. The Left doesn’t care that the work is contrived BS. All that matters is that someone with a PhD published a study that promoted lefty dreams — it must be revealed truth!

    • Curious Mayhem

      The phony pseudo-academic mumbo-jumbo is there to provide cover and bamboozle the rubes. In this case, the rubes live in Berkeley and Cambridge.

  • Anthony

    Thomas J Stanley, an expert on American Millionaires, discusses Piketty. Via Meadia readers will enjoy this.

    “In the introduction to the interview, there was an interesting
    statement: “hard work will matter less, inherited wealth more.”
    Really? Added up the entire annual realized income of those
    households in the $10M and over category the total would be over $300
    billion. What percent of this amount is derived from trusts and estates?
    The answer is 1.3%. This percentage even doubled or tripled would
    hardly qualify America as a country where inherited wealth “mattered

    • Curious Mayhem

      Also utterly wrong. One of the problems with raising taxes on the “wealthy” these days is that so much LESS income of the well-to-do is inherited. Today’s rich are largely “working rich,” not the idle rich of yore. What they’re doing to earn that income is another matter (perhaps not all constructive work in the financial industry, devising derivatives that will blow up at the wrong moment).

      Nonetheless, it’s not Downton Abbey and hasn’t been for a long time. That era is long gone. Someone should tell Prof. Piketty, who seems pretty amateur in his historiography and statistics.

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