By Marc Jampole
Here is another excerpt from my on essay on Thomas Piketty’s Capitalism in the 21st Century. You can read the full article in the latest issue of Jewish Currents:
A few years back, when government debt trumped all other macroeconomic concerns in the news media, a fairly shoddy economic study called This Time Is Different: Eight Centuries of Financial Folly, by economists Carmen M. Reinhart and Kenneth Rogoff, caught the attention of the news media because it concluded that countries with public debt greater than 90 percent of gross domestic product suffered measurably slower economic growth. Politicians and journalists throughout the world used this “new discovery” to bolster assertions that governments everywhere had to reduce debt instead of pumping money into the economy to create jobs. The problem was that Reinhart and Rogoff miscalculated in a number of places and even made counting errors. With their bad math corrected, no real correlation was found between levels of debt and economic growth.
The Occupy movement next grabbed the attention of the media, which began to devote significant time and space to the growing inequality of wealth and income in the United States and worldwide. That set the stage for Thomas Piketty’s left-leaning Capital in the Twenty-First Century to become the “hot book” of our day, a cause célèbre or bête noir, depending on the political views of whoever is commenting.
Summing up years of research by Piketty, a professor at the Paris School of Economics, and his frequent collaborator, UC-Berkeley economics professor Emmanuel Saez, Capital in the Twenty-First Century presents a detailed history of how wealth and income have shifted in the developed world since 1800, and documents the dramatic increase in inequality of wealth and income over the past thirty-five years. Most significantly for the book’s notoriety, Piketty proposes a grand theory of inequality that proposes that in all but high-growth economies, wealth inequality will naturally increase because the return on capital tends always to exceed the rate of economic growth.
For a technical work jam-packed with economic theory, Capital in the Twenty-First Century has sold a tremendous number of copies. Left-leaning pundits and economists have supported Piketty’s research and findings while often disagreeing with his proposal on how to decrease wealth inequality throughout the world. The right and mainstream have had fits trying to disprove Piketty’s findings.
Most of their criticism crumbles under routine inspection. Daniel Shuchman and critics in The Economist, for example, have stated that Piketty’s analysis ignores ways in which wealth and income trickle down, such as through non-profit funding of community activities. These writers merely demonstrate that they haven’t read the book cover to cover, since Piketty addresses these issues extensively.
Tyler Cowan in Foreign Affairs and Martin Feldstein in the Wall Street Journal atomize wealth in a feeble attempt to prove that it doesn’t tend to concentrate. Each of these authors looks at wealthy individuals, pointing out that old fortunes like the Rockefellers’ and Astors’ get diluted over time. If they had instead looked at the wealthy as a class, they would see that Piketty is right to conclude that inequality has increased, even if the monogrammed initials on the cufflinks and bracelets have changed.
Feldstein and the Financial Times claim to have found errors in the data, but Piketty has refuted every one of their objections, in most cases by pointing out that the writer had not read the footnotes or charts that accounted for what they were calling mistakes. Unlike the dubious premise about debt and economic growth put forth by Reinhart and Rogoff, Piketty’s overall theory stands up to scrutiny.
When both supporters and detractors of Capital in the Twenty-First Century compare it to Karl Marx’ Capital, they demonstrate a lack of familiarity with Marx’ 1867 tome. Piketty neither recreates nor transforms Marx, who made a detailed, step-by-step analysis of capital, its origin, its uses, and its relationship to labor. Piketty devotes 577 pages (in a very easy-to-read translation by Arthur Goldhammer) to one sole aspect of capital: its tendency to accumulate in fewer and fewer hands.
Marx postulated that labor creates all surplus value from the exchange of money for a commodity. By contrast, Piketty accepts at the very beginning that both capital and labor contribute to the production and delivery of goods and services and focuses exclusively on the distribution of wealth and income. Marx slowly and carefully constructed an overarching economic theory, whereas Piketty tells a history.
Piketty has written one of the most important books of economics since World War II, but is’ not without its flaws. In tomorrow’s OpEdge, I’ll discuss them.