Continuing Conversation... Thomas Piketty on Inequality and Capital in the 21st Century
By Amy Willis
EconTalk host Russ Roberts talked with Thomas Piketty, author of the controversial and best-selling tome, Capital in the 21st Century.
Check Your Knowledge:
1. Piketty asserts that the theory of marginal productivity of labor is naive. What does he mean by this, and to what extent do you agree?
2. Piketty calls his now famous identity, r > g, the “central contradiction of capitalism.” What does this identity purport to tell us, and what is the basis of Roberts’ skepticism regarding its validity?
Going Deeper:
3. In his “Piketty Fever” column this spring, Pedro Schwartz critiques Piketty’s r > g law. What is the basis of Schwartz’s critique, and how does it compare to Roberts’s?
4. Roberts and Piketty may agree that the share of income at the top of the distribution is growing at a faster pace than the rest. But Roberts, contrary to Piketty, argues that the share of net income the top 1% received is not relevant. Rather, he argues, we should focus on the level of well-being of all those in the distribution. In fact, the growth rate in the income of the top 1% reflects entrepreneurs’ ability to reach more customers using technology in an increasingly globalized world. To what extent is Roberts correct that the growth rate of the top 1% reflects consumers being better off? To what extent does the increasing income of the top 1% reflect the returns to past investments and inheritance as Piketty emphasizes?
Extra Credit:
5. Toward the end of the episode, Piketty says, “…at the end of the day, the main policy to reduce inequality is not progressive taxation, is not the minimum wage. It’s really education.” What does Piketty mean, and to what extent would you agree? This seems to be a claim with which both Piketty and Roberts can agree. To what extent do they, and why?
6. Piketty argues that a middle class with stable access to wealth is critical for both democracy and economic growth, and that current trends suggest this class is disappearing. Contrast Piketty’s claim with the work of Richard Burkhauser. What evidence is there that the middle class is in danger, and how will this affect politics and economics?
READER COMMENTS
Patrick R. Sullivan
Sep 24 2014 at 12:09pm
According to German insurance company Allianz’s latest Global Wealth Report, the middle class is doing well;
Dave Baird
Sep 25 2014 at 4:31am
Patrick, this trend is absolutely to be expected and is illustrated in detail in Piketty’s book. It is a consequence of technology transfer from wealthy nations to developing nations. It’s the same phenomenon as the 3 decades of rapid growth following WWI and WWII, which was basically the west catching up with itself (with its own pre-existing level of technology) after the destruction of capital during the wars. Wealth growth in the advanced economies has 1) stagnated since then and 2) largely been captured by the 1%. The same phenomenon is very likely in these developing economies as they catch up. The reason Piketty advocates education over redistribution as a long-term solution is because advances in technology come from highly educated populations, and these advances are a stronger engine of egalitarian wealth distribution (through broad-based economic growth) than redistributionist tax policies.
Kevin L
Sep 25 2014 at 11:00am
Wouldn’t the same phenomenon that causes technology transfers between countries (thereby reducing inequality between countries) work to reduce inequality between individuals? That is, what would stop the bottom 99% from adopting the technology of the 1% – whether that be education, bargaining techniques, risk-taking, stable social relations, or whatever factors go into the success of the wealthy. As that technology spreads across humanity, the rents that went to the very wealthy will be competed away.
Now, to reject this view, I think you either need to claim that some people are not capable of using the above technologies, which implies there are inherent traits among the wealthy giving them mastery over wealth-generating technology, and therefore educating the masses will not be very effective; or the wealthy are intentionally keeping this technology out of the hands of the rest of humanity, implying that they have tremendous political power that will make it difficult to tax them either for redistribution or public education.
I also caught a few huge assumptions Piketty makes, the one that sticks out being, “If governments could acquire more of the economy, they would have less debt.” This assumes that there is a fixed set of goods the government will provide, and if the government’s revenue increases, it will fund fewer of those goods from debt. I think a more realistic model is that there are near unlimited “wants” within the political system, and that governments will spend as much as possible; if revenue grows, borrowing will grow relative to it, leading to an absolute increase in government debt.
Krzysztof Ostaszewski
Sep 25 2014 at 2:47pm
So is Piketty advocating rapid privatization of education worldwide? Free market in education? If so, why is this not the headline?
And if he is saying education is the key, but at the same time advocating total government control over education, so that it is not education but indoctrination, then obviously, like all socialists, he is a proponent of creating poverty.
There are two models of education: Salamanca (because it was best developed at the University of Salamanca, one of the first universities in the world), a.k.a., scholastic method, where students learn to argue all points of view, and Albertina, after the once famous university in Koenigsberg/Krolewiec/Kalinigrad, which created the modernist method of mass indoctrination, widely practiced at American universities now.
Econtalk.org is a prime example of Salamanca of the modern world.
Privatize education, and all educational institutions will evolve into Salamancas (with their own flavor). Nationalize, and you will get Albertinas.
Is Piketty advocating for mass indoctrination, or for privatization of education? Can he clarify?
Patrick R. Sullivan
Sep 25 2014 at 7:42pm
Again, Piketty’s worship of education is very revealing, especially this;
Where did he ever get the idea that formal education is the key to success in business? We have numerous examples showing that it isn’t, from John D. Rockefeller to Henry Ford to Bill Gates (Harvard dropout).
There appears to be more things under heaven and earth than are dreampt of in Piketty’s philosophy.
Michael Byrnes
Sep 25 2014 at 9:32pm
Kevin L wrote:
“Now, to reject this view, I think you either need to claim that some people are not capable of using the above technologies, which implies there are inherent traits among the wealthy giving them mastery over wealth-generating technology, and therefore educating the masses will not be very effective; [b]or the wealthy are intentionally keeping this technology out of the hands of the rest of humanity,[/b] implying that they have tremendous political power that will make it difficult to tax them either for redistribution or public education.”
This seems absurd, but maybe there is a sense, in a “death by a thousand paper cuts” kind of way, that it is actually true. Here is an argument from Steve Waldman (he directly addresses your point on technological progress):
“In fact, we should expect the prevalence of rent capture (or worse) as a source of economic profit to increase with technological progress. Why? Because, absent chicanery, technology increases the ease of production and the efficiency of distribution. As Schumpeter pointed out, the source of profit in real-life capitalism is the fact that monopoly power is ubiquitous because of natural barriers to competition. The corner store has a monopoly on the convenience of its neighbors, and so can capture some of the surplus that might otherwise be bid away to customers by competitors. On-demand delivery drones would eliminate that monopoly. Yet the corner store industry might lobby to prevent residential rooftop deliveries, in which case it is no longer exploiting a natural inefficiency but capturing a rent. In business school, students are taught that a successful business has a “moat” that makes it difficult for competitors to bid away ones margins. Technological progress renders moats that derive from nature harder to come by. Instead, successful businesses — and successful people (since under capitalism, a human is just a small business) — must rely increasingly on moats that result from social and political arrangements.”
Link here: http://www.interfluidity.com/v2/5031.html
I think there is a tendency to rebut arguments such as Piketty’s by pointing to the great technological advances we have seen in the last 50 years, or even the last five years, particularly those aspects that are well-dispersed like smartphones, Amazon Prime, better cars, etc. And there’s a lot of truth to that – I don’t know any people who would want to go back to the “more equal” 1964.
But I think that Waldman is right that if there is vastly more wealth in the world today (and there is) then there is also vastly more rent seeking in the world today. Apple Computer created the iPhone, which has made the world a better place, but they have also engaged in working the system (for instance, their patent lawsuit against Samsung).
Michael M
Sep 26 2014 at 8:21am
In thinking about Piketty’s R > G “law” I thought of some basics I was taught in my first economics class.
If G is the growth rate of the economy, measured as GDP and R is the return on (private) capital, a quick look at the formula for GDP makes it very clear why R should be greater than G.
If GDP is formed by: C (consumption) + I (investment) + GS (government spending) + [X-M] (net exports), then C, I & [X-M] all contribute to Piketty’s R, leaving GS as the only other variable explaining Piketty’s G.
Here is my leap of logic: in an economy with zero government spending, would not Picketty’s R = G? Have I oversimplified here?
I wonder if a correlation could be found between the ratio of GS/GDP and Picketty’s R/G? That might help to explain why big government, crony capitalism and increasing inequality tend to go together.
Would it surprise anybody that government spending makes no net contribution to economic growth? As Milton Friedman used to say, nobody spends money more carefully than when they are spending their own money.
Amy Willis
Sep 26 2014 at 10:16am
@Krzysztof, great points re: education. In his book, Piketty focuses primarily on higher education. (Here’s a good post I read recently on this.) It would be fascinating to hear him go into K-12 more. I suspect you’re right, that he would rely on state-provided education. But I wonder whether he would consider perceived funding inequities, especially given his concern re: college endowments (as similarly unequal to individual wealth).
Bogart
Sep 26 2014 at 2:03pm
In number 4 above, Russ is more correct than Piketty in that a lot of the increases in wealth of the 1% have come from technology but a lot has come from central banking and government transfers. Contrary to Piketty, more government money makes its way to the higher classes in society than the low. If you look at the USA in particular you see huge wealth transfers to the stock holders and managers of companies that make things that go boom and offer very little (a few jobs) to the poorest among us. But even direct subsidies like farm supports and what not mostly go to the wealthiest among these specific groups. When you include Medicare and Social Security it becomes completely off as poor males have shorter life expectancies than wealthy women.
And there is the elephant in the room which is central banking. That is nothing more than a scheme to steal money from the poor wage earners and deliver this to gamblers in the major financial companies.
Doug Tree
Sep 26 2014 at 2:09pm
I acutally thought quite a bit about how the Piketty episode relates to the Burkhauser episode (since Burkhauser is one of my all-time favorites). One thing I especially liked about the latter, is how strikingly clear it becomes that the devil is in the details. The subtleties of data sources and methodology are so important! It is clear that this was an important sub-current in the Piketty episode as well (for instance the discussion of the work of Kaplan and Rauh and of the Forbes 500 list).
Frankly however, I found Piketty’s discussion of data more obtuse and less humble. While it is undoubtedly true that practically all academics promote their methods and data sources as the best (and Burkhauser certainly did that), I found Piketty’s repeated assertion, “I only look at the data” somewhat patronizing. We are all looking at the data. The data you choose to look at, and what methodologies (and assumptions!) you use are certainly going to be influenced by your priors.
Of course, as Roberts said in his comments, there was little time to delve into details. Nevertheless, I was hoping for the classic Russ Roberts question: Given all of the conflict over the work in this area, have you read an empirical study recently that changed your mind or disproved something you previously believed?
Ron Warrick
Sep 26 2014 at 6:29pm
1. Marginal utility of labor. I don’t know what he means, but there certain are cases where the marginal utility of labor doesn’t follow normal rules. If a job requires three people and you only have two, the marginal utility of the third person is higher than that of the other two, even if the position is less skilled. Or if you have four people working 60 hours a week, they may not be as productive as six people working 40 hours a week and getting adequate downtime. Or he may just mean that marginal utility of labor can be so difficult to measure as to be more an art than a science, or that employees can be trained to be more productive without adding workers.
2. r > g is not dictated by any theory, and may not always hold. However, Piketty’s data shows it holding for long enough periods of time to make it the default assumption for the future. It means that those with wealth tend to accumulate more than those without and those with more wealth accumulate more than those with less wealth, so in the long run case one guy or one family ends up with everything in the world, mostly by inheritance. Robert’s skepticism seems to be based on hypothetical possibilities why it might not continue to hold, but with no evidence that it will not. This is a case of not wanting to believe something because one does not want to face the implications.
3. Schwatrz’s objections look similar to me. He also goes no reason why we should expect that g > r will predominate in future.
4. Judging from the last 30 years or so, there is less reason to believe that the middle class will be better off than there is to believe the 1% WILL be better off, since this has been the trend in the past few centuries except following wars. This certainly does not imply that making the 1% worse off will help anyone else, but it also provides no reason to coddle the 1% with low taxes, either.
5. Roberts and Piketty agree on education, but it is not clear to me why. The higher education system does not look to me as if it provides real productive skills for most people outside the professions. It is mostly a way of credentialing those who have shown they can tolerate drudgery, drugs and alcohol better than those who dropped out.
6. If you need the manipulations of Burkheiser to convince the middle class that progress is being made, you are in trouble already. The very wealthy, especially the top labor income people (big corporate CEO’s) are sowing the seeds of destruction, perhaps through no fault of their own, but just by their inexplicable existence. Perhaps it will take a conservative president to advise them to back off on pay increases that bear no relation to company-specific performance. The whole world is watching now.
Ron Warrick
Sep 26 2014 at 6:40pm
Michael M. I can’t really follow your logic here, but empirically, Piketty’s historical data shows larger differentials between r and g in the 18th and 19th century when government spending was minuscule compared to today. Although it may be true that government spending has dampened growth.
RW Yundt
Sep 28 2014 at 10:52am
It might be a fascinating EconTalk episode if some opposing views could be heard from the likes of conservative / libertarian David Stockman (author The Great Deformation) or economic historian Deirdre McCloskey (author The Bourgeois Dignity).
Both have a penchant for financial straight talk.
I’d suggest either could credibly refute some of Piketty’s assertions.
Thanks for considering.
Michael Byrnes
Sep 28 2014 at 2:26pm
RW,
Check the archives – McCloskey has been a guest before.
Denis Sevee
Sep 28 2014 at 5:15pm
I know a lot of people find comments like this annoying, but at the top of this page the inequality r>g is twice referred to as an identity. It is not an identity.
Ajit
Sep 29 2014 at 1:02am
I think Cochrane said it best. “We’re told that income disparity is bad and societies will get along better and grow faster if we institute broad-based transfers through the tax system. That seems to be made-up economics.”
I couldn’t have said it better myself. I was legitimately disturbed at how easily the guest jumped from his observations of the data to policy implications he’s “confident” are the answer.
Ajit
Sep 29 2014 at 5:06am
I also want to echo some of the comments above. I was flabbergasted at how casually the guest just takes his assumptions as given to be true. He speaks as if he knows what the “equilibrium” distribution ought to be. Worse, he then prescribes a set of overall policies as if those will course correct us onto the optimal path.
You only need to have taken 1 econ graduate course(if even that) to recognize the massive holes in this kind of logic. It’s especially frighting, given how influential the book has become.
In a world which is rife with economic illiteracy, this book only sends us further down the rate hole.
Amy Willis
Sep 29 2014 at 9:40am
@RW and @Michael etc… True, McCloskey has been a past EconTalk guest.
Though this also made me recall this piece from the Spectator shortly after Piketty’s release.
Earl Rodd
Sep 30 2014 at 9:43am
Very interesting episode! As I thought this through, I realized an interesting dilemma for big government politics. If Piketty is right that lower marginal rates have lead to a sharp increase in high end wages and wealth, I thought about how this led to the rapid increase in government revenues (1980-2000). The mechanism I see is that even though the top rates are lower, more income is going to the people at the high end and thus more of total income is taxed at higher rates (considering that if you add income across the bottom, it is taxed at VERY low rates in the US). Thus big government politics actually DEPENDS on the growing wage inequality to maintain high government revenues! If Piketty is right, raising rates on the top end will flatten income distribution, but decrease government revenue!
Earl Rodd
Sep 30 2014 at 9:48am
Listening to this challenging episode, I came up with a possible rational for very high tax rates at the very high end. I don’t know if I like the idea, but here it is: As many episodes have discussed, outrageous success has a strong element of “luck” or “being in the right place.” To some extent, this means that the outlier successes (Facebook etc.) are really products of the “times” and many people adapting to new ways of doing things. Therefore, such success in some way belongs to “everyone”, not just the one whose company happened to be in the right place. Thus, extreme tax rates (hopefully indexed) on extreme incomes may make sense philosophically, if not economically.
Amy Willis
Sep 30 2014 at 11:40am
@Earl, great comments. While you’re not necessarily talking only about inherited wealth, to which Piketty devotes a lot of attention, he’s not alone. Even some luminaries in the classical liberal tradition have had negative attitudes toward inherited wealth, notably Buchanan. You can hear a bit about that in Part 2 of our EconVideo interview with him, as well as in this retrospective on Buchanan’s work at the Online Library of Liberty.
Don Crawford
Sep 30 2014 at 12:39pm
Having learned much of what I know about economics from Russ and fellow travelers from a libertarian point-of-view I found the arrogance of Piketty’s assertions to be surprising. He said he didn’t know what the right amount of equality was, but he was certainly in favor of empowering the government to take more of the wealth of people who are succeeding. Isn’t it a simple fact that taking as much in taxes as the government already takes has not greatly reduced inequality? Trying to use politics (read government) to address inequality is socialism, which we have ample evidence does not work. We are already giving a good living to a huge and rapidly growing percentage of our population that is not working at all. Empowering the government to take ever more from the successful in the name of equality is not only morally wrong, it is self-defeating as it incentivizes sloth and punishes ambition. I hate hearing this wrong-headed point of view espoused without serious challenge from Russ. Couldn’t we have an episode with Deirdre McCloskey debunking this episode or Piketty’s book.
John Sallay
Oct 1 2014 at 7:06am
I was just reading an article about the Forbes 400 list.
http://finance.yahoo.com/news/youngest-billionaires-forbes-400-11-060000953.html
Of the 11 youngest billionaries, only 1 is there because of inherited money. Most of the rest are very recent additions, some in the last few years. This makes me very skeptical of r > g.
The Rockefeller kids may have enough money that none of them will ever have to work, but they apparently have not been able to stay at the top.
I am willing to accept that their wealth may be growing at a rate greater than that of the overall economy, but other billionaires are just leap frogging them. If we look at this over time, using Piketty’s logic, then eventually the Rockefellers will be pushed out by the other billionaires with r >> g. They will control an increasingly smaller portion of the pie and will become eventually “poor”.
You can’t have it both ways. As far as math goes, it’s not fair to say that all the rich earn the same rate on their money. There should be a set that earn r_max. This set over time will dwarf not only the poor, but all other rich. But that is only if they can keep up the r_max growth. Which nobody has been able to do yet.
benwood91
Oct 3 2014 at 12:29pm
I’m an ordinary 30%er, not an economist, and have a coupla questions:
Why should I (and my family) care if my (our) proportion of wealth compared to the whole is less than the 1% (or whomever) as long as my (our) wealth (i.e. well being) increases at a rate that is acceptable to ME (US)?
Why should I want the wealth of “the rich” to be confiscated through tax policy, to be, in my opinion, re-distributed (read: wasted) by special-interest group-influenced government policy?
Amy Willis
Oct 7 2014 at 12:52pm
@benwood91 Good question! But many in similar positions do…How can we convince them otherwise?
Christopher
Oct 9 2014 at 3:36am
“Why should I want the wealth of “the rich” to be confiscated through tax policy, to be, in my opinion, re-distributed (read: wasted) by special-interest group-influenced government policy?”
“@benwood91 Good question! But many in similar positions do…How can we convince them otherwise?”
You either belong not to the 30% as you claim but the top 10% also mentioned in Piketty’s book (who are not doing too badly either) or you live on a different planet. Living on an academic and a teacher’s salary with worries about retirement and putting three kids through college, I can assure you the issues discussed by Piketty matter greatly to me/us. Thank got we have relocated to Scotland where tuition free (good) universities and reliable retirement arrangements have greatly increased our standard of living and the quality of my night’s sleep.
Different T
Oct 11 2014 at 9:07am
[Comment removed for supplying false email address and for crude language. Email the webmaster@econlib.org to request editing your comment. A valid email address is required to post comments on EconLog and EconTalk.–Econlib Ed.]
Glenn
Oct 13 2014 at 10:08am
@ Christopher – So, let me get your rationale straight. Because university tuition has skyrocketed like mad for 30 years due to massive govt interventions, you believe more intervention is required to ensure that hundreds of thousands of dollars are spent on your 3 children by others to educate them? I’m just trying to make sure I’ve got what you are saying correct.
Enjoy Scotland, a socialist paradise, sounds like you’ll fit right in.
Ayman
Oct 15 2014 at 3:01pm
I just finished listening to the Adam Smith episode and would like to quote Russ Roberts quoting Adam Smith – People want to be loved and be lovely. Now reflecting on the Piketty discussion, I wonder if the chasm between the 1% and the rest continues to grow at the current rate wouldn’t that create problems as people value themselves in relative terms? For instance will it start to be difficult to feel loved when you are standing in the Shadow of a super elite class that take the lime light, further will it start to become difficult to be/feel lovely if the super elite become our working definition of Lovely?
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