The Piketty bubble may be coming to an end. Economists are starting to criticize the heart of his argument. That is not to diminish important aspects of his book. But the most profound of his claims simply may not hold....
I have compiled links to all these reviews on the Bernard L. Schwartz Rediscovering Government web site of the Century Foundation.TripleCrisis
I hope this doesn’t sound too harsh. Piketty has done a more than admirable job to trace high capital ratios. He lays the groundwork for more analysis and a true attack on general equilibrium theory and its relevance in the real world. But in interviews I’ve read, he defends himself by saying he’s talked about market imperfections and political institutions in the book. But making many broad general comments is not analysis. His central assertion depends on faith in a general equilibrium model. As he has done in some interviews, arguing that people haven’t read a book as large as his fully is not a defense. It could be equally fairly charged that writing such a large book led him to too many inconsistencies.
In the long run, I think Piketty’s work will indeed prove seminal. It will force economists to deal with the remarkably wide range of issues he raises. But he hasn’t replaced Marx with a more well-founded model of capitalism’s unfairness. For me it is not capital that is power alone. Piketty’s persistently high r, a wonderful discovery, is likely a reflection of the power of wealth not of natural economic forces. With his empirical work we can begin to find solutions about how to constrain the power. But let’s follow his example in regard to income inequality and understand more fully the market failures in capital markets. A global tax would be a wonderful addition to the list of potential tools to bring down r. So let the arguments begin.
Is the Piketty Enthusiasm Bubble Subsiding?
Jeff Madrick
5 comments:
Madrick says:
“The simple question is: Why doesn’t r fall as returns necessarily diminish? Piketty’s mainstream answer is that new technologies, broadly defined, keep creating new profitable opportunities.”
Piketty does not argue that the return on capital won’t fall. What he argues is that historical experience suggests that the volume effect due to a rising capital-to-income ratio will likely outweigh the price effect, and that the capital share of income can continue to rise even if the return on capital falls. See p. 221
Also, Piketty’s account of the causes of income and wealth inequality, developed over 240 pages in chapters 7 through 12 of the book, are more complex than the quickie r > g takeaway that reviewers have tended to emphasize. Among other things, Piketty deals at length with inequalities in the return to labor. And in this section he does argue for the role of market imperfections and sheer hierarchical power. Also, he shows how even inequalities due solely to inequality in capital income can and likely will continue to increase even if the capital share of income stabilizes at some constant level.
The reason Piketty thinks it is important to emphasize the extent to which growing inequalities are also due to problems with the ordinary functioning of capitalism under relatively competitive market conditions, and not just from market imperfections, is to avoid the optimistic dodge of those who think inequality is an economic disease that is self-healing so long as markets work properly.
I have in another place dealt at some length with the interpretive errors Summers makes in his review:
http://ruggedegalitarianism.wordpress.com/2014/05/14/summerss-review-of-piketty-underestimating-the-argument-for-the-forces-driving-inequality/
Summers simply hasn’t read Piketty’s argument correctly, which means his critical comments misfire. I’m not saying grounds for criticism don’t exist, but that people need to develop a more thorough familiarity with Piketty’s argument before these critiques can be informed ones. It simply won’t do to blame Piketty for writing a big book whose complex argument can’t easily be summarized in the space of a three or four page review. Piketty is a clear and unpretentious writer by any reasonable standard. If reviewers are getting the argument wrong, that is their fault for rushing these reviews into print, not Piketty’s fault.
There's no penalty in the economics profession for saying and doing stupid things and acting with conflict of interest. Therefore, I would not call it a "profession" at all. It's a racket.
Calling economics as presently practiced a science is silly. It is ideological through and through, making it a combination of speculative philosophy and partisan politics.
Philosophically, economics is an argument between proponents of the "natural order" (social Darwinism) and humanists, which amounts to economic liberalism versus social liberalism.
This is the universe of discourse that replaced universes of discourses based on the Great Chain of Being. It's only "scientific" in the sense of replacing a theological anthropomorphism with a more philosophical one based on individualism. The former was a form of holism and the latter a form of atomism.
The fundamental assumption of atomism is that reality is an aggregate of elements, and analysis of the elements yields all possible knowledge of the aggregate.
The fundamental assumption of holism is that the whole is greater than the sum of the parts in that the relationships among the parts are as significant as the parts considered separately. This is called synergy.
If economics is to become a science, it needs to develop a fresh holistic approach to replace the previous one based on the Great Chain of Being.
Methodological individualism fails as an assumption in that it is based on ontological individualism, which in the case of humans in untrue, as amply demonstrated in the case of feral children, as Roger reminds us. In the case of feral children, the person remains at the animal level when introduced to society and is non-functional.
I think part of the problem is that in our contemporary ultra faced-paced digital world, people feel compelled to generate rapid reviews, summaries and critiques of important books that are very big and contain complex arguments.
In an academic journal, a major critical review of a book like Piketty's might not appear until over a year after publication.
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