Steven Pressman — Live-Blogging Piketty: Reading Pt. II

Pressman is conducting a pretty in depth analysis in comparison with most others. Here are some of the highlights.

Part II of Capital in the Twenty-First Century focuses on the functional distribution of income—how income gets divided up between labor and capital; or to be more precise, this part of the book is about how income is divided between labor income and non-labor income. Piketty groups all non-labor income together and refers to it as “capital income”; he also calls it “income from wealth.” He thinks this division between income from working and income from owning is important because the ownership of wealth is distributed so much more unequally than income, because non-labor income has been rising as a share of total income, and because non-labor or capital income earns a high rate of return. These trends push up income and wealth inequality. Capital Part II documents this.

One thing that continually impresses me is the care Piketty takes when presenting data. He seeks to explain the sources of his numbers, their limitations, and then tries to find additional support for his empirical results (through literature or through other sources)....

While the main argument here is convincing, this part of the book is not nearly as good as the first part of the book. One problem is that Piketty throws too many numbers at his reader without providing sufficient breaks, or support from literary or other sources, or at the least a little bit of humor. Another problem is that despite great efforts to come to terms with very complex data, I have concerns regarding his numbers.

Nonetheless, Part II of Capital is an empirical tour de force....

Cambridge Capital Controversy

One final word concerning Part II seems necessary. The Cambridge Controversy has been nagging at me while I have read this book. At the bottom of page 201, Piketty makes it clear that he gets his data from national income accounts, which merely add up the incomes from non-labor income (e.g., rents and profits), and also the value of capital or wealth from the best sources available containing this information (e.g., published data land values and stock prices). As such, Piketty does not fall prey to the theoretical problems identified in the Cambridge Controversy. There is no vicious circularity in trying to measure capital in order to get its rate of return by relying on rates of return to measure capital. Piketty has measured wealth given the best available data and then compared these figures to measured income using the national income accounts.

Having said this, Piketty does not do a very good job of defending himself against the Cambridge critique. When Piketty does address the Cambridge Controversy directly (p. 232), and kudos to him for attempting to do this, he gets things wrong by claiming the problem was really due to the lack of empirical data to resolve the issue. To repeat what I have already said, the Cambridge Controversy was a theoretical debate about the ability to measure something called “capital” in order to determine its rate of return for economic theory and analyze its economic role. All the data in the world could not help resolve this issue, since it is not an empirical issue. This is why Piketty’s work is safe from the Cambridge Controversy. He is doing empirical work and not theoretical work; he is relying on standard measures of income and wealth and examining their relationship over time. There may be flaws with some of these measures (as I noted above), but this only means we must be even more careful with the data than Piketty and even more modest in the sorts of conclusions we draw from the data. It does not mean that the whole attempt is nonsense or that Piketty is caught up in some sort of vicious circle. And Piketty is open to the criticism that he has no theory of what determines the rate of return to capital; but he is not guilty of doing meaningless work because of not understanding the lessons of the Cambridge Controversy.

Dollars and Sense
Live-Blogging Piketty: Reading Pt. II
Steven Pressman | Professor of Economics and Finance at Monmouth University in West Long Branch, NJ, co-editor of the Review of Political Economy, Associate Editor and Book Review Editor of the Eastern Economic Journal, and member of the Editorial Advisory Board of the journal Basic Income Studies