Wrong, but in a really great way.

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The Year of Piketty

Clive Crook is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was chief Washington commentator for the Financial Times, a correspondent and editor for the Economist and a senior editor at the Atlantic. He previously served as an official in the British finance ministry and the Government Economic Service.
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Last month the Financial Times chose Thomas Piketty's "Capital in the Twenty-First Century," a study of the underlying dynamics of inequality, as its Business Book of the Year. The honor rather understates the book's impact. Forget "business book." "Capital" was the non-fiction publishing sensation of the year, and maybe of the decade or more. When has a work of its kind ever been so rapturously received?

Yet what a perplexing phenomenon this was. Now that the acclaim and the subsequent backlash have subsided, the Year of Piketty seems worth another moment's reflection.

Let me say at the outset, I wasn't among the book's admirers. I found it mostly infuriating. As I wrote in "The Most Important Book Ever Is All Wrong,"

There's a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws. At times this borders on schizophrenia. In introducing each set of data, he's all caution and modesty, as he should be, because measurement problems arise at every stage. Almost in the next paragraph, he states a conclusion that goes beyond what the data would support even if it were unimpeachable.

I stand by that, even though much of the scholarly discussion of the book has led me to think I was too kind. The most pointed  scholarly critique was by Per Krusell (Stockholm University) and Tony Smith (Yale). They say Piketty makes an unwittingly extreme assumption about saving that makes his math wrong.

Larry Summers wrote a congratulatory appraisal, which gently picks apart the economics and dissents from Piketty's analysis on every key point. Turning to policy, and Piketty's recommended global wealth tax, Summers says, "Perhaps the best way of thinking about Piketty’s wealth tax is less as a serious proposal than as a device for pointing up two truths." The truths in question (reducing inequality requires tax reform; high taxes on the rich call for international cooperation) were obvious before Piketty sat down at his keyboard.

There's a pattern here. Scholars who profess admiration for the book, and who call it the hitherto-missing foundation for any intelligent discussion of policy, proceed to discuss policy in ways that have almost nothing to do with it. Summers' mode of praise, applied to the book as a whole, is typical: What Piketty says might not make sense, but we applaud him for saying it.

An interesting essay by Oxford University's Tony Atkinson, long an academic authority on inequality, is another example. Atkinson discusses a wide range of policies to promote equality. Some of them are more plausible than others, but none -- despite strenuous tributes to "Capital" throughout -- is new, and none, so far as I can see, is illuminated by Piketty's supposed theoretical insights. The essay is entitled, "After Piketty?"

Piketty told the FT that his aim had been "to promote the democratization of economic knowledge." The issues are too important "to be left to a small group of economists and statisticians," he added. He's right that the issues are important, which is why his book annoys me so much: It democratized confusion and misdirection more than knowledge.

The expert review I found most interesting didn't appear until later in the year; by that time a degree of Piketty exhaustion had set in, so it didn't get the attention it deserved. Daron Acemoglu (MIT) and James Robinson (Harvard) took the book to task in "The Rise and Fall of General Laws of Capitalism." They argued, first, that Piketty's economic theory would be wrong even if his basic approach to the issue was correct; and, second, that his basic approach to the issue is wrong as well.

Regarding the theory, Piketty is fond of stating "laws" of economics. He emphasizes throughout a "fundamental logical contradiction" in capitalism, arising from the fact that the rate of return on capital, r, is greater than the rate of economic growth, g. The fact that r is greater than g, he says, tends to give owners of capital an increasing share of national income; unless this is offset, by global warfare or other interruptions, it serves to widen inequality.

One problem with this, as Acemoglu and Robinson explain, is that g and r aren't independent, as Piketty's reasoning requires. Piketty's view about the future gap between r and g is a conjecture not a deduction, and one that's at odds with most of the empirical evidence. Even if r did perpetually exceed g, many other factors -- including a relatively modest amount of social mobility -- would be capable of offsetting the effect on income inequality.

Income inequality

The point is, what Piketty calls laws of economics aren't, in fact, laws. They aren't even well-established empirical regularities. Acemoglu and Robinson:

The reader may come away from these data presented at length in Piketty's book with the impression that the evidence supporting his proposed laws of capitalism is overwhelming. However, Piketty does not present even basic correlations between r-g and changes in inequality, much less any explicit evidence of a causal effect. Therefore, as a first step we show that the data provide little support for the general laws of capitalism he advances.

On its own terms, in other words, Piketty's theory is unpersuasive. But Acemoglu and Robinson point to a more basic problem. The very goal of deducing general laws of capitalism, in the spirit of Karl Marx, is misconceived. It cannot do justice to the interplay of politics, institutions and technology that drives economic outcomes. The whole point of looking for reductive logical contradictions is to deny or at least diminish those other factors. History, again and again, has mocked this endeavor. Piketty's theory will be no exception.

The signs, though, are that being wrong won't subtract much from the esteem accorded to the author and his book. Even critics of "Capital" -- including Acemoglu and Robinson -- are generous in praising Piketty for his industry and especially his ambition. Attention, social scientists. Don't worry about being wrong, just be wrong in a big way. Be wrong because you over-reach. Be wrong the way Marx was wrong (but maybe hope for less collateral damage).

Above all, admirers and critics alike pay tribute to "Capital" for drawing attention to inequality. I hadn't noticed that it was lacking attention to begin with. The American left pays attention to little else. It was really the reverse: The obsession with inequality demanded, so to speak, an academic testament, and that's what "Capital" provided. Piketty's economics leaves a lot to be desired, but his timing was fantastic.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Clive Crook at ccrook5@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net