Geoffrey Harcourt. Piketty, flawed, but not a light that failed.

Current Affairs

A review of Thomas Piketty, Capital in the Twenty-First Century.* Translated by Arthur Goldhammer, Cambridge, Mass and London: The Belknap Press of Harvard University Press, 2014. viii + 685 pp. ISBN 978-0-674-43000-6*

*This is a smaller version of a review article to be published in the next issue of Economic and Labour Relations Review. The article contains a bibliography on which this version draws.

At each end of the spectrum of responses to Thomas Piketty’s best seller are those of Paul Krugman and Deirdre McCloskey. Krugman pronounced it “the most important book of the year – and maybe of the decade”. McCloskey graded it as mistaken on most fronts. Bob Solow supports Piketty – “Thomas Piketty is right” – and provides the clearest account of the issues without leaving the realm of simple arithmetic.

The book is nearly 700 pages long; it has been 15 years in the making. Piketty handsomely acknowledges his collaborators and his mentor, Tony Atkinson, who has devoted his working life to understanding inequality of income and wealth; Solow dubs Tony, “the pioneer and gray eminence of modern inequality studies” (2).

Piketty started his career as a promising young French mathematical economist who was head-hunted to an American department. Tiring of American life and the narrow American approaches to economics, he returned to France where he is a Professor at the Paris School of Economics. He is both an economic historian and an economist who favours multi-disciplinary approaches to social sciences issues.

The driving force behind his research is the tremendous growth in the last 40 years of inequality in income and wealth in advanced capitalist economies. Seeing this as a return to normal developments after a blip for part of the 20th century, Piketty went back to the preoccupations of the classical political economists and Marx with distribution and growth. He assembled long periods of data, from tax returns, including estate duty data, for a number of advanced economies. Piketty is inspired by their example, and by Simon Kuznets, to do for the 21st century what they did.

His comments on how we should “do” economics could be the blueprint for the French and other undergraduates campaigning for pluralist approaches. But he uses an aggregate production function model to explain the Kaldor-like stylised facts his data revealed. He wants to be heard by the mainstream whose approach of choice it still is.

To use it he conflates his concept and measurement of wealth with those of capital in his theoretical arguments. Wealth thus includes land, housing, financial asset holdings as well as capital goods.

Piketty’s explanation of his findings is presented as three “laws”: 1) the rate of profits is greater than the rate of growth; 2) the capital to income ratio tends to rise; 3) the share of profits in income tends to rise. Together, they imply greater and greater concentration of wealth amongst relatively fewer people, a cumulative causation process leading to “the resurgence of patrimonial capitalism”, and “the triumph of the rentier”, as opposed to Keynes’s prediction of that class’s euthanasia.

His theories do not imply inferences that match his main findings. To do so, the value of the elasticity of substitution between capital and labour must be greater than unity, for him reasonable, but most empirical studies suggest it is usually less than unity.

So what of the use of the aggregate production function and the marginal productivity theory of distribution? Piketty is aware of the polemical debates between the two Cambridges about capital theory. His reading of the issues and the outcome is wrong. First, Piketty does not correctly identify the theoretical and empirical issues at stake. Secondly, his claim that MIT eventually won is wrong. Alas, the profession subsequently chose to pass by on the other side.

The most serious theorists moved onto a different terrain – can the initial results vitiate the most rigorous form of mainstream theory? What has happened so far suggests “Yes”.

Piketty does not understand that the principal issue is not capital’s measurement but its meaning, i.e., what ‘vision’ of the economy has the analyst in mind? There are two main claimants: the mainstream, whereby the consumer queen is the driving force of development with all other agents, and institutions serving to help her maximise her life-time expected utility. The other “vision” arises from the classical political economists and Marx: the ruthless swashbuckling capitalist class rules the roost; other classes in the economy and its institutions dance to its tune as it endeavours to achieve the behavioural requirements of money-making and accumulation.

The economists involved in the debates were clearly aware of this distinction. Economists on the Cambridge UK side who early on perceived what was at stake include Amit Bhaduri and Anwar Shaikh. Anwar criticised the arguments and practices of Solow’s 1957 article, which spawned the literature on the relative contributions of deepening and technical progress to the growth of overall productivity. There have also been internal critiques on how stringent the conditions are for aggregation and how inappropriate such an endeavour is because the empirical specifications are manipulation of identities.

Piketty attached himself to a Say’s Law world over the long term, ruling out the insights of Marx, Keynes, Kalecki and Pasinetti being brought to bear on historical findings. Some base their criticisms of Piketty’s approach around this. Properly worked out, Piketty’s model may result in the euthanasia of the rentier, or a steady-state, or the triumph of the rentier, Piketty’s claim. Including the gang of four provides a rich, relevant analysis of Piketty’s findings.

Keynes has shown us that there is no automatic tendency for capitalism to attain and sustain full employment. Marx argues that the capitalist class will always take steps to make sure there exists a reserve army of labour, to “discipline” the wage-earners by making the sack an effective weapon.

This argument came into the modern era through Kalecki’s classic 1943 article, “Political aspects of full employment”. Balogh and Kaldor pointed out in the 1970s that Monetarism was “the incomes policy of Karl Marx” — the shift in economic, political and social power from capital to labour over the long boom ceased to be tolerated by the capitalist class the world over. Add to this the inexorable rise of large multinational oligopolies dominating markets (and governments) and we may understand recent events as a concentrated attempt to create worldwide, cowed, quiescent work forces to allow large increases in the spheres of production of potential surpluses available for accumulation in the spheres of distribution and exchange.

An unintended consequence of this was often sluggish overall demand.“Animal spirits” were dimmed and the potential surplus was not realised because of sluggish rates of accumulation, or was only realised if governments stepped in with increased government expenditure. The actual outcomes of these factors at work in conjunction with Taylor’s analysis constitutes a more plausible narrative with which to interpret Piketty’s findings than does Piketty’s neoclassical fairy tale.

Piketty is a progressive social democrat who wants, like Keynes, to save capitalism from itself. He is not a member of any political party, he is first and foremost a scholar deriving evidence-based accounts of the motions of society and suggesting, for others to take up, positive policies with which to tackle malfunctions uncovered. He advocates a world-wide wealth tax and/or for individual countries, progressive income taxes, measures any non-militant progressive would agree with. They would also agree with Piketty that, in the current world political climate, they are utopian proposals. Piketty does also point out that major historical reforms have not come about primarily by well-trained civil service technocrats designing them, that often wars and revolutions were the necessary impulses needed to get them off the ground; and that people like Piketty have to start the debates going.

His admirable highlighting of the extent and causes of growing inequalities the world over have, because of its timing, struck a responsive chord, resulting in his rise to mega star status, with reviews of his book by many leading economists and a symposium in the Journal of Economic Perspectives (2015). There, Piketty defends his major themes but does have some second thoughts. There have been also many discussions in media outlets around the world. His data base and the full accounts of its sources and limitations, within the book and on his website, are major contributions of enormous help to like-minded researchers.

I close with comments and criticisms, including limitations associated with his data sources. First, his concept of wealth includes not only houses and land but also financial assets. Because of double entry bookkeeping, financial assets reflect real capital goods which are also included in the totals, of necessity valued at market prices. Does this mean that double-counting may be part of the overall totals?

Secondly, if the distribution of income is to be explained by the use of ‘capital’ and ‘its’ marginal product, this requires that ‘capital’ be measured in a unit independent of distribution and prices. But outside an all-purpose one commodity world, valuation is required and the prices used include profits and rate of profits components, leading to arguing in a circle.

Thirdly, there are limitations associated with use of taxation reports and the impact on them of historical cost accounting conventions and procedures. This issue was discussed in the 1960s to 1980s. If an accountant were to be let loose in a Golden Age where expected and actual rates of profit coincide because expectations are always realised, the accountant, using his/her tools, could give very misleading answers as to what the rates of profit were; the discrepancies between the accountant’s measure and the true figure could be very large indeed. As there are no rough rules of thumb to correct for these effects, we can only take Piketty’s findings on trust.

To sum up: McCloskey goes far too far in her negative evaluation and her asymptotic approach to a Panglossian view of the merits of capitalism even when it is red in tooth and claw. The profession and countries world-wide are much in Piketty’s debt for raising in a readable way fundamental issues facing the modern world and providing much of the necessary empirical material for others to use in alternative approaches to understanding what has been discovered and what is likely to happen. Capital in the Twenty-First Century cannot be classed as a light that failed but as vital illumination for us all to get on with it.

* Translated by Arthur Goldhammer, Cambridge, Mass and London: The Belknap Press of Harvard University Press, 2014. viii + 685 pp. ISBN 978-0-674-43000-6*

G.C. Harcourt is Emeritus Reader in The History of Economic Theory,Cambridge 1988,Professor Emeritus,Adelaide 1988;Visiting Professorial Fellow UNSW Australia.

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