Tuesday, 29 April 2014

Thomas Piketty's Capital in the Twenty-First Century

French economist Thomas Piketty's book, only recently translated into English (and on 2-3 week back order at Amazon) has clearly struck a nerve. Income inequality in the United States has become like climate change -- just too emotional for most people to discuss rationally. It should surprise no one that Paul Krugman loved it, and it should not surprise very many people that David Brooks was more skeptical. You might guess at the political preferences of a French economist who was hired by M.I.T. at the age of twenty-two, but opted to return to France to research and teach, and someone who writes that "the discipline of economics has yet to get over its childish passion for mathematics and for purley theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences." (p. 32) You could guess, but you'd be wrong. I don't actually find Piketty's book particularly ideological. He seeks to convince us that the capital-to-income ratio will, over time and assuming an absence of a shock like a world war, asymptote to some level. For the Krugmans of the world, Piketty's message that capital will become even more important in the future, exacerbating inequality, allows them to say, "see, I told you so!" Unsurprisingly, those critical of Piketty's wealth tax -- a tax on capital, which is hardly a new idea -- label him a Marxist. But Piketty is very critical of Marx, while acknowledging that he did not have the benefit of data that succeeding economists had. At times Piketty verges on the snide in criticizing socialists and modern-day quasi-socialists ("Unfortunately for the people caught up in these totalitarian experiments, the problem was that private property and the market economy do not serve solely to ensure the domination of capital over those who have nothing to sell but their labor power. They also play useful role in coordinating the actions of millions of individuals ... human disasters caused by Soviet-style centralized planning illustrate this quite clearly." p. 532). Piketty is not naive, so the fact that his book as caught the sails of a highly partisan and largely fact-free debate about inequality cannot be a surprise to him. In this vein, I find this book refreshing in its balance and humility.
What I wish Piketty did more was to explain why countries were destined to asymptote to some pre-determined capital-to-income ratio. And here, I wish he would have spent just a little more time thinking about the role that law and legal institutions have in shaping capital formation. A paper by Paul Beaudry and David Green at the University of British Columbia suggests that technological change is not just an exogenous shock, as Katz and Goldin seem to imply, but one that has some endogeneity, adjusting toward relative factor supplies, including education. My own work does not delve into the nature of capital accumulation itself, but the role that legal rules and institutions play. That law and legal institutions play a role in capital formation is obvious, but exactly how it affects, and in what areas, is more complicated.