The Journal of Economic Perspectives is a terrific journal. Its first issue was released in 1987 and at that time the founding editor, Joseph Stiglitz, wrote: 'The Journal of Economic Perspectives will try to fill a gap between the general interest press and existing academic economics journals.'
It has succeeded. It's a great vehicle for the educated public to keep in touch with what academic economists are doing. And it's free. The most recent issue came out a few weeks ago, and includes a symposium on wealth and inequality. Contributors include Daron Acemoglu, James A. Robinson, Charles Jones, Wojciech Kopczuk, and of course, Thomas Piketty.
I'd like to focus on Piketty's contribution, although clearly the other pieces are self-recommending. (There is also an article on the marginal cost controversy, a must read for all economists, and also a paper on how economists should pull their heads in which got a lot of attention a few months ago as a working paper).
Piketty's book is long at 700 pages. After ploughing through, some people who have read every single word may be somewhat confused about his point. That's why the contribution in the Journal of Economic Perspectives is so valuable. For a start, here are some lines from the introduction:
When a lengthy book is widely discussed in academic circles and the popular media, it is probably inevitable that the arguments of the book will be simplified in the telling and retelling. In the case of my book Capital in the Twenty-First Century (2014), a common simplification of the main theme is that because the rate of return on capital r exceeds the growth rate of the economy g, the inequality of wealth is destined to increase indefinitely over time. In my view, the magnitude of the gap between r and g is indeed one of the important forces that can explain historical magnitudes and variations in wealth inequality. However, I do not view r > g as the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century.
When you next read commentary on Piketty, ask yourself if its portrayal is consistent with that quote.
In addition, Piketty's paper contains a valuable reminder that his book also discusses labour income inequality. I've had people say to me in the past something like, 'Of course, Piketty is all wrong because inequality over the last few decades has been driven by inequality of labour income.' These people obviously have not read the book. The title of Chapter 9 is 'Inequality of Labor Income'. But it is also covered elsewhere in the book. In Chapter 8, probably the most important part of the book, he says:
Let me now return to the cause of rising inequality in the United States. The increase was largely the result of an unprecedented increase in wage inequality…
We can debate what he means by 'largely', but he clearly does not ignore the issue. Another reason this paper is so interesting is that Piketty reflects on what he may have done differently. In particular he has this to say:
As I look back at my discussion of future policy proposals in the book, I may have devoted too much attention to progressive capital taxation and too little attention to a number of institutional evolutions that could prove equally important, such as the development of alternative forms of property arrangements and participatory governance.
For me, Piketty's most important contribution in his book is the extraordinary collation of data, while discussing an underappreciated force in the long-run development of an economy (namely r-g). Take for example the following two graphs:
What force could have driven the capital to income ratio of Europe to 7-to-1 in the 19th Century, while the US has never come close to this level?
It seems to me that some sort of explanation must include r-g. And I note that many of the critiques offered of Piketty cannot explain the 7-to-1 ratio. For example, many note that Piketty's forecasts of exploding capital to income ratios will not come to pass because depreciation will erode the wealth. Perhaps. But why didn't this erosion happen in the 1800s? I'd like to hear more about that. Maybe the historic importance of agricultural land as a part of a nation's capital partially accounts for the lack of erosion, but by 1910 agricultural land was already a relatively small part of the capital stock.
I'll close with another quote from Piketty's article. In discussing Acemoglu and Robinson's critique of his work, Piketty says:
It seems to me that we disagree less intensively than what they appear to believe, and that the well-known academic tendency to maximize product differentiation might be at work here.
I suspect that this point is applicable to more than just Acemoglu and Robinson.
Photo courtesy of Flickr user Universitat Pompeu Fabra.