Tufts professor Amar Bhide devotes a Barron’s column to debunking Thomas Piketty‘s arguments about the impact of profits on inequality.
In Capital in the Twenty-First Century, Thomas Piketty announced an audacious thesis that sets his opus apart from most other works of economic history. Capitalism inevitably increases inequality, Piketty claims, because the return on capital grows faster than the economy. …
… Replication won’t resolve whether Piketty has discovered an economic law about the root cause of inequality that had eluded generations of researchers. Economists cannot run independent scientific experiments—they have to rely on the same historical data to advance or refute their theories. Inevitably, economists with different preconceptions offer different opinions about what the same data tell us. Milton Friedman, who extolled historical analysis, conceded that researchers tend to resolve the unavoidably ambiguous results of historical analysis in favor of their pet theories. Economists, whether Keynesians or monetarists or supply-siders, find proofs of their theories wherever they look, even when they look in the same places.
Worse, historical information about inequality and return on capital that Piketty relies on is both voluminous and spotty. Any analysis of such information is time consuming, the possibility of errors is high, and the need for subjective judgments is great. We cannot expect many serious efforts to reproduce Piketty’s results. The few that are undertaken will also be prone to error and partisan interpretation.
Whatever happened in the past, two broadly accepted features of a modern capitalist economy make it highly unlikely that Piketty has discovered a durable principle about investment returns. …
… The complexity and dynamism of modern capitalism make Piketty’s reductive, once-and-for-all thesis even less plausible. People are not mindless atoms controlled by immutable natural laws. Capitalism delivers the goods through myriad contests of wills and imaginations. Fortunes and incomes don’t rise and fall for everyone in tandem. Some investors and entrepreneurs make a killing. Others lose their shirts.
No Final Answers
Because capitalist enterprise relentlessly challenges the existing order, the past is a poor guide to our individual or collective futures. The predictions of mechanistic models of overall economic growth and investment returns—Piketty’s or anyone else’s—are not much better than coin tosses. Look at the forecasts of the Federal Reserve, the U.S. Treasury, the Congressional Budget Office, the International Monetary Fund, and the smart money on Wall Street.
Yet, we cannot dismiss Piketty’s book the way physicists did cold fusion. His fanciful theory has tapped into real angst even among stalwart supporters of capitalism who applaud great rewards for great economic contributions. Huge increases in the fortunes of a few while the economy as a whole has stagnated do raise legitimate concerns about rent-seeking and cronyism.
Denying concerns about unfairness as petty jealousy invites a dangerous popular backlash. Even though Piketty’s vision of inevitable unfairness is misguided, we must identify and change the specific inequities that undermine the legitimacy and dynamism of capitalist enterprise in our age.
