French Economist, Thomas Picketty, Undergoes Trial By Peers

Thomas Piketty after a lecture on his book Capital in the Twenty-First Century at the Normal University of Beijing, on Nov. 15.

French Economist Thomas Piketty Faces 

Trial by Peers

By Peter Coy  January 02, 2015

Thomas Piketty broke out of the pack of faceless economists in 2014 with an unlikely bestseller, Capital in the Twenty-First Century, which argued that capitalism accentuates inequality. He was recently presented France’s highest award, the Légion d’honneur (though he promptly turned it down). This weekend, though, Piketty faces a trial conducted by some of the world’s top academic economists—his peers. And from the looks of it, they won’t be going easy. Presiding over the session is N. Gregory Mankiw, a conservative economist at Harvard University who was a chief economic adviser to President George W. Bush.

Here’s a preview of the intellectual litigation courtesy of the website of the American Economic Association, which has posted preliminary versions of papers that will be presented on Saturday on the first day of the association’s annual meeting. Despite having “American” in the name, it draws top economists from around the world.

The first scheduled presenter, David Weil of Brown University, is the gentlest:

“The definition of capital that Piketty uses in his book—the market value of tradable assets—is both problematic as a measure of the quantity of physical capital in the economy and incomplete as a measure of wealth. …

“The fact that Piketty misses out on some dimensions of wealth does not undermine the value of the exercise conducted in his book and supporting articles, however. Over recent decades, the dynamics of market wealth on which he focuses probably have indeed been the biggest part of the story of wealth evolution. And even if his analysis of wealth inequality over the longer horizon is incomplete, it nonetheless represents an enormously valuable contribution to the state of our knowledge.”

Second is a paper by Alan J. Auerbach of the University of California-Berkeley and Kevin Hassett of the American Enterprise Institute:

“… the translation of the data from original sources into the series used in the book may have overstated the extent of the recent growth in the wealth-output ratio and the increasing share of wealth received by the top 1 percent of the wealth distribution, at least in the United States.

“To the extent that labor income inequality is the underlying source of overall inequality, it is hard to see why the appropriate policy response is a wealth tax, rather than, for example, an increase in the progressivity of labor income taxes.”

Next up is Mankiw, the session chairman, who alludes to Piketty’s “law” that the return on capital (r) exceeds the growth rate of the economy (g), which Piketty calls “the central contradiction of capitalism.” Mankiw’s headline is, “Yes, r > g. So what?”

“Although I admire Piketty and his book, I am not persuaded by his main conclusions. A chain is only as strong as its weakest links, and several links in Piketty’s chain of argument are especially fragile. Other aspects of Piketty’s book may well pass the test of time, but the bottom line—his vision of the future and the consequent policy advice—most likely will not.

“… the forces of consumption, procreation, and taxation are, and will probably continue to be, sufficient to dilute family wealth over time. As a result, I don’t see it as likely that the future will be dominated by a few families with large quantities of dynastic wealth, passed from generation to generation, forever enjoying the life of the rentier.

“… in considering Piketty’s proposal of a global capital tax, we have to ask: Would you rather be born into a world in which we are unequal but prosperous or a world in which we are more equal but all less prosperous? Even if equal opportunity is a goal, one might still prefer unequal opportunities to be rich over equal opportunities to be poor.”

Piketty himself will be given the last word:

“I stress from the beginning [of the book] that we have too little historical data at our disposal to be able to draw definitive judgments. On the other hand, at least we have substantially more evidence than we used to. Imperfect as it is, I hope this work can contribute to put the study of distribution and of the long run back at the center of economic thinking.

“Let me first say very clearly that r>g is certainly not a problem in itself. Indeed, as rightly argued by Mankiw (2015), the inequality r>g holds true in the steady-state equilibrium of the most common economic models. … Intuitively, a higher gap between r and g works as an amplifier mechanism for wealth inequality. …

“… When the Koch brothers spend money on political campaigns, should this be counted as part of their consumption? A progressive tax on net wealth seems more desirable than a progressive tax on consumption.”

The sparring might not play well on television. But for the economists gathering in Boston this weekend, the heavyweight battle over Piketty’s blockbuster is as good as it gets.

Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.