The critique of Piketty and his reply

Editor’s Note: French economist Thomas Piketty’s new book, “Capital in the Twenty-First Century,” may be flying off the shelves (Harvard University Press had to send it for a second printing), but that doesn’t mean he doesn’t have his critics.

Last week, Making Sen$e Social Security columnist Larry Kotlikoff took issue with Piketty’s inequality theory, arguing that inequality stems not from the wealthy hoarding and accumulating their wealth but from skewed labor earnings.

Piketty believes that inequality will rise as long as the return on capital (wealth) exceeds the growth of the economy. For Piketty, this is capitalism in its normal state. But one admirer of Piketty’s years of research, which “absolutely conclusively” demonstrate the rising concentration of wealth at the top, is suspect of his hypothesizing. Larry Summers, the former president of Harvard who has served in both President Bill Clinton and Barack Obama’s administrations, writes in Democracy that Piketty is raising the right questions, even if his interpretation of capitalism isn’t always right.

This rather fatalistic and certainly dismal view of capitalism can be challenged on two levels. It presumes, first, that the return to capital diminishes slowly, if at all, as wealth is accumulated and, second, that the returns to wealth are all reinvested. Whatever may have been the case historically, neither of these premises is likely correct as a guide to thinking about the American economy today. …

Even where capital accumulation is concerned, I am not sure that Piketty’s theory emphasizes the right aspects. Looking to the future, my guess is that the main story connecting capital accumulation and inequality will not be Piketty’s tale of amassing fortunes. It will be the devastating consequences of robots, 3-D printing, artificial intelligence, and the like for those who perform routine tasks. Already there are more American men on disability insurance than doing production work in manufacturing. And the trends are all in the wrong direction, particularly for the less skilled, as the capacity of capital embodying artificial intelligence to replace white-collar as well as blue-collar work will increase rapidly in the years ahead.

Piketty doesn’t disagree about the importance of skills, but as he explained in another Making Sen$e post about the United States, he sees wealth and capital too often determining access to those skills and education.

Here is an edited and condensed excerpt of Piketty’s conversation with Paul Solman in which he responds to some of critics, including Summers.

Simone Pathe, Making Sen$e Editor

Thomas Piketty: I believe that inequality in access to education and to the top universities, in particular, has become increasingly problematic. When many people just don’t have access to the right skills and to the right education, then it’s very difficult to have access to the right jobs.

The growing inequality of labor earnings in the U.S. has a lot to do with the distribution of skills and access to education, and this is going to be increasingly an issue in the 21st century economy where we need a broad investment in skills. It’s not enough to have huge skill investment in a tiny elite.

Paul Solman: But maybe it’s natural in the sense that people with skills and extra brain power, let’s say, marry similar people and their kids, therefore, have genetic advantages over other people. There’s something self-sustaining about that, right? And there’s nothing we can do about that.

Thomas Piketty: Well the historical evidence is that there’s a lot you can do about it. In societies that were working this way, you actually had less economic growth than in societies where more mobility was created. There is a lot of evidence that skills do not just pass from one generation to the other. You have lots of people with poor parents who have excellent ability, and if they don’t have access to the right schools and to the right universities, they will not be able to contribute to the economy as much as they would otherwise.

Paul Solman: It’s possible though isn’t it that we’re in a different regime where smart, talented, skilled people are marrying one another in ways they didn’t used to and therefore segregating the population in ways that didn’t use to happen?

Thomas Piketty: Well, it’s a risk that the rise of wealth inequality makes that kind of endogamous marriage happen again. But it is ironic that this country, which was largely built as an antithesis to patrimonial societies of old Europe, is now about to become the new old Europe of the planet. This is not the vocation of this country and it would be nice to try to avoid that evolution.

Paul Solman: Well, but look at athletes or entertainers; they make a fortune. Look at Mark Zuckerberg. Look at so many entrepreneurs in Silicon Valley, for example, who have amassed huge fortunes on the basis of their merits, their ability.

Thomas Piketty: Yeah, but there are also dozens of millions of people who are working harder as well — maybe not as hard as Mark Zuckerberg — in their daily jobs and would like to have a system that would allow them to access some property, not as large as Mark Zuckerberg’s, but still, something.

Paul Solman: Larry Summers, when you spoke at Harvard, was skeptical of your story about why there’s such a high return on capital today. He thought it had more to do with the innovations that are being made by people Zuckerberg, whom he actually had to deal with when he was the president of Harvard.

Thomas Piketty: Yeah, but even if that was due to innovation, you don’t want the top wealth group to rise three times as fast as the size of the economy. You want to have innovators, you want to have entrepreneurs, but the different levels of wealth must grow in line with one another.

In the post-war period, in the 1950s, 1960s and 1970s, when you had entrepreneurs, you also had workers, but they were all rising at a comparable rate. So if entrepreneurial wealth is rising three times as fast as the size of the world economy, in the long run, you have a problem.

In addition, what you see in the data is not only entrepreneurial [wealth], but growing inherited wealth, which grows almost as fast as entrepreneurial wealth. You see that in university endowments like Harvard’s.

Paul Solman: And Harvard’s endowment is 30-plus billion.

Thomas Piketty: Harvard is paying hundreds of millions each year in wealth management costs, but this is only 0.3 percent of their $30 billion endowment, and this allows them to get a return of 8 or 9 percent per year. So this is a very good deal that has nothing to do with entrepreneurial talent. This has to do with the fact that it’s easier to spend a lot of resources to manage a large portfolio if you have $100,000 or $1 million. In the middle class, portfolios right now are getting not so good returns compared to this.

Watch Paul’s interview with Piketty about his inequality theory and the success of his book.