Tag Archives: Piketty

On Piketty

When I go into my local bookshop, the first thing I see on the table in front of me is usually new fiction, or a coffee table book, or something with celebrities in it. Today, it was Capital in the Twenty First Century, by Thomas Piketty. I love this.

It makes me feel all warm and fuzzy inside that a huge economics book is a bestseller. I don’t care that most people aren’t reading it cover to cover. I haven’t finished it yet myself. What’s great about it is that it represents a longing for a functional political ideology that does not involve handing our autonomy over to people who have already been proven to be crooked.

The gist of the book is simple. Examine data from the last two hundred years and a pattern emerges: over time, wealth accumulates in the hands of a few. Large-scale social shocks like war can reverse this, but then the trend begins again.

Of course, not everyone loves this book. There are many frowny faces from economic and financial circles. The Economist cites four major kinds of criticism to his work. While not an economist, I have just spent over a year at Princeton studying wealth inequality, I would like to add my twopenneth and address each concern in turn.

1: An antipathy to markets

Piketty is accused of being biased against markets right out of the gate. The allusion to Marx’s work in the title is, to some, a clear indicator of prejudice, and a political agenda. This response strikes me as weak. The main thrust of the book is an attempt to do proper data-driven economics. If the data reveals a flaw in our conception of markets, that’s science, not bias.

What I mean by this is, how else would you expect an economist sitting on his pile of data to present a book? If I did a bunch of research about, let’s say, car crashes, and discovered that faulty tires were to blame in almost all cases, would I title the book ‘Tires Make Us Safe’? Would I frame the book as a rousing defense of current tire technology? No, that would be cray cray.

Or perhaps the concern that it was his bias that made him go and collect all that data in the first place? Maybe he should be more like the last Republican presidential bid, and spend more time unbiasing his polls.

2: Inexact economics

Piketty has been challenged on the specifics of his economic tools, such as his definition of return on capital. And on ignoring certain base principles of the field, such as the fact that capital should fall as it accumulates. Not being an economist, I find it harder to comment on this. However, I confess I confront this notion with profound skepticism.

Economics is the study of trade, and appears to take this activity as a social axiom. However, any study of the social behavior of animals makes it painfully clear that trade requires a parity of power to function. In nature, where one organism can take from another without cost, it does so. Yet when I look at the field of economics, the fact that it is inevitably backed by a structure of power that can break down seems broadly absent. So holding Piketty to the standard of a field that doesn’t describe how power works in the first place seems a pretty weak defense.

You do not need economics for the chance accumulation of advantage in one group of agents to lead to an irreversible runaway effect. It is everywhere. Pick up a book on evolutionary dynamics. You will come across this idea very quickly. It is called ‘selection’, and it does not magically stop itself.

3: An assumption that the future will resemble the past

There are those who point out that only at a significant remove does our current era resemble the Gilded Age. For starters, wealth is more frequently allocated via large salaries than by large inheritances.

This is also a sad comeback. Those large salaries are not actually wages. They are the result of an investment of reputation. In effect, they are social network capital, not payment for labor.

We know this because CEOs cannot logically be worth as much as they’re paid for the work they do. The tech sector provides a perfect illustration of this. Look at the cross section of highly paid CEOs. Some are wealthy due to the business savvy, some via the theft of ideas, some from writing good algorithms, others transparently through luck. There is no intersecting formula that cuts across these characters that codes for outstanding leadership. Thus we must ask, if not quantifiable leadership skills, what are these people being paid for?

The answer is investment potential. Because celebrity CEOs have already succeeded, human beings are prone to allocate to them a high likelihood of future success. The idea of them is worth a lot, as a magnet for the contribution of further capital and the acceleration of sales, despite the folly that this entails. These people are retained because of the mystic aura they grant their companies.

Ironically, when engaged in repeat performances in other companies, these characters are more likely to fail than succeed. And it is precisely this noise in the system that gives people hope in creating new startups. Everyone believes they stand a chance, because, of course, they do. They know in their secret hearts that business is more chance than talent. Everyone also wants to believe, though, that after the fact their luck will be recognized as skill, and that they were really great all along. And due to our collective inability to differentiate between luck and skill, this often actually happens.

Lurking behind this criticism is another form of folly, though. Those who propose that the future is necessarily different from the past must do so in the face of data that shows an accumulation of inequality.

In previous social episodes in dozens of human civilizations, the concentration of power has terminated in war. The war is not necessarily directed at those accumulating wealth. It is often directed at those closest to the people suffering most who appear to have an advantage–often a minority group. However, the effect is usually the same, a shock to the social system that destroys enough order that society can equilibrate.

Those who look at the current accumulation of wealth who propose that it will not end in war are proposing that something else will happen instead. Not a climate disaster, mind you, but something nice. However, they don’t have any prior historical examples to support this claim. Instead, they have theories that are not backed up by data because the data doesn’t exist yet. This is like people standing in a burning building claiming that, because their roof hasn’t caved in yet, that their building is different and that they should not expect it to happen. For this building, they say, they built a really tall roof on sturdy wooden ratchets so that it keeps going slowly up, and this ensures that collapse is impossible.

4: Disagreement over what should be done

There are those who agree with Piketty’s assessment, but disagree with his notion of what should be done, namely: tax the rich. For instance, one commenter I read suggested the solution was to promote growth by investing in eduction. Except of course, we have seen investment in education, and we have seen growth, and neither have done a blind bit of good at the scales we’re talking about. You cannot back out inequality by trying to jolly everyone simultaneously into the middle class.

Nevertheless, I have more sympathy for this critique because, quite simply, I believe that the rich have already accumulated enough power that they will not permit themselves to be taxed. Instead, I suspect that war will do its customary job, aided in significant part by social unrest due to climate change. Witness the rise of radicalized politics in Europe as a thrilling precursor to the fun in store.

But herein lies my greatest concern about this entire scenario. The centralization of power simply happens because it can, just as water flows downhill. There is no surprise here. Watching this happen is rather like watching what happens to a slime mold investigating food sources in a petri dish. At first, there are questing threads of protoplasm everywhere. Then the mold identifies the food sources, locks onto them, and abandons the less productive parts of its structure. This is all great while the food source is present. Take the food away, though, and the mold is in trouble. It has lost all those experimental tendrils that formerly provided useful information.

In short, the centralization of power creates a society that is optimized but inflexible. This is because it has concentrated the extra capacity in the system in agents who do not actually need it. This means it is less able to resist environmental shocks. And it is this that we should be worried about, because we already know that environmental shocks are coming. A society with concentrated wealth is not only more prone to war, it is more likely to dramatically disassemble when the conditions that create wealth are disturbed.

Unfortunately, it is also normal for people to look at this kind of picture and deny it because they do not want it to be true. The irony though, is that without early, non-destructive changes, everyone loses. And perhaps, most ironically, the people who stand to lose the most are those who support the status quo, but who lack the luck, power, and ruthlessness to be the last person standing on the iceberg as it melts.

I say this because this is a pattern that readily shows up in simulations. The pattern of aiding the rich in the hope of joining their club is the one most likely to create personal catastrophe in the end-game. Witness the account in Freakonomics on why drug dealers live with their mothers, or why academia in America is imploding.  Those people who participate in the rat-race dollar-auction but who are not at the absolute top of the pyramid are the ones who bear the fallout when the system topples. This is because they have made the largest unsustainable investment in it. It is, in short, the kind of people who write articles for magazines pooh-poohing books like Piketty’s. The people who actually win do not write those articles. They have little people to do it for them. The threat to these acolytes, though, comes not from the disbelieving readership, but from those very icons of finance that they seek to reinforce.

For the rest of us, the options are simple. A: Get behind a progressive tax on extreme wealth. B: Get ready for war. Not next year, or the one after, but sooner than you’d like.

I know which one I prefer.