Summarizing Thomas Piketty’s voluminous research in his new book, Capital in the Twenty-First Century,” the NY Times said that looking back, we have overstated the beneficence of capitalism and looking forward, gross income inequality is our destiny unless policies radically change. Reading several other Piketty responses, I longed for further consideration of the tradeoffs his approach and conclusions involve.
First, Piketty’s statistical tradeoff:
Trying to convey the irrefutable character of Dr. Piketty’s research, The NY Times said, “His findings, aided by the power of modern computers, are based on centuries of statistics on wealth accumulation and economic growth in advanced industrial countries.”
However, even with a mountain of statistics, still we have to decide on which numbers to focus. Then, the numbers we select force us to eliminate others that would lead to different conclusions.
Two years ago, commenting on Dr. Piketty’s work with Emmanuel Saez on inequality, we said that, “Researchers disagree about how much middle class income grew from 1979-2007. Citing a 3 percent total, economists Thomas Piketty and Emmanuel Saez say there was virtually no growth. By contrast, a group of Cornell scholars says middle class income grew 36.7 percent.
A 33.7 percent difference! How? Because the answers you get depend on what you ask.
Piketty, Saez and the Cornell group had to decide whether they would ask questions about a tax unit, a household, or a family. The former two economists chose the tax unit while the latter selected the household. Then, the Cornell group considered whether to ask questions solely about returns from land, labor and capital or to include government transfers. And after that, questions about household size become relevant because people sharing a household–even if unrelated–benefit from each other’s income through shared spending.”
For Piketty and Saez and the Cornell group, using their statistics, their conclusions were most likely accurate. Who is right? It all depends on your statistical tradeoffs.
Next, capitalism’s incentives and tradeoffs…
I just read Nobel Laureate Thomas Sargent’s 2007 Commencement Address at UC Berkeley and thought these excerpts were relevant. Only 335 words, his talk was mostly composed of “a list of valuable lessons that our beautiful subject teaches.”
1. “Many things that are desirable are not feasible.”
2. “Individuals and communities face trade-offs.”
3. “Other people have more information about their abilities, their efforts, and their preferences than you do.”
4. “Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.”
5. “There are tradeoffs between equality and efficiency.”
6. “In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.”
And finally, our bottom line:
There is no free lunch.
Sources and Resources: An excellent pro-Piketty discussion of the man and his work, this NY Times article was the best I found; not quite as lengthy, this column conveyed an opposing opinion. And here, Business Insider quotes Thomas Sargent’s entire commencement address. Finally, here is our econlife post on Piketty and Saez.