Peer Review: "We've All Been Wrong! Incredible!"

Capital in the Twenty-First Century

By Thomas Piketty

Harvard University Press, 2014

It's a pattern as old as the United States itself - older, in fact: some cause celebre from France, some raffish raffine comes to America, looks around, affects approfondir, and voila! - produces a book. The books in question vary wildly in depth and quality - a la guerre comme a la guerre! - but they have at least two things in common: first, they pretend to a wider international mission but are really just writing about the United States, and second - since Americans always view attention of any kind as flattery - the books tend to sell really well. Michel Guillaume Jean de Crevcoeur's 1782 Letters from an American Farmer sold like chocolate-chip croissants despite its abundance of idiotic reductions like the infamous "Ubi panis, ibi patria." Only a generation later, in 1835, Alexis-Charles-Henri Clerel de Tocqueville's Democracy in America became a runaway bestseller on both sides of the Atlantic by touting America's "depraved taste for equality" and other such remplissage fit to make a sensible reader cry c'est trop fort!

Plus ca change, plus c'est la meme chose: witness our Season of Piketty. Thomas Piketty, that is, a Frenchman who teaches at the Paris School of Economics (and who previously, comme tout le monde, paid his pedagogical dues in Cambridge, Massachusetts, although with perhaps more cranerie than could have been managed by some typical post-doc from Ohio Wesleyan) and who'd been something of an eminence grise to the squatters in Zucotti Park during "Occupy Wall Street” and who, in March, published his 700-page tome, Capital in the Twenty-First Century and launched a thousand conversations about the political stalking-horse issue of income inequality in the West.

The fiscal result held true: borne aloft by early ecstatic reviews, Capital flew off the shelves, becoming the best-selling title in the history of Harvard University Press and making its author a very wealthy man, the toast of feuillletons through the length and breadth of the tepid bathtub that is American and British review coverage. Leading the fanfare was influential columnist and economist-to-the-elite (and, like Piketty, a veteran of Cambridge academia) Paul Krugman, who heaped praise on Capital in The New York Review of Books:

Piketty has written a truly superb book. It’s a work that melds grand historical sweep - when was the last time you heard an economist invoke Jane Austen and Balzac? - with painstaking data analysis. And even though Piketty mocks the economics profession for its “childish passion for mathematics,” underlying his discussion is a tour de force of economics modeling, an approach that integrates the analysis of economic growth with that of the distribution of income and wealth. This is a book that will change both the way we think about society and the way we do economics.

In a New Yorker "Talk of the Town" piece, Jonathan Blitzer caught Krugman in full fanboy gush:

Piketty appeared in the doorway, looking dazed. He is forty-two and trim, with a head of wavy dark hair, which put him in the top one per cent, hairwise, in the room. Sartorially, he looked to be on the cutting edge as well, turned out in a slim charcoal suit, with an open white shirt. There was a momentary hush, then a salvo of introductions."It's about time!" Krugman said. "Someone I know only by repute!" The two squared off, Krugman asking, again, the pronunciation question. "Peek-et-tee,' he said. "We've all been wrong! Incredible!"

Legerete a faire fremir, perhaps, but then, anybody can be made to look silly in "Talk of the Town." And Krugman was hardly alone: as the months rolled on, Piketty plaudits flowed in from all quarters of the book world and blogosphere. Critics were captivated by the simplicity of the idea at the heart of this forbiddingly mathematical book: when the return rate on capital rises faster than the growth-rate of the economy, income on capital will increase more than total overall income - resulting in widening economic inequality. Piketty and his team of fellow-researchers looked at aggregate economic data going back as far as reliable records would allow, and, as caviar for the layman: Austen! Balzac! It all seemed like a deliriously seductive blend of abstruse economic theorizing and popular history, like finally being able to read a book by that famous economist-U.S. President, Josiah Bartlet.

Pourtant, who could possibly be qualified to review such a thing? The alternative to Krugman's informed effusing was far too often uninformed effusing from the ranks of the criterati, figures like The Nation's capable but out-of-his-depth Eric Alterman, who tossed aside textual analysis in favor of some ardent bandwagon-hopping:

... one can, for once, believe the hype. Beautifully translated by Arthur Goldhammer, Piketty's Capital is simultaneously intellectually rigorous, historically grounded, culturally nuanced, and, in important respects, politically visionary. Even nitpicky economists who take issue with some of his interpretations of the mountains of data he and his colleagues assembled feel compelled to shower the book with praise beforehand - and frequently after as well. Paul Krugman credits Piketty with inspiring "a revolution in our understanding of long-term trends in inequality."

Time and again, that troubling note about "nitpicky economists" is neatly buried in a foam of general-purpose enthusiasm, as when Timothy Shenk (a biographer of economists, if not one himself) said the book "stands a fair chance of becoming the most influential work of economics yet published in our young century" and, perhaps a touch defensively, tried to head off its critics with some more pre-emptive nit-picking:

Like any major work of scholarship, Capital in the Twenty-First Century will be subjected to numerous critiques. Many lines of attack are already obvious. Specialists will challenge the individual interpretations and note that there are not nearly as much data as investigators would like, especially before the twentieth century. Piketty does the best with what is available, but the best simply might not be enough to verify his claims, and even his sympathizers might cringe at the readiness with which he uses a largely European - to be more precise, largely French - history to ground proclamations about the universal dynamics of capitalism. The mechanics of how Europe and the United States achieved so much notable egalitarian successes require far more scrutiny than they receive here, where the causal story can veer into a martial determinism portraying inequality's decline as a natural byproduct of war. He has a weakness for grand decrees pitting democracy against capitalism that, while rhetorically effective, muddy the analysis.

Other cracks appeared. Writing for The New Republic, Nobel Prizewinner Robert Solow (who is Economics Institute Professor of Economics emeritus at Piketty's old posting, MIT) raises what might strike the layman as a fairly major problem - and then quickly dismisses it:

There is a small ambiguity here. Piketty uses "wealth" and "capital” as interchangeable terms. We know how to calculate the wealth of a person or institution: you add up the value of all its assets and subtract the total of debts. (The values are market prices or, in their absence, some approximation.) The result is net worth or wealth. In English, at least, this is often called a person's or institution’s capital. But "capital" has another, not quite equivalent, meaning: it is a "factor of production," an essential input into the production process, in the form of factories, machinery, computers, office buildings, or houses (that produce "housing services"). This meaning can diverge from "wealth." Trivially, there are assets that have value and are part of wealth but do not produce anything: works of art, hoards of precious metals, and so forth... More significantly, stock market values, the financial counterpart of private productive capital, can fluctuate violently, more violently than national income. In a recession, the wealth-income ratio may fall noticeably, although the stock of productive capital, and even its expected future earning power, may have changed very little or not at all. But as long as we stick to longer-run trends, as Piketty generally does, this difficulty can safely be disregarded.

But nothing rankles the rank-and-file like the bottle-rocket success of one of their own, and as Piketty's book began to be digested by economists with neither Nobel Prizes nor New York Times columns, more cracks were pointed out - most damningly by Joshua Hendrickson, assistant professor of economics at the University of Mississippi, in The National Review:

While there are places in the book where Piketty gives hypothetical benchmarks of potentially desirable allocations, these benchmarks are entirely arbitrary. His theoretical framework is ill-equipped to determine the optimal level of inequality, and one could argue that it is similarly ill-equipped to make predictions about the future. The reason for this is that what Piketty presents as a theory is really an accounting identity: His conclusions simply follow from the definition of the capital share of income.

Piketty's main argument is that inheritance is becoming a more important determinant of income, that this is evident from the rising capital share of income and that this trend is likely to continue. But what if he's wrong about the capital share of income? Using data compiled by Gregory Clark from every decade in England from 1200 to 1860, I calculate that the average capital share of income has been roughly 21.6 percent - a percentage not substantially lower than the most recently observed figures. even after we update these data using decade averages since 1860, the average does not change.

The process culminated in a report from that old cheval de bataille, the Financial Times, alleging Piketty oversimplified or even misrepresented his numbers, filling in historical gaps with leaps of intuition and backstairs gossip overheard in the servants' quarter of Longbourn - hardly comme il faut for a book so many New York novel-readers pretended for so long to take so seriously. Overnight, the Season of Piketty devolved into rival camps of quibblers and counter-quibblers, with pundits either claiming agnosticism or apostasy. The spotlight turned from income inequality and the evils of the 1% to the data-fudging of the 1%'s newest member, the now-embattled academic forced to deposit his five-figure royalty checks under a cloud. His defenders rallied, fact-checking the fact-checkers, and what started as a grand, Olympian revolution further devolved into a battle of protractors. Bonne renommee vaut mieux que ceinture doree, a wise man once said - but can't we have both, if we try very hard?