Saturday, June 14, 2014

Another 180 on Piketty's Measurement

My first Piketty Post unabashedly praised Piketty's measurement (if not his theory):
"Piketty's book truly shines on the data side. ... Its tables and figures...provide a rich and jaw-dropping image, like a new high-resolution photo of a previously-unseen galaxy. I'm grateful to Piketty for sending it our way, for heightening awareness, and for raising important questions."  
Measurement endorsements don't come much stronger.

Then I did a 180. Upon belatedly reading the Financial Times' Piketty piece, I felt I'd been had, truly had. Out poured my second Piketty Post, written in a near-rage, without time to digest Piketty's response.

Now, with the benefit of more time to read, re-read, and reflect, yes, I'm doing another 180. It seems clear that the bulk of the evidence suggests that the FT, not Piketty, is guilty of sloppiness. Piketty's response is convincing, and all-told, his book appears to remain a model of careful social-science measurement (thoughtful discussion, meticulous footnotes, detailed online technical appendix, freely-available datasets, etc. -- see his website).

Ironically, then, as the smoke clears, my first Piketty post remains an accurate statement of my views.


  1. Thanks for the honest reassessment.

  2. There's a lot to digest in Piketty. Safest line is to start all comments with: "Here is my current thinking, which will undoubtedly change."

  3. Thanks for the re-calibration.

  4. After this I really have no choice but to yank your chain by playing devils advocate against your current convictions.

    Picketty's data is interesting but is fundamentally flawed by his habit of using averages to brush over huge outliers in the data. Perhaps the most striking example is his handling of French and German inflation from 1919 to 1946. Calculating a naive average in the high teens is doing a disservice to the reader by ignoring that both countries went through a period of deliberate hyperinflation (Germans under Wiemar, French during occupation) and otherwise it was a period notable for the sustained low interest rates. The problem is that Picketty just doesn't get inflation and long term interest rates and that's a big problem given that long term interest rates is the whole dang point of the book and that gets him into real trouble.

    His thesis rests heavily on a stable return to capital throughout human history but it's only by mangling the data that he produces that trend. He assumes no inflation in the 19th century due to stability of gold value of currency (no surprise since those values were established by laws) but seems bizareely ignorant that the value of gold fluctuated (perhaps it's a european thing?). He supposes a stable return on capital from 1 AD-1700 AD but ignores that in those days the risk premiums were so high. Even the gospels, written during the height of Pax Romana mentions how wealth is so easy to lose in several of the parables. Thus he has a massively, massively important assumption, that capital returns are stable that is nothing but a statistical illusion.

    All this adds up because when he gets to his predictions about the future he is putting lots of weight on this statistical illusion. Picketty supposes a rising capital ratio which a simple understanding of Cobb-Douglass tells us would mean that the return on capital would fall. But Picketty assumes that the returns on capital will not fall. This leads him to the result of skyrocketing inequality and a move from wealth by labor to wealth by capital. It may be possible that the Cobb-Douglass function will shift and that will lead to inequality and the wealth shift he imagines. But that requires something new happening, not just the status quo.

    So Picketty has some interesting historical data but he, like much of europe, seems to have forgotten about previous theory. This leads him to make a rather elementary error and write an entire book about that. It's an interesting piece of speculation but that's all it is, speculation.

  5. But why would anyone take Chris Giles without a grain of salt in the first place?

  6. Perhaps you will write a blog post with still another 180 on Piketty ? See below. He has been criticized by a team of french economists, SciencePo, Paris. Apparently, the ratio of capital to income has stagnated for France, England, US, Canada. And this certainly refutes Piketty. No ?

    1. "And this certainly refutes Piketty. No ?"

      -- You seem less than certain