Sunday, June 8, 2014

Piketty's Introduction - Part III

This is a four part series going through Thomas Piketty's Capital in the 21st Century the parts can be found here:
Part I, Part II, Part III, Part IV

After only suspecting it from press accounts, picking up Piketty's Capital in the Twenty-First Century has convinced me by the second paragraph of its introduction that it desperately needs a thorough fisking. I'm picking up here from page 15 on the introduction.

On page 15 there's an interesting concept introduced of "inequalities at the global level" that leaves me scratching my head. China "may well prove to be a potent force for reducing inequalities on the global level" but isn't China's turning towards capitalism mean that its headed towards more inequality? What is different (superior?) about the Chinese road towards the market? Before Deng, what was China's role regarding inequality on a global level? I would hope that Piketty explores this more fully later. We'll see.

The idea that you can make any sort of straight line trends in global economics last 35 years, much less 85 years with a straight face is in my mind, well, naive at best. But Piketty goes for it even as he makes sure to inject enough uncertainty in his projections to make this statement meaningful. In other words, he's dog whistling about the world ending up being owned due to the straight line projection across several decades. If anybody of influence were to call him on this, no doubt he would retreat, and quickly. From the media appearances I've observed, he's obviously not enough of an idiot to defend such a declaration, though he is enough of one to have made it in the first place.

An interesting assumption embedded in Piketty's snark about Solow and Kuznets "balanced growth path" is that the rich world is advanced in the sense that Solow and Kuznets meant. That's not actually proven. For instance in the 1970s, the US made a retrograde move that established an oligarchy in bond rating agencies, one that continues to this day. How many other retrograde moves have been made and what does that mean in the sense of the Kuznets curve? There's plenty of pages to go and perhaps Piketty addresses this later but it is as absurd to assume that capitalism is a one way road. As Newsweek famously observed in 2009 "we are all socialists now." Has this socialism turned back the clock on the Kuznets curve? Is that even on Piketty's radar?

The 19th century economists, especially Marx, underestimated the mobility of people to change roles when the legal system permits them to and the economic system incentivises them to. Our economy would be more balanced if we made these role transitions easier. In reality the forces influencing these role transitions are decidedly mixed with considerable government pressure making them harder. We have, just to take one example, qualified investor rules limiting certain investment opportunities only to the well off that are completely out of place in a world that has undergone an information revolution.

There's a four page run where Piketty is acknowledging his colleagues and making a few technical points. Nothing to complain about there, and thank goodness for pacing issues in this analysis.

But page 20 has a bit of interesting caution to not accept any economic determinism, walking back Piketty's page 15 straight line analysis about who will own the world in 2050 or 2100. Piketty anticipates critics and refutes himself.

Piketty asserts that "there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently." This is wrong as there is a powerful one, human nature. Those who are rich tend towards complacency and those who are poor tend towards activity. You have to work hard to beat the poor down into giving up, especially in a world of cheap information and huge gaping holes of unfulfilled goods and services. As this is a major result of the study that the book is based on, Piketty is in trouble long before he pulls out his first spreadsheet because, like Marx, he doesn't get people right. Let us hope it is with less momentous consequences.

It is really breathtaking, Piketty's idea that the market has little to do with the catch up in economies that are happening in a number of formerly poor economies. A key portion of the "process of the diffusion and sharing of knowledge" that is driving that catch up is that markets work and it is wise to dismantle the legal structures that prohibited or restricted markets in these countries. But for Piketty, that sort of knowledge diffusion is a priori not important.

In the forces of convergence section, there is a great elephant of a void, one that is quite noticeable if you don't have Piketty's sort of ideological blinders on. Over time, if you are prudent, you can move from being a laborer to a capitalist, and it would be normal that there are a large number of people who gain income from doing both and shifting emphasis from one to another as a counterbalancing force, chasing the better deal.

If capitalist activities are where the money is, there would be a natural tendency to increase effort in those areas and to divert income to investments, bidding up the prices and thus reducing the returns on capital. The sort of world where there's a tiny class of investors and everybody else gets all their income from labor is simply not today's world. This is exactly the sort of evolution that supports the Kuznets curve. That we're presently sabotaging this evolution via a huge creation of moral hazard by central banks and other policy stupidities does not change the underlying reality that humans tend to follow the money when it comes to earning their daily bread and Piketty's book is largely devoted to the proposition that they do not.

If you give short shrift to and do not accurately list the forces for convergence, of course they will look weak and easily overcome by forces for divergence. Again, this is an argument that does not depend on Piketty's statistics being in error, though the argument would be consistent with the errors that the FT found in its analysis.

Once again, I have reached the point where it is too long to go much further on a blog post and will try to pick things up again later.