The Financial Times’s Lazy Reading of Piketty

The Financial Times has sparked a major debate on Thomas Piketty’s Capital in the Twenty-First Century by releasing an investigation that purports to find important data problems and errors in Piketty’s work. A helpful summary of some of the initial contributions to this debate can be found here. My conclusion at this stage is that the only really major data issue appears to lie in the analysis of UK wealth inequality for the past four decades. While I strongly suspect that Piketty’s basic conclusions with regard to the recent UK trends will be sustained after his results are compared with other measures of wealth inequality, including the revised estimates by Saez and Zucman that incorporate wealth held abroad, including wealth held in offshore havens that Zucman has called the “missing wealth of nations,” the data issues themselves are not the topic of this post.

What I am interested in here is the bearing of the data problems the Financial Times purports to have discovered on Piketty’s central theoretical arguments, and on his assessment of the likely path of inequality in the 21st century absent policy corrections that might redirect that path. Yesterday, the Times described the impact of its investigative results on Piketty’s argument in very dramatic terms. But some of the statements they make about that impact are so odd that one can only conclude that the people at the Financial Times who are making these charges have not read the book with even minimal care. It is apparent they don’t understand its argument very well.  Thus they are in a poor position to evaluate the bearing of the data issues they have raised on the book’s central themes, and are misleading their readers about the substance of Piketty’s arguments and claims.

Here is one key passage from yesterday’s piece:

…The FT has found grounds to question the finding that the holding of wealth by the rich in Europe has increased since 1980. Without that result, there cannot be an iron law of capitalism that leads to ever rising inequality.

One would gather from these two sentences that Piketty has announced the existence of an “iron law” of capitalism according to which inequality increases at all times, in all capitalist societies, in all countries. If that were the case, then finding even one country where wealth has not grown over some extended time period would be a major blow to the argument. Perhaps their assumption that Piketty has proclaimed such a law explains why the Financial Times believes that their discovery that wealth might not be have increased in the UK during the past 40 years is a mighty strike against Piketty.

But the problem is that Piketty nowhere claims that there is an iron law of capitalism according to which it leads to ever increasing inequality. Rather, Piketty identifies several forces of wealth and income divergence within capitalism, but also forces of wealth and income convergence. His argument is that conditions are propitious at the beginning of the 21st century for the forces of wealth and income divergence to attain renewed strength in capitalist countries, resulting in a highly inegalitarian century.

On pages 20-23 of Capital in the Twenty-First Century, Piketty identifies his major results. The first is that “one should be wary of any economic determinism in regard to inequalities of wealth and income.”

That doesn’t sound like a man about to lay down deterministic iron laws.

The second result is that “there is no natural, spontaneous process to prevent inegalitarian forces from prevailing permanently. If the proper policies are not pursued to achieve effective democratic control over capitalism, the potential exists for the economy to enter an inegalitarian spiral.”

Piketty’s orientation is quite removed from the rigid historical determinism the Financial Times is attributing to him. Throughout the book, Piketty emphasize the role of historical contingency, and the degree to which the relative strengths of the various forces of divergence and convergence depend on the economic conditions that actually prevail when those forces are operating. Even the famous inequality r > g is, Piketty argues, a “contingent historical proposition, which is true in some periods and historical contexts, and not in others.” It is also, he continues later, to be analyzed as a “historical reality dependent on a variety of mechanisms, and not an absolute logical necessity.”

Later in yesterday’s piece, the Financial Times argues:

Even if wealth inequalities were to rise, it is important to understand the reasons for this increase. There is a gulf of difference between wealth derived from entrepreneurial skills and inheritance. There will also be a natural tendency for wealth concentrations to rise in an ageing society, as people need to stash more in private pensions to prepare for a long retirement. This is not to say that, in the modern world, there are no cases in which wealth for the few is inhibiting opportunities for the many. But rather than simply assuming there is a central contradiction in capitalism, one should seek the specific causes.

This paragraph is breathtaking, and reveals profound ignorance of the contents of Piketty’s book, a very substantial portion of which is devoted to precisely the kind of search for causes that the Financial Times calls for in the last sentence. The notion that Piketty simply “assumes” that there is a central contradiction in capitalism is worthy of a lazy college freshman who has skipped to the seven page conclusion of Capital in the Twenty-First Century, and has made up a whole term paper on that basis.

The core of Piketty’s argument lies in Chapters 7 through 12 of Capital in the Twenty-First Century, laid out over 240 pages. Those chapters comprise Part Three of the book, the title of which is “The Structure of Inequality.” In the complex and nuanced series of arguments in that part of the book, Piketty identifies several factors that contribute to the overall structure of inequality, and explores the relative impact of those factors in various historical circumstances. Topics include the role of the initial distribution of wealth, the role of inherited wealth, the contemporary rise of supersalaries and the causes of that rise, the role played by differences in the rates of savings achieved by different deciles in the income distribution, the role of differences in the rates of return on capital that go to different kinds of wealth-owners, and the role of the global competition for capital. It is stunning that a paper with the august reputation of the Financial Times would start throwing down polemical thunderbolts of critical destruction while remaining so ignorant of the contents of the book they are criticizing.

Where does this term “iron law” come from? Not from Piketty. But of course, that is a phrase used by Marx in his account of wages. If I didn’t know better, I might think that the Financial Times was attempting to smear Piketty by publicly attributing to him Marxist phraseology that he does not use.

The Financial Times also makes a crucial appeal to authority in yesterday’s piece:

The theoretical argument that wealth inequalities are likely to rise if growth rates are weak is also dubious. As Prof Lawrence Summers has argued, there are deep questions regarding the likely return to capital in coming decades and whether it will be reinvested to provide a rentier income.

But while there may indeed be deep questions about aspects of Piketty’s discussion of the rate of return to capital under conditions of low growth, there are also some serious flaws in Summers’s understanding of Piketty’s argument. Summers errs in his reading of what Piketty says about the dynamics of wealth-to-income ratios, and also in attributing to Piketty the idea that capital returns must be fully reinvested in order for capital income phenomena to drive an increase in inequality.

The problems I am pointing out with the Times’s representations do not pertain to theoretical exceptions or hidden and obscure reservations buried in the footnotes and appendices to Piketty’s work. I’m talking about the main line of Piketty’s argument, an argument which is set out with great care over many pages and is intelligible to any attentive and diligent reader.

Because they are under the grossly mistaken impression that Piketty has announced an “iron law” according to which inequality should be always and everywhere increasing under capitalism, the Financial Times seems to believe that having discovered that wealth might not be increasing rapidly in the UK during the past 40 years, Piketty’s arguments now totter on the brink of collapse. This suggestion is very remote from reality, and is indeed a crude error, on the order of believing that climate science has announced an “iron law” of temperature increase in all industrialized countries, and thereby concluding from a period of stable temperatures in one country that the results of climate science are now all in doubt.

The Financial Times is to be commended for carrying out an exhaustive study of Piketty’s data. But they really need to do much more homework before infesting the minds of their readership with wild and ill-informed claims about the impact of those results on Piketty’s core arguments.

5 thoughts on “The Financial Times’s Lazy Reading of Piketty

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