Piketty’s Capital in a Nutshell
openculture.com
openculture.com
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1) Churn in Inequality:
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12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year
39 percent of Americans will spend a year in the top 5 percent of the income distribution
56 percent will find themselves in the top 10 percent
73 percent will spend a year in the top 20 percent
Although 12 percent of the population will experience a year in which they find themselves in the top 1 percent of the income distribution, a mere 0.6 percent will do so in 10 consecutive years
54 percent of Americans will experience poverty or near poverty at least once between the ages of 25 and 60
Half of those who earned over $1 million a year did so just once during this period (1999 and 2007), while only 6 percent reported millionaire status across all nine years
Data analyzed by the I.R.S. showed similar findings with respect to the top 400 taxpayers between 1992 and 2009. While 73 percent of people who made the list did so once during this period, only 2 percent of them were on the list for 10 or more years.
via: http://www.nytimes.com/2014/04/20/opinion/sunday/from-rags-t...
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2) How much is the inequality being driven by Technology?
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Sam Altman @YC: http://blog.samaltman.com/technology-and-wealth-inequality
Albert Wenger @ USV : http://continuations.com/post/52302452621/internet-and-incom...
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3) How much of this technology led inequality is transistionary?
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Innovation has brought great benefits to humanity. Nobody in their right mind would want to return to the world of handloom weavers. But the benefits of technological progress are unevenly distributed, especially in the early stages of each new wave, and it is up to governments to spread them. In the 19th century it took the threat of revolution to bring about progressive reforms. Today’s governments would do well to start making the changes needed before their people get angry.
Your post seems mainly to be about income inequality, particularly pointing out that it's often transitory and different over lifetimes than in single years. Those are interesting points, but Piketty's book isn't about income inequality. The book is mainly about capital holdings and what they do in economies over time. With issues such as: returns on capital vs. labor; concentration of capital holdings; persistence of large capital holdings over time; ratios between economies' capital holdings and rates of income; etc.
Even looking only at the political part of the book (which is not the biggest part), his concern isn't about income inequality, or even inequality in general, but about wealth inequality that can maintain itself persistently. He predicts (with some caveats) that current trends suggest large holders of capital will increasingly be able to maintain and increase their capital holdings, producing stable multigenerational stocks of wealth akin to those seen in 18th and 19th century Europe. Whether right or wrong, that's not at all the same an issue as inquiring into things like income ratios between Google's programmers and janitors. He's interested in a more structural level about e.g. the differences between an economy where extant wealth equals 10 years of annual income, versus one where it equals 2 years of annual income (he argues that in the latter case existing wealth stocks are less entrenched, because they in effect represent fewer years "head start" over current income earners, and that this ratio explains some things about the relative roles of capital in 19th-century France vs. 19th-century U.S.).
My assumption was that income (flow / p&l) & wealth (stock / balance sheet) are correlated.
By pointing about churn in income & some of the causes of income inequality - we could have a different perspective on the wealth inequality question.
Also - the HBR review the article references talks about the income question:
Since the 1970s, though, the U.S. has seen a sharp and unparalleled increase in the percentage of income going to the top 1% and especially 0.1%.
A+ for politics, C- for attention to detail!
Top 1%: $383,000 Top 5%: $188,000 Top 10%: $140,000 Top 25%: $89,125 Top 50%: $50,742 Top 75%: $25,411 Top 90%: $12,154
Give that those incomes are so low[2] it isn't surprising that the top percentiles have so many people that have at least one year in them. As an example, My mother, who reached $60k for 2 years at the end of her 45 year career had to take a 401(k) withdrawal[3], which is counted as income, which boosted her, barely, into the top 20 percent, for one year. It's pretty easy to see how people can be boosted into higher brackets for short periods of time. Picketty is talking about wealth, not income, so it's hard to see how you could build wealth consistently with short term boosts. Remember, 54% of people experienced poverty or near poverty as well...potentially wiping out any wealth they had accrued.
1: http://www.nytimes.com/interactive/2012/01/15/business/one-p...
2: I think we see incomes like $188k as low or middle class when they are anything but. Median household income is only ~$50k.
3: Please try to avoid doing this!
Your earlier comment about the income level brackets was fantastic!
That helped better understand the issue.
Not sure why your comment was downvoted!!
Th
Krugman, who I sometimes do not agree with, but was right on in reviewing this book, rightly points out that the elites are freaking out over this book because the facts are against their position.
This is an important book depicting how bad income equality has become because of inherited capital.
http://www.foreignaffairs.com/articles/141218/tyler-cowen/ca...
Ultimately a very political subject though, so I flagged it.
http://www.dissentmagazine.org/article/kapital-for-the-twent...
[author] has a habit of [baseless insult]
hurr, durr, [attack_target]'s too stoopid/misleading you so everything he says is wrong.
And yes, you are misleading. Because if I didn't actually go read that article and find the part you were complaining about I would have assumed an actual insult was where you claimed it was. Whereas, in fact, I found criticism, which the author attempts to justify/backup in the rest of the article. But you'd have us believe that that was all that was in the whole article. That's called misleading people; pretty much general dishonesty on your part.
This asserts that these two are entirely unrelated, which is jumping to conclusions at best. Also, a reduction in inequality is a redistribution of wealth by definition, something Piketty points out at the very beginning of his book.
I'm about halfway through the book, but apart from a bunch of historical data ("wealth inequality was high, then low, then high", "really bad things like war and depression reduce inequality, while growth increases it"), I can't figure out what the actual point of the book is. Piketty certainly doesn't clearly state his theory in the first 400 or so pages.
If it's about inequality caused by inherited capital, Piketty only supports this claim in the historical era (Jane Austen/Balzac/etc). He says very little about the present.
He also seems unaware that there is a world outside of the US, UK and France (and maybe also Sweden+Germany). That's quite a strange omission given that the vast majority of inequality in the world is not within the west, but between the west and the rest.
(As I mentioned, I'm only halfway through, so feel free to correct me if the rest of the book is different.)
I'm not even halfway into the book, but he apologises for this at the beginning, especially the focus on France, and gives justifications for this. Simply put, he doesn't have data (yet) for most of the rest of the world. France gets extra attention because it is the country for which he has the most and oldest data, and has had less drastic changes compared to the US, which has grown two orders of magnitude in population in the same time.
(I say "almost" because I've met enough ignorant westerners to realize that dishonesty is not the only explanation for this. I don't understand it myself, but some people's vision truly does stop at the border. )
[1] In the long run I'd be concerned about the damage immigrants might do in the voting booth, but that's a non-economic problem.
Do you have any data to support this claim?
"When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based."
Indeed, you yourself wrote an interesting blog post essentially regarding technicalities of that point [1].
You note that he has (as far as you have read) said little about the present, so he may not have substantiated the conditions necessary for his hypothesis in the present day, but it's a little unfair to suggest that a hypothesis doesn't exist.
[0] http://www.hup.harvard.edu/features/capital-in-the-twenty-fi...
[1] http://www.chrisstucchio.com/blog/2014/piketty_inequality_an...
If he wants to show that r > g has any effect on inequality, he needs to do a LOT more than he's done. Historic timeseries of the sort he presents are completely incapable of demonstrating this point - you need longitudinal microdata for that, together with a far more detailed theory than "r > g". If you simply have r > g (ignoring volatility, as he's done so far), and treat capital as homogeneous (as he's mostly done so far), then this will explicitly NOT happen:
http://www.chrisstucchio.com/blog/2014/piketty_inequality_an...
Maybe he does this in the rest of the book, but I'm far less hopeful as I read more. To paraphrase Eliezer Yudkowsky:
But the real cleverness is in how inequality was marketed. They left out the math.
[NB It was probably Drew McDermott's "A Critique of Pure Reason" that fatally damaged my interest in symbolic AI].
His claim that I quoted is a causal one, however, as I am sure you are aware, it is very standard practice in all fields of inquiry to propose causal relationships from careful and qualified analyses of correlations. You are of course correct that demonstrating causality would require more than time series analysis, however a lack of causal analysis cannot be taken of itself to invalidate a well-identified correlation (I am of course assuming good faith and rigour on his part, which I am not in a position to attest to at the moment). Contrary data, or an explanation of a mechanism that would induce the identified correlation without the proposed causal relationship should now be sought to invalidate his claims, simply saying that he has only shown correlation is probably not enough.
Finally, could you just explain this a bit more, I didn't quite get it: "If you simply have r > g (ignoring volatility, as he's done so far), and treat capital as homogeneous (as he's mostly done so far), then this will explicitly NOT happen: ..."
Rather than explaining why you need more than just a correlation, I'll link to the Lucas Critique: http://en.wikipedia.org/wiki/Lucas_critique
Finally, could you just explain this a bit more
Not sure I can explain better than the comment I linked to. If your capital and mine grow at the same rate, we'll have the same ratio of capital forever. I.e., my wealth will be X exp(rt), yours will be Y exp(rt).
This seems to be Piketty's implicit model in most of the book, though once or twice he calls it unrealistic. But he never actually states explicitly what his model is, so it's a bit hard for me to be sure.
> Not sure I can explain better than the comment I linked to. ...
Thanks for the clarification, I'm not feeling very switched on at the moment. I would question your analysis though. It is certainly correct on its own terms, however it conflates wealth with capital (which is something I've seen people saying Piketty does - does he?). To me it seems to be vital to include both major sources of income, capital and labour. If you do that, then you can calculate the quantity
(Xl exp(gt) + Xc exp(rt)) / ((Xl + Yl) exp(gt) + (Xc + Yc) exp(rt))
Where Xl and Yl are the labour "holding" for X and Y, and Xc and Yc are the capital holding. Here I'm taking r as the return on capital, and g as the return on labour, which seems abusive but I think it captures the point. This quantity tends to the capital ratio where r > g, and the labour ratio where r < g. Whilst it ends up at the same limit as your model (for r > g), it shows that there is a shift of wealth from labour to capital over time, so the inequality between capital holders and labour "holders" increases over time, as the returns on labour are dominated by the returns on capital.
edit: Just thinking about it a bit more, this implies that we definitely do want g > r, because then in the limit wealth is proportional to labour, i.e. productivity, not to capital bequeathment. One can still make returns on capital, but in the limit your wealth will be proportional to your effort. Surely that is the goal of a meritocratic society?
edit edit: To clarify, I have broader views on the value of pure meritocracy, in my first edit I was just trying to relate the implications of the wealth ratio given above to meritocratic goals.
Unfortunately the relation of r to g tells us very little about meritocratic goals. Suppose that the growth rate r is driven entirely by startup founders building gigantic companies (or lotteries, which would be mathematically equivalent), which cease growing after the founder dies. Then you could have r be huge, inequality would be huge, and everything would be entirely meritocratic.
The relationship between this point and meritocracy is that average returns on capital are approximately "unearned" - you can get close to the market rate of return with minimal effort, whereas returns on labour are positively earned, by your labour. So when r < g the limiting case is for income to match labour, i.e. effort. Note that this by no means inhibits the possibility of greater returns to intelligent capital investment (something that you definitely want to keep) - the point is that you control average returns to stop capital domination fostering inequality.
I am not sure what you mean by this.
'r' is the rate of return of capital, 'g' is the rate of growth of the economy. If 'r' is greater than 'g', than money continuously invested with a rate of return of 'r' will grow faster than 'g', by definition.
Are you disputing the basic match? Are you disputing that 'r' is ever greater than 'g'? Are you disputing that a diversified portfolio will return at a rate of 'r' when the average rate of return of all capital investments is 'r'?
There is no reason why a society with capital/income = 10 years has more or less inequality than one with capital/income=5 years.
I will attempt to google an answer for you
If the houses price goes up ten times while the bonds pay only 110% than total inequality goes down even if Alice still hasn't worked a day.
most of this math is above me (differential equations and finite difference methods), but the models are pretty easy to experiment with if you employ Monte Carlo methods.
In fact, that would be a nice side project: Piketty web app where the user can mess with various permutations of r and g and their distributions.
Using these definitions of r and g,
How can the return on capital exceed the growth of the economy in the long term?
If the return on capital is so good, governments should invest their pension funds in the stock market and then sit back and relax while all the free money pours in.
> the elites are freaking out
It's a good thing we have things like science and open discourse then. Then we can stop "freaking out" over peoples ulterior motives and consider their arguments and the evidence they present supporting their arguments. We can even be open about our motives and ideology driving this, because it's the evidence that counts.
If you discount evidence leveraged against the conclusions of the book because you mistrust the motivation behind giving the evidence, the corollary is that you accept the conclusion of the book, not on the back of the evidence but because you agree with the (supposed) motivation behind reaching those conclusions.
That's reductive. Not everyone has the bandwidth to sort through every iota of evidence. And the fact is that there's no shortage of people who have little in arguing in good faith. So people resort to heuristics such as reputation, credibility, what other "reputable" people say, etc.
One would therefore be well advised to take his notes about the work of a French economist with a pinch of salt.
"The optimal strategy is to go become an academic or a French-style civil servant, the anti-wealth generators."
To pick but one example among many others, Louis Pasteur was French, an academic and (therefore) a civil servant, and arguably contributed to save many lives. Or does that not qualify as wealth generation?
Economics is not just about the maths, it's about whether the maths being proposed (i.e. the model) are the right tool to understand and explain the observed data (and do predictions / counterfactuals). So the question of interest (is Piketty right or wrong) is not a question of someone's "maths" (either Piketty's or Taleb) being "right" or "wrong". Sorry if you find this obvious -- perhaps I missed the point of your question?
https://docs.google.com/file/d/0B8nhAlfIk3QIbzRrRkhhc1RNY0U/...
So far as I can tell (I'm only halfway through Piketty) he has no math. Just a bunch of pretty graphs and lots of words.
If he has a paper which clearly and succinctly summarizes the point book, please point it out. Cause the book doesn't even contain a hint of that.
More research here: http://piketty.pse.ens.fr/fr/publications
I haven't said anything about clearly and succinctly though; I do not know if that kind of material exist. I believe the book to be a mix of original material, existing research (as linked above), and most of all the fruit of many years of productive research on these topics.
You are of course free to not buy Piketty's thesis based on his book alone; however, to convincingly build your case to convince others, it looks like you may have to absorb a fairly considerable body of knowledge.
On a more personal note -- while I am an economist by training (doctorate obtained in early 2010s in a top 10 uni), my field was quite far from Piketty's, so I am not in a position to know with any confidence whether he's right or wrong. (I would say though that his position certainly has merit and deserves the attention it is getting.) That being said, I maintain that Taleb shows himself as disconcertingly naive and frankly quite condescending to think that he can dismiss years of research in a few witty disparaging paragraphs. (Possibly without reading the book, almost certainly without reading the research, and very definitely without looking at the raw data.)
What is really need is a rebuttal/response to Taleb's probability based argument.
2+2 == 4, always, so the underlying math is sound. But two bikes, a car don't make!
Thomas Piketty Is Right: Everything you need to know about 'Capital in the Twenty-First Century'
http://www.newrepublic.com/article/117429/capital-twenty-fir...
so, we think the wealth tax this sounds like a great idea, let's go after the billions that accrued in offshore hedge funds for US citizens and take 30%, sounds fair since it avoided taxes in the first place.
of course, when it comes time to implement the tax, that money is gone, perhaps to some other jurisdiction, and they settle for enforcement by having the average joe write a check based on money in your bank or brokerage account, whatever meager amount over $100k you may have. and, probably convert 401ks into a myRA account, which gives the government a new forced buyer of treasury securities, while pretending it was for some other reason.
He is basically using mainstream economics techniques to prove that mainstream economic ideas, especially those centered around free-trade and low taxes to chase growth maximize inequality, they don't minimize them.
Everyone who has had problems with the teaching of mainstream economics as a means to lessen inequality now have more evidence.
So when I read most of the articles regarding this book, all I can picture is a slew of angry mob-like people shouting: Those pesky economists must be wrong! This guy is saying stuff we all like to hear, therefore he is correct! Indeed, the public is fickle, and will naturally gravitate to what feels good and re-affirms what they feel is true. There has been a growing mistrust of intellectuals of late, and it's because people are dissatisfied. Intellectuals have been losing the media war with the government.