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.
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.
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.
[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.
> 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.
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.
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.