
Why Are Economists Giving Piketty the Cold Shoulder? (2017) - huihuiilly
http://bostonreview.net/class-inequality/marshall-steinbaum-why-are-economists-giving-piketty-cold-shoulder
======
mordymoop
Are we still talking about this? Within months of the book’s release, readers
had found many examples where his data selections had been incomplete. To the
extent that the main points were invalidated or made far less convincing. When
you include the full data in his analysis, the main conclusions are drawn into
question. There are many very thorough blog posts by economists you can easily
Google.

It’d be like if Origin of Species came out, but evolution was actually wrong,
and Darwin had only seemed right at first because he left out the species that
didn’t fit his model.

I don’t think Piketty did this on purpose, by the way. He just didn’t push
hard enough on the data that he didn’t want to find fault with.

~~~
KirinDave
This would be an excellent time to cite sources.

~~~
tptacek
[https://www.cambridge.org/core/journals/social-science-
histo...](https://www.cambridge.org/core/journals/social-science-
history/article/one-percent-across-two-centuries-a-replication-of-thomas-
pikettys-data-on-the-concentration-of-wealth-in-the-united-
states/20F44C37D29070B205D5FF33B30131C1)

------
burlesona
This bit really struck me:

“Matthew Rognlie—then a doctoral student, now an assistant professor at
Northwestern—took up that line in even greater detail in an article that
eventually appeared in the Brookings Papers on Economic Activity, to which he
added that the rising capital-to-income ratio in Piketty’s data is
disproportionately the result of the price appreciation of certain scarce
stores of wealth, primarily housing and the land it sits on, not the quantity
accumulation of productive capital that is the subject of the neoclassical
theory of economic growth.”

I find that a compelling explanation because it fits with a bunch of the deep
problems in the way urban development changed in the 20th century, which in
turn have created the frustrating housing situation today.

It’s difficult to summarize this, but in short, modern zoning, the suburban
development pattern, and auto dependency, create an economic vicious cycle
which tends to polarize economic outcomes, where Places trend toward either
the Bay Area or Detroit. (Some reading linked below)

This is most true in the US, but also to varying degrees in many other parts
of the world.

In other words, if Rognlie’s quote is true, then it would mean Picketty’s
observations are better explained by the bad housing and infrastructure
policies of the last 80 years than by “r > g”, and if that’s true then it
completely changes what we should do about it.

Some expansion on the development pattern problems:

[https://www.strongtowns.org/journal/2016/10/23/portland-
hous...](https://www.strongtowns.org/journal/2016/10/23/portland-housing-
prices)

[https://www.strongtowns.org/journal/2018/9/17/austins-
codene...](https://www.strongtowns.org/journal/2018/9/17/austins-codenext)

[https://www.strongtowns.org/the-growth-ponzi-
scheme](https://www.strongtowns.org/the-growth-ponzi-scheme)

~~~
mcguire
I have some problems with that same quote. The "disproportionate price
appreciation of housing and the land it sits on" seems to me to be primarily a
factor only in some (maybe most) large cities; outside those cities, price
appreciation, perhaps excessive price appreciation, has occurred, but it's
nothing like that in those few cities. My feeling is that, sure, the effect of
real estate prices are large in real terms, but compared to the rest of the
economy, they are limited in effect by their limited distribution. (I haven't
looked at Rognlie's research; I could be wrong.)

Further, my feeling is that real estate appreciation is an effect, not a
cause. Consider the 2008 event ("circumstance?" "shenanigan?"): it was purely
driven by the financial industry. It had, really, nothing to do with real
estate at its core; it was caused by bad financial behavior, and the failure
of the real estate market was simply how it was translated out of the finance
world into the rest of the economy.

Likewise, my impression of the situation you describe is a result of the
growth and success of the financial industry and the pursuit of a very limited
class of real estate assets by that resulting block of money.

Tl;dr: High rents in San Francisco? Caused by the venture capital industry---a
purely financial operation---and its insistence on having all of its
investments physically co-located with where it wants to live.

~~~
AnthonyMouse
> The "disproportionate price appreciation of housing and the land it sits on"
> seems to me to be primarily a factor only in some (maybe most) large cities;
> outside those cities, price appreciation, perhaps excessive price
> appreciation, has occurred, but it's nothing like that in those few cities.

But those cities are where "the 1%" live or own property, so they're the
beneficiaries of the price inflation, which is precisely the issue. A rich
person bought a house in SF for $500K and now it's worth $5M, a middle income
person bought a house in Detroit for $200K and now it's worth $200K, a lower
income person rented an apartment in SF and saw the increase as an increase in
rent rather than an increase in home value.

> Further, my feeling is that real estate appreciation is an effect, not a
> cause. Consider the 2008 event ("circumstance?" "shenanigan?"): it was
> purely driven by the financial industry. It had, really, nothing to do with
> real estate at its core; it was caused by bad financial behavior, and the
> failure of the real estate market was simply how it was translated out of
> the finance world into the rest of the economy.

It's more like a mechanism rather than a cause or effect. You make money cheap
so people borrow and bid up housing costs. This enriches the existing owners
who bought before prices increased, which increases wealth inequality because
they were already the ones with the most money.

The problem now is that you can't roll back the clock because transactions
have already happened. Richard bought a house for $80K and sold it to Michael
for $800K, because Michael needed a place to live and the bank was willing to
loan him the money. If you now raise interest rates, the housing prices start
to come back down, but Richard already has his $720K profit and the loss
accrues to Michael who still has the $800K mortgage, and may now have to start
paying higher interest on it in addition to the loss in home value.

As a result the possible solutions start to look weird. Like causing general
inflation on purpose to devalue everyone's mortgage debt and allow the price
of everything else (including wages) to rise to meet the cost of housing
without reducing nominal housing costs which would put too many people
underwater on their mortgages, and employing policies like relaxing zoning
restrictions to ensure that nominal housing prices don't rise with everything
else.

~~~
burlesona
The hyper-inflation fix is the only "solution" I've heard in serious
discussions on this mess. It's sort of insane, but when you dig into it, it
maybe the least bad choice as far as bringing a healthy equilibrium back to
the economy without economically devastating huge chunks of the population.

~~~
cookingrobot
Inflation would also be a tidy way to pay for Universal Basic Income. Just
print money and give it out.

------
atdrummond
Arguably, as with Nancy MacLean, it is his continued refusal to acknowledge or
address methodological ([https://www.mercatus.org/system/files/Warshawsky-
Piketty-v2....](https://www.mercatus.org/system/files/Warshawsky-
Piketty-v2.pdf)) and data
([https://marginalrevolution.com/marginalrevolution/2017/10/pi...](https://marginalrevolution.com/marginalrevolution/2017/10/pikettys-
data-reliable.html)) errors.

------
epistasis
> This dearth of reaction to such a critical work is not healthy. It is as if
> the rapturous reception by the public increased the resentment among
> Piketty’s academic economist colleagues. As an appeal to the public to
> resolve, or at least have a say in, what the experts consider their own
> domain, Piketty appears to have questioned the very value of having a
> credentialed economics elite empowered to make policy in the name of the
> public interest but not answerable to public opinion. The economics elite,
> it seems, answered by stonewalling Capital in the Twenty-First Century, so
> it would not have the impact on economics research agendas that it merits.

This disdain for those that have found popularity is fairly common in many
fields. There seems to be a simultaneous feeling of 1) but what about this
super complicated way of viewing it, this popular piece misses all these
details, and 2) maybe a bit of jealousy.

I'm not an economist, in case it's not clear, and haven't had the time to read
the book, but the critiques were short enough to read in an hour and convinced
me that Piketty is right, because the critiques were so shallow and seemed
like such motivated reasoning.

------
mark_l_watson
On someone’s advice, I just skimmed the first 2/3 of his book on his data
collection. Even his critics mostly acknowledge that his professional lifetime
work on data collection is high quality. I carefully read the latter part of
the book on his conclusions and I generally agree with him, partially because
it passes my ‘common sense filter’ and partly because I am skeptical of
mainstream economists. A little off topic, but reading the mises.org material
in 2006 convinced me to temporarily get out of the stock market so my
skepticism of mainstream economics at least paid off that one time.

------
rjf72
This paragraph seems bothersome:

 _" Most striking, however, is that when you hold educational attainment and
other observable worker characteristics constant, pay is starkly different
depending on the firm where you work, even within narrowly-defined education
categories, industries and occupations. This is prima-facie evidence that the
human capital model in a competitive labor market is an increasingly poor way
to explain earnings inequality. Wages for similar workers do not, in fact,
equilibrate across firms."_

An analogy I like here is one of a basketball school. Imagine you take _x_
students, all of a relatively reasonable capability, and put them into a
school. And you give them all an identical education in basketball. Nobody in
the world would ever then expect these students to be of roughly equal ability
after they graduate the school 4 years later. There would be vast differences
between their abilities at that point. Even if you control for obvious genetic
factors such as height and perhaps athleticism, there'd _still_ be absolutely
tremendous differences. There have been thousands of professional basketball
players -- all in the 0.0001% of society, yet even given that ultra-
selectivity Michael Jordan stands head and shoulders above nearly all of them
yet. And the same is true in most of everything. If you want to go a purely
mental game, we have a series of chess players -- Paul Morphy, Jose Raul
Capablanca, Bobby Fischer, Gary Kasparov, and now Magnus Carlsen that in turn
stand leaps and bounds ahead of a player pool (of their respective times) that
is/was once again already made up only of the most capable 0.0001%.

If it's somehow not clear, the point of this is that just because A and B go
to the same school and end up with roughly the same grades - that says
absolutely nothing whatsoever about the ability of A or B. I would argue that
not only is the stated observation _not_ "prima-facie evidence that the human
capital model in a competitive labor market is an increasingly poor way to
explain earnings inequality" but rather the exact opposite! If companies were
recruiting exclusively based upon observable characteristics it would mean
these less measurable differences that separate the good (or even the rather
less than good) from the great would not be being factored in. That would be
rather strong evidence that effective competition was not correlating to
positive results. But we have the exact opposite!

~~~
lusmd
Yes, that paragraph is very, very bad, because it's not people of equal
education that would have equal wages, but equal productivity---which will
vary depending on what firm you're at! Not just because of sorting and
poaching of talent, but some firms' production and capital structure will be
such that the marginal worker will be more productive.

~~~
s17n
That makes no sense, equivalent workers should get paid equivalent wages
regardless of their firms’ productivities. Apple doesn’t pay more for aluminum
than a soda can maker.

~~~
CamTin
It doesn't but it would continue buying for longer if the price went
significantly and permanently up. But the point of this whole thread is that
labor isn't just another commodity like aluminum. It's a special, weird thing
and the market in it is just different and probably less "efficient" than the
markets for metals and grain. The question isn't "how can we best model this
using our existing theory?" It's "what is the best way to model this?", so if
the existing theory isn't very helpful, we should look for new ones that are
better.

------
rb808
I think one of the reasons lots of people liked Piketty is that he produced a
huge book that most people didn't read but confirmed their bias, so he became
some kind of hero.

Taleb did a pretty good job of taking apart Piketty's work. Its worth reading:
[https://medium.com/incerto/inequality-and-skin-in-the-
game-d...](https://medium.com/incerto/inequality-and-skin-in-the-
game-d8f00bc0cb46)

------
yughurt
I've experienced a similar response from people I talk with. It's such a
simple premise and idea that seems oversimplified and lacks nuance. The main
issue is that it is so against the way the system currently world, there's no
foreseeable solution.

~~~
xg15
> _The main issue is that it is so against the way the system currently world,
> there 's no foreseeable solution._

But you could argue against climate change with much the same logic (and,
indeed, a lot of people seem to do). "The conclusions would demand changes to
our status quo in a degree of magnitude that hasn't ever been there before,
therefore, they must be wrong".

------
thoughtstheseus
Also wanted to add- Piketty has and continues to focus on data collection. We
should be thankful people are out there doing tough work like this so we can
all make more informed decisions- even if we come to different conclusions.

------
cpr
Tom Woods has a series of good critiques of Piketty.

Here’s one:

[https://tomwoods.com/ep-318-piketty-taken-down-for-
good/](https://tomwoods.com/ep-318-piketty-taken-down-for-good/)

~~~
wavefunction
I'm seeing a lot of signals on that site that throw up red flags and honestly
the content is confirming those assumptions. I find this talk radio guy and
his guest Phil Magness of George Mason to be the ideologically blinkered ones
as I follow their arguments and cross-reference them with what was written in
Capital.

~~~
mcguire
You mean like the pop-up ad for his book and newsletter?

" _Three Words That Say "I'm Clueless"_

" _" Deregulation caused it!"_

" _We 've all heard that account of the financial crisis._

" _It 's dead wrong. Preposterously wrong._

" _It 's all the Left has._

" _Don 't let them get away with it._

" _Solution: enter your email address below for your free copy of The
Deregulation Bogeyman and to start receiving the legendary Tom Woods Letter._
"

------
bawana
Yes the establishment economists have vested interests. But, Vested interests
are what allowed Silicon Valley to flourish. The east coast financial center
largely ignored the pc space until Bill Gates, Steve Jobs, Bill Joy and
numerous others built the pc hardware and networking stack to allow everyone
to have a'voice' and to hear all those voices. Although Piketty's arguments
hold water, he has not shown a synthesis that will allow us to unwind smoothly
from the concentration of wealth.

I once had a heated discussion with an economist about this very topic.
Financial wealth grows now largely through speculation. Although stocks and
options were once based in fundamentals, their prices now fluctuate wildly
based on their own supply and demand which is often decoupled from reality.

I suggested having two currencies, one money derived from human labor and
another derived from the work that financial instruments generate.

One could establish an exchange rate between one and the other based on wealth
disparity. Or another way to deal with these currencies would be to restrict
income and capital gains from financial money to only be spent on non-
financial products (goods, services, upgrade factories, upgrade roads, etc.)
As this economist was working in the financial sector in NY, he thought the
idea was ludicrous.

He felt that money from the financial sector was equally valued as money from
human labor. Or even more valued ! He wanted to control his money and not have
to invest in the messy world of humanity directly.

------
lusmd
> This dearth of reaction to such a critical work...

It's a five year old book, of course no one is talking about it specifically
anymore. (And when it came out, _everyone_ was talking about it.)

And "nobody is talking about inequality" is ridiculous. I've been to three
major conferences in the last six months and there were multiple whole
sessions on inequality. And not just income inequality. Educational,
environmental even. It's not the _only_ thing economists talk about, but far
from "no one" is looking at it.

------
atmosx
Here's a thorough and interesting critique by another _controversial_ (haha)
economist, Y. Varoufakis[1].

[http://www.paecon.net/PAEReview/issue69/Varoufakis69.pdf](http://www.paecon.net/PAEReview/issue69/Varoufakis69.pdf)

------
cletus
We are in some ways victims of the Long Peace.

There hasn't been a large-scale war since WWII. Obviously there have been
numerous conflicts since but these haven't occurred in the developed world and
have largely been contained geographically.

Obviously those conflicts are bad for those stuck where they occur and it's
good there hasn't been such a conflict, particularly now we're in the nuclear
age. But war and revolution served a peculiar economic purpose too: they were
the ultimate form of wealth redistribution.

It's why the Patricians of Rome don't own the world today.

The public is also increasingly apathetic. The French Revolution redistributed
the wealth of the French aristocracy. But we now live in an era where people
don't care enough to vote or they limit their "activism" to liking an image
deriding the latest Trump scandal on Facebook.

Some like Bill Gates and Mark Zuckerberg have committed to not handling $100B+
to their descendants but it doesn't take many to essentially establish a
permanent ruling class in all but name.

Unfortunately we live in an era where the ultra-wealthy are increasingly
unwilling to pay for the infrastructure and political stability that made and
continues to make their wealth possible.

It's easy to see a dystopian future that results from nothing more than local
optima of the ultra-wealthy minimizing their own tax liability because there's
apparently a difference between having $70B and $75B.

I'm not sure you can (or should) appeal to economists humanity to make them
care about income inequality. It's perhaps better to argue that income
inequality has limits. At some point, no one can afford anything and the whole
system grinds to a halt or war and/or revolution "solves" that inequality and
it's in the long term interests of pretty much everyone to avoid that.

~~~
nateburke
Piketty implied but came short of saying this very thing.

------
dang
Discussed at the time:
[https://news.ycombinator.com/item?id=14332159](https://news.ycombinator.com/item?id=14332159).

------
thoughtstheseus
If anyone wants to dive deeper into Piketty’s work Just check out his website
and lecture slides.

------
internet_user
Because wealth taxes Piketty proposes are anathema in the current world order?

------
mcguire
" _In the book, Piketty relies on a paper by Loukas Karabarbounis and Brent
Neiman that estimated a high marginal elasticity of substitution given two
sets of facts: capital has gained national income at the expense of labor, and
the price of capital inputs to production has been falling. The authors
interpret the latter as the cause of the former, and again within the confines
of neoclassical production theory, the only way to reconcile those two facts
is with a high degree of factor substitutability: when capital becomes cheap,
firms switch to using it, displacing workers. The labor displacement exceeds
the increase in wages to workers who remain employed, thus reducing the total
labor share of national income. That paper does not mention Piketty, but in a
follow-up the next year, the same authors foreground the similar model
proposed by Piketty._ "

Back in the '80s and '90s, a topic that I kept seeing was, "where is the
productivity?" With companies spending huge money on technology and
computerization, there should have been visible gains in productivity numbers,
right? But, there weren't. What's up with that?

My thoughts, as a non-economist, when I saw that were of things like just-in-
time inventory controls, which were new and entirely dependent on new
technology. They needed massive structural changes, which may be why they
didn't show up immediately, but still...they were there and the metrics and
models of economists weren't capturing their effects until they had completely
taken over.

Likewise, the elasticity of labor and capitol sounds very much like the
effects of automation on industrial jobs.

" _The aforementioned paper by Furman and Orszag argues that what Piketty (and
Gabriel Zucman, in their joint work) identify as a high and invariant rate of
return on capital in aggregate in fact reflects uncompetitively high rate of
return on capital for a few specific, superstar firms in the economy, and the
key task is not to manipulate aggregate macro equations, as Piketty (and
neoclassical economists more generally) do, but rather to explain why these
superstar firms do so much better than everyone else. The short version,
according to Furman and Orszag, is rents—payments that some agents, superstar
firms in this case, are able to extract from the rest of the economy either
because they have successfully blocked any competitive pressure or because
they have bought special treatment through the political system, or some
combination of the two, in addition to other mechanisms._ "

Or perhaps we're talking about things like the FAANG set. the extracted
payments are personal information---which is not captured in any economic
theory I've ever seen---and the moat blocking competitive pressure is the
combined result of network effects (bigger databases win) and extensive
financial capitalization. (How do you fight a competitor to whom not only is
additional capital effectively free but also has huge stocks of monetary
capital just lying around in stacks on the floor?)

~~~
webmaven
_> the extracted payments are personal information---which is not captured in
any economic theory I've ever seen---and the moat blocking competitive
pressure is the combined result of network effects (bigger databases win) and
extensive financial capitalization._

You might take a look at Carl Shapiro and Hal Varian's 1999 boom _Information
Rules_ :

[https://books.google.com/books?id=z0hQ12PrERMC&printsec=fron...](https://books.google.com/books?id=z0hQ12PrERMC&printsec=frontcover)

As well as their (along with Joseph Farrell) 2004 book _The Economics of
Information_ :

[https://books.google.com/books?id=-dcLAQAAQBAJ&printsec=fron...](https://books.google.com/books?id=-dcLAQAAQBAJ&printsec=frontcover)

It is perhaps surprising that Varian in particular (Google's Chief Economist)
hasn't had more to say about data as a raw material in the years since those
books came out.

BTW, your _" extracted payments are personal information"_ formulation may be
part of your problem in finding relevant economic theories. At least in part,
what is being extracted is actually a capitulation to being locked-in to a
system that _continuously_ extracts information. So looking into the economic
theories of technology vendor lock-in, as well as the perverse economics of
information security may provide some insight.

------
coldtea
Because, "It is difficult to get a man to understand something, when his
salary depends upon his not understanding it!".

Economists' careers as receivers of grants, policy advisors, members of
prestigious think tanks and organizations, and pundits, depends on being good
at promoting whatever aligns with the elite's interests.

The scientific parts of economics are merely applied math (including game
theory), and quite basic at that.

The rest are establishment ideology plus/minus some personal improvising to
the left or right, and obscurantism, - just like "social science", "political
science", "psychology", "architecture" (the conceptual part that gave us the
20th century visual atrocities) and so on.

For real science one needs to stick to physics, chemistry, engineering, and
other "hard" stuff.

Heck, even Computer Science itself (whose actual scientific part is basically
math as well), is taught, and practiced like fashion, based on commercial
trends du jour...

~~~
mcguire
To an extent, I suspect you're right.

I further suspect that economists, as a field, will continue to claim that
their models, metrics, theories, and policy advice are good, while complaining
about the inexplicable rise of populism, right up until somebody sets up a
guillotine in front of Goldman-Sachs. (Populism is easy to explain: the
peasants are revolting.)

~~~
geezerjay
Populism is a major problem, and one which is based on unscrupulous
politicians taking advantage of the ignorance and prejudice while promissing
unrealisting and outright impossible solutions to problems that they
missrepresent and even invent.

And that has absolutely zero to do with science in general and economic models
in particular.

Time and again we see populist politicians fanning up the masses with anti-
capitalist rhetoric that is absolute bullshit from the start, and they
routinely attack economic problems by disregarding basic facts of nature with
assertions involving silly conspiracy theories always attributing blame to
their political opponents and scapegoats. Every time this happens it does not
mean that science failed or that there is a massive conspiracy theory keeping
the socialist man down. It just means that disregarding science has serious
consequences that no totalitarian regime can quelsh no matter how many
gillotines they set up in feont of Goldman-Sachs.

~~~
coldtea
> _Populism is a major problem, and one which is based on unscrupulous
> politicians taking advantage of the ignorance and prejudice while promissing
> unrealisting and outright impossible solutions to problems that they
> missrepresent and even invent._

Isn't that also what the elites (say, the 10%-ers) have historically also said
for realistic and entirely possible solutions (like beheading the King and
building a democratic state, or stopping segregation, or extending the vote to
women, or adding labor protections, or welfare, and so on), that they felt
were beneath them, because they were demanded by the populace and went against
their interests as a class?

Every modern right has been established by struggles, parties, mass revolts,
and so on, deemed "populist", "vulgar", "irresponsible", and "destructive" at
the time by those opposing them.

Every single one of them.

~~~
pas
Pretty big difference between deemed populist by the king and deemed populist
by the middle class, by secular opposition to that populism, and so on.

That said, you are right, the struggle is real. But it's likely not the 10%,
but probably less or a lot more, depending on how you view people who benefit
from the status quo. For example anyone who buys a new car, plans a trip,
ponders over a job offer, submits an offer on a tender has options to try to
rock the boat. Greener, more fair, more just options are usually there - but
of course those usually also require some kind of trade off. Do we want
something that's good on the long term, or something that's good on the short
term?

And based on how many options people have and how little they value the long
term, the global perspective we could classify them into different kinds of
beneficiaries of the status quo. And it's enough for a small cabal of
cooperating power brokers to benefit themselves to and unimaginably huge
degree. As in significant portion of the world's "income" goes to people who
had the option to enrich themselves and took it.

Sure, this can be complicated further by looking at those who enriched
themselves then proceeded to spend those riches on goals that ultimately help
others - but these deviations are usually small, and again, ultimately, can be
factored in.

However, sometimes beheading kings is contraproductive as you get a civil war.
Similarly just adding more voters does not magically lead to a fairer outcome.
The classic example is adding more and more cannibals will eventually lead to
a bit of a pickle.

------
microcolonel
Because he's wrong, and people who stake their livelihood on these things (not
academic economists) know it and act accordingly.

~~~
burlesona
Genuinely asking: why is he wrong?

~~~
xenophonf
There are problems with the data and methods Piketty used. The Wikipedia entry
for the book has a summary including multiple references:

[https://en.wikipedia.org/wiki/Capital_in_the_Twenty-
First_Ce...](https://en.wikipedia.org/wiki/Capital_in_the_Twenty-
First_Century#Criticism)

------
patrickg_zill
I picked up his book and in 45 seconds figured out he was wrong...by looking
at the index.

He has an entire collection of stats and measurements, but, no where in the
index is the gold standard mentioned.

Changing from a silver and/or gold based monetary standard to a fully-fiat
model as almost every government did at some point in the first half of the
20th century, should have resulted in various adjustments; adjustments that he
should have mentioned and discussed.

(Heck, even changing from the Deutsch Mark to the Euro resulted in price
changes for Germans.)

If he did discuss it but they made a lousy index, then, please give me page
numbers in his book and I promise to re-examine...

