
Piketty's Three Big Mistakes - tptacek
http://www.bloombergview.com/articles/2015-03-27/piketty-s-three-big-mistakes-in-inequality-analysis
======
elchief
You can't say the rich have lots of land, then complain about not taking
depreciation into account. Land doesn't depreciate. This guy is just searching
for reasons to dismiss Picketty.

Edit: If you didn't read the article: "Rognlie points out that almost all of
the increase in the value of capital over Piketty’s timeline comes from land"

[http://www.accountingcoach.com/blog/why-isnt-land-
depreciate...](http://www.accountingcoach.com/blog/why-isnt-land-depreciated)

~~~
Perceval
There is a long-standing distinction within classical political economy of
differentiating between land, labor, and capital holding classes. Adam Smith,
David Ricardo, and Karl Marx among many others make this distinction.

Capital holders face depreciation. Land holders do not (at least, not to the
same degree). Piketty looks at the asset mix of the rich over time, arguing
that the rich have predominantly shifted away from land holding toward capital
holding. Pre-WWI most wealth was drawn from land holdings, whereas Post-WWII
most wealth is drawn from capital holdings and super incomes.

The argument about the reconcentration of wealth from the 70s and 80s through
the present ought to be affected if depreciation of capital were much higher
than Piketty allowed for in his model—especially since the rich mostly hold
capital now.

If the wealth increase over time has been coming from land and not capital
(which faces depreciation, while land does not), that's an interesting and
important fact, because it affects the policy recommendations that flow from
Piketty's argument. Piketty's conclusions call for a global progressive wealth
tax and a global progressive income tax. What the article points out is that
if most of the wealth increase is coming from land, a different type of tax
might be the best way to target the concentration of wealth—namely the
Georgist land-value tax instead of broader global wealth and income taxes.

It doesn't appear that the MIT student is just casting about to find reasons
to dismiss Piketty, rather these may be significant insights into the data
that affect the overall conclusions that we might draw from it. Just like
Piketty, Rognlie should be judged on the quality of his data.

~~~
ThomPete
Discussing his solutions is very different from discussing his evidence.

His evidence is sound but that does not mean his conclusions are or need to
be. IMO you could throw away the entire last part of the book and still have
one of the most important books written about capitalism.

Now all we need is someone who write one about technology which is the
elephant in the room and why I think Piketty is wrong about his proposals but
thats another story.

~~~
Perceval
I agree that his evidence is sound. But like any other constructed data set,
Piketty makes choices about measurement indicators and categories that are
open to challenge. The way that he composes his measures of wealth and capital
could be more nuanced, if those nuances make a significant difference in the
results produced by the models built on top of them. This MIT student seems to
be doing just that—arguing that the composition of land and capital in
measures of wealth need to be treated with more nuance, and that measures of
capital need to take account of depreciation in a different way than Piketty
does.

I make similar arguments in my dissertation about one of the longest-running,
most widely used data sets in my field. Sometimes the categorization of data
is misleading in certain ways that elides phenomena that are actually very
significant.

Piketty's construction of the data set is fantastic work. But it doesn't mean
that all the choices he made in constructing and categorizing the data are the
best choices that could have been made.

~~~
ThomPete
You are probably right about that but I don't think better choices would
change the result, but thats just my personal opinion.

------
ThomPete
Pikketys contribution is not his conclusion but the data that backs up the
conclusion.

Most people already knew what Pikkety concluded, they just didn't have
evidence for it. Now we do and until someone shows better evidence it's hard
to claim Piketty is making mistakes without most probably being politically
motivated to do so.

His solution on the other hand was an unnecessary but understandable addition
to the book.

And I say this as a European style liberal.

~~~
soneca
Please correct the typo _note_ for _not_ ; because this is most correct thing
that can be said about Pikkety's work.

His conclusions are arguable, and can even be dismissed. But the data he
collected and organized can and should be taken seriously and reworked. Yes,
revised, treated with different assumptions in mind. But dismiss his whole
work because he might be wrong on his final politic suggestions is a
disservice to the science (no matter how small amount of science there is in
Economics).

If you want to make Economics learn some things from hard sciences, you should
take Piketty's data seriously.

~~~
slowmovintarget
Unless the data itself is suspect, which it is.

[http://www.ft.com/cms/s/0/c9ce1a54-e281-11e3-89fd-00144feabd...](http://www.ft.com/cms/s/0/c9ce1a54-e281-11e3-89fd-00144feabdc0.html)

[http://www.nytimes.com/2014/05/24/upshot/did-piketty-get-
his...](http://www.nytimes.com/2014/05/24/upshot/did-piketty-get-his-math-
wrong.html)

[http://www.wsj.com/articles/alan-reynolds-why-pikettys-
wealt...](http://www.wsj.com/articles/alan-reynolds-why-pikettys-wealth-data-
are-worthless-1404945590)

It's interesting to see how many people so dearly _want_ his assertions to be
true.

~~~
ThomPete
Not at least you :)

Those claims have been discussed here before and they don't change anything
substantial.

------
Trumpet6
Piketty's big contribution is the creation of time series of top wealth
distribution going back to the ~1850. In the linked paper, all the time series
start at 1960 at the earliest, thus dismissing most of the new empirical data.

So whatever technical merit the critique has, it doesn't seem to concern
itself with the big picture results since it neglects the empirical work.

~~~
aetherson
Piketty's thesis is that the concentration of wealth in the permanent upper
class of the 1800's is the historical law, and that the mid-20th Century
prosperity of the middle class is a historical anomaly that was created by
unprecedented destruction of real property by the two world wars, and further
that now that the world wars are receding into history, we are returning to
the 19th Century status quo.

If post-1960 data does not show a return to the status quo, then that
undermines the core of Piketty's claims. Nobody is claiming that the 19th
Century had a strong middle class.

~~~
WDCDev
Economic and political conditions of the mid 19th century led directly to the
development of ideologies that we fought wars over in the first half of the
20th century.

I've always wondered whether humanity would enter a new cycle of competing
ideologies. Maybe we are...

------
vannevar
None of these arguments seems very strong. I don't believe that depreciation
costs are significant compared to the rate of growth in income among wealthy
individuals. No numbers are presented to support that hypothesis and
intuitively it seems unlikely. I don't see how the third point about landlords
cuts against Piketty's premise at all; on the contrary, it supports it.

Only the second point has some merit. It is possible that we're not measuring
real wealth growth, but merely the froth in an economic bubble. But again, I'm
not sure that historically that froth accounts for the disparity. Despite the
correction in 2008, the wealthy are still handily beating GDP growth over the
past 20 years.

~~~
vasilipupkin
you don't have to go by the blog post, but rather you can read Matthew
Rognile's paper, which goes into this in detail

[http://www.brookings.edu/~/media/Projects/BPEA/Spring-2015/2...](http://www.brookings.edu/~/media/Projects/BPEA/Spring-2015/2015a_rognlie.pdf?la=en)

------
lmm
I thought the land case was implicitly part of Piketty's critique already?

The equitable way to stop the rich getting disproportionately richer is to tax
other ways of gaining wealth - in particular investment income and changes in
property value - the same way we tax labour income.

~~~
yourapostasy
The mainstream Standard Model of economics generally replies to calls like
yours with:

1\. Investment income has already been taxed once labour income, it isn't
"fair" to tax it "again".

2\. Property value taxes drive out elderly on fixed income.

Soros' promotion of economic reflexivity broadly addresses these responses. As
a practical matter however, capital behind investment income (including
property interests) has generally captured sufficiently large sections of
political, legislative and regulatory infrastructures that you could
theoretically muster enough votes to get taxes ostensibly "raised", yet still
get defeated in detail when it gets down to brass tacks implementation in
those areas.

The way it works is if the political races cannot be tilted in favor of
sufficient numbers of legislators to dilute/destroy the implementation of the
vote through successive election cycles, then pressure through lobbying will
attempt to sway legislative processes (from standard lobbying tactics to
clamoring for parliamentary manoeuvres, etc.), and if the changes get through
that, then regulatory capture will work on diluting/nullifying enforcement.

It's not hopeless; go into it with eyes wide open.

------
ely-s
I don't see how any of these points directly threaten piketty's conclusion,
that "r > g is a force for divergence," at least as they are presented here.

The first counterargument is nothing new. It's in the Solow model for Pete's
sake! It only threatens the returns to capital as a theoretical conclusion in
the distant, long-run future (going off the Solow model). Piketty has made an
empirical argument off historical data.

The second paragraph saying most of r has come from capital gains in the
financial market just looks silly before the one saying most of capital gains
has been from an appreciation in land value. I don't know if that is how the
original argument goes.

~~~
vasilipupkin
r > g is definitely a force for divergence. my intuition was that it is
empirically unrealistic to expect r > g and Rognile's paper seems to provide
quantitative evidence for this intuition

------
skilesare
I explain many of the same things, but I don't think Piketty is 'wrong'. It is
our responsibility to address the current preference for 'on paper' capital
and keep it from getting out of control.

[https://vimeo.com/user17783424/review/122784294/439ab072b5](https://vimeo.com/user17783424/review/122784294/439ab072b5)
<-fixed

~~~
Brakenshire
Your vimeo link is broken for me.

~~~
skilesare
Thanks for the catch...I don't know why they do this to pro users.

------
gress
If these effects are strong enough to undermine Piketty's hypothesis then it
is incumbent upon Rognlie to run the numbers and show that they do otherwise
it's just more fud.

~~~
krrrh
Here's a link to the paper if you're interested:

[http://www.mit.edu/~mrognlie/piketty_diminishing_returns.pdf](http://www.mit.edu/~mrognlie/piketty_diminishing_returns.pdf)

------
fetbaffe
Most people just read Piketty to page 26 anyway. So anyone claiming they read
it, probably not.

The Summer's Most Unread Book Is… [http://www.wsj.com/articles/the-summers-
most-unread-book-is-...](http://www.wsj.com/articles/the-summers-most-unread-
book-is-1404417569)

""Capital in the Twenty-First Century" by Thomas Piketty: 2.4% Yes, it came
out just three months ago. But the contest isn't even close. Mr. Piketty's
book is almost 700 pages long, and the last of the top five popular highlights
appears on page 26. Stephen Hawking is off the hook; from now on, this measure
should be known as the Piketty Index."

------
PythonicAlpha
It seems to be some kind of new sport for economists and economy journalists:
Finding some errors in Pikettys book and writing about it as they had found
the stone of wisdom.

------
lotsofmangos
I'm not sold that the overhead of being a capitalist has risen as drastically
as is made out. Obsolete isn't the same as broken, no matter how low the
resale value.

------
jim_greco
You have to appreciate the impact that Piketty has made on economics. It's one
year later and columnists and academics are writing about the blog post of
students that have minor quibbles with his data or conclusions.

------
troyastorino
The original paper that Rognlie wrote:

[http://www.mit.edu/~mrognlie/piketty_diminishing_returns.pdf](http://www.mit.edu/~mrognlie/piketty_diminishing_returns.pdf)

------
tptacek
This is the story of how a grad student's blog comment at Marginal Revolution
appears to have blown up into one of the most influential critiques of Piketty
to date. The WaPo story linked here has more more detail as well.

------
vasilipupkin
Piketty's argument that capital will grow at a rate significantly faster than
GDP should seem weak to pretty much anyone who has ever tried to invest
reasonable size capital at a decent return. Think about it. How can returns
outpace gdp growth for a very long time ( obviously it can happen over a short
time horizon ) ? It would require some kind of magic bean that as an investor,
I would love to get a hold of

~~~
vasilipupkin
the person downvoting, be interested to hear an explanation of your reasoning
:)

~~~
the_gastropod
(I did not downvote). But have you read Pikkety's book? It pretty thoroughly
explains how capital grows more rapidly than GDP.

~~~
the_gastropod
What research? Even over this anecdotally chosen timespan, the S&P 500
returned 3.98% / year on average. That completely squashes GDP growth over the
same period.

~~~
vasilipupkin
no it doesn't. we've had 2 percent inflation over the same period.

~~~
mrow84
> over this anecdotally chosen timespan, the S&P 500 returned 3.98% / year on
> average

> we've had 2 percent inflation over the same period

So, still, return on capital "completely squashes GDP growth over the same
period" by twice as much, given your figure. No?

~~~
vasilipupkin
no, US real gdp growth and real S&P 500 returns have been basically in line in
the 2000s. And real S&P 500 returns are way lower than world GDP growth over
the same period.

Piketty assumes that technological innovations will raise returns on capital
while not really raising GDP by the same amount. This is a very zero sum game
view of the world, which I find strange. Do we really believe that rise of the
robots will not increase our GDP ? self driving cars will not increase GDP ?
better medical care will not increase GDP ? Maybe, but it doesn't seem
realistic

~~~
mrow84
Ah yes, sorry, I had a brain fart and confused growth and inflation...

As for Piketty's point on technological innovation, isn't it that it is one
possible mechanism to escape the capital trap, but only if the rents on the
resulting developments are low enough, and that historically they haven't been
because of investor's desire for returns?

~~~
vasilipupkin
I think his point is that technological innovation will result in transfer of
income from labor to investors that finance the innovation. It most certainly
will, but he skirts the issue that the innovation itself could very well
dramatically increase GDP !

~~~
mrow84
Isn't it more that there will be a transfer in the _share_ of income, rather
than the absolute amount - i.e. not ruling out a rise in absolute GDP?

