This is an example of the sort of writing that I think serves only to isolate the left-wing blogosphere. Brad starts out innocently enough:
Piketty’s argument is detailed and complicated. But five points seem particularly salient:
1. A society’s wealth relative to its annual income will grow (or shrink) to a level equal to its net savings rate divided by its growth rate.
2. Time and chance inevitably lead to the concentration of wealth in the hands of a relatively small group: call them “the rich.”
…
Pointer from Mark Thoma. Read the whole thing. He then proceeds to heap scorn on Piketty’s critics. He does not cite any criticism of the second point, which is really the heart of the criticism that I have made. I think that many others have criticized point (2), also, but let me just speak for myself.
To reiterate my criticisms:
1. The distinction between capital income and labor income that underlies the forecast for wealth concentration is unrealistic. Most of “labor” income is a return to capital: human capital, social capital, institutional capital, and so on. Much of “capital” income is a return to risk. Brad himself has pointed out that the rate of return on private capital includes a huge risk premium.
2. Several critics (although I believe I was the first) have pointed out that if you believe r is greater than g, then social security is a giant rip-off and should be privatized immediately. Instead, in one of the most disingenuous arguments in the book, Piketty dismisses privatizing social security because of the high risk embedded in capital income. What is disingenuous is that this risk in private investment undermines Piketty’s main thesis.
3. I think it is pretty difficult to reconcile the risk component of investment with a model in which inherited wealth comes to dominate. Instead, given the relatively low rate of return on risk-free assets, my line is that the inheritors shall be meek.
The Capital Asset Pricing Model notwithstanding, it is idiosyncratic risk that makes you rich. People like Bill Gates and Mark Zuckerberg take large idiosyncratic risks that pay off. For wealth to become concentrated into an oligarchy, their heirs will have to invest in ways that outperform future idiosyncratic risk-takers. That strikes me as implausible.
Finally, I have to quote this from DeLong:
To be sure, everyone disagrees with 10-20% of Piketty’s argument, and everyone is unsure about perhaps another 10-20%. But, in both cases, everyone has a different 10-20%. In other words, there is majority agreement that each piece of the book is roughly correct, which means that there is near-consensus that the overall argument of the book is, broadly, right.
If I understand this paragraph, what Brad is saying is that unless a majority of Piketty’s reviewers harp on a particular fault, then there are no faults in the book. That is certainly a charitable approach to assessing someone’s work.
I think that taking the most charitable approach to people with whom you agree and taking the least charitable approach to those with whom you disagree is a path that leads to intellectual isolation.
Thanks to compounding, someone doesn’t have to be very wrong to be VERY wrong! Chance is a fickle benfactor, and lucky for us, everyone dies eventually!
1 isn’t unrealistic or realistic, just a partition between what can be transferred and what can not be. 2 is an argument only at the social level since returns to scale would prevent this from being effective at an individual level. 3 lotteries offer large winnings but only to a few, while even fewer of those are able to hold on to it, this does not say others won’t, all the others have to have is ownership of what those few will want. Idiosyncratic risk may make you rich but is unlikely to keep you there; for that you need to transition to market risk before it makes you poor. No there is no risk free path to proportional wealth or more, only to an absolute diminishing proportion. No faults? Sounding petulant now?
I haven’t read the book, but here’s something I’ve wondered. In Piketty’s calculation for r does he include the stock market? And if so, how does he do that? My concern is survivor bias – does he look at indices and ignore all the companies that have returns of negative 100%?
Very good point Warren – I’ve been wondering the exact same thing myself. All the capital/wealth destruction that takes place – is there a huge survivorship bias here As someone who invests in the stock market I can see how beating the averages ain’t straightforward over time.
As a libertarian I’ve been quietly pleased by all the fuss an fawning from the Left over Piketty. It’s horribly flawed in a number of ways and proves, quite frankly, how wrong/blind they are. And I thought that all that matters is a robust theory of property rights! … no, don’t even need that!!
Your last paragraph is gold.
DeLong ought to be embarassed to have written that last paragraph you quoted.
I can’t believe anyone with even a trace of scientific credibility could have written that last quote from DeLong. Astonishing!
DeLong isn’t doing economics or even intellectual analysis. What he does, and does well, is play very hard for Team D. Team D wants, always, more taxes and more government. Piketty’s book provides a convenient rationale so obviously it must be brilliant.
It’s an interesting knowledge problem. If you had built a rocket ship, and pretty much everyone believed that at least one critical piece would fail, but there was no consensus on which one, would that leave you more confident or less confident that the rocket would make it to orbit?
I guess you’d have to know the background rate of disagreement with other similarly situated projects to know whether “everyone disagrees with 10-20%” is right or wrong. (Assuming you trusted Brad to survey and represent “everyone’s” opinion, which is suspect.)
On the other hand, when you read the whole thing, Brad might only mean that everyone “in the center-left American communities where [Brad] live[s] and work[s]” thinks Pieketty is broadly correct. If that’s what he means, that seems fair.
I agree with Brad’s criticism of the Pieketty skeptics though – pretty much everyone seems intruigued by the argument, and is interested in testing and unpacking the assumptions.
Slight correction. I meant that I DISAGREE with Brad’s criticism of the Pieketty skeptics. (Sorry).
I’m always so disappointed when I click on a post about DeLong, and DeLong hasn’t posted a crytpic, condescending comment in return. Come on, Brad! Don’t let us down!
I would think that all the excitement exhibited by the Left over Piketty should have a tendency to discourage private investment. Just seeing how pumped up they get over the idea of confiscating wealth should make an rational investor a little nervous. And even if the notion of actual confiscation seems remote, the knowledge that a large group of people who would be advising a president like Hillary or Elizabeth Warren are in favor of it means that there is a higher risk of much higher tax rates at some time during the life of any potential investment. That means fewer investments.