Tyler Cowen On Piketty

See Why I am not persuaded by Thomas Piketty’s argument. Excerpts: 

1. If the rate of return remains higher than the growth rate of the economy, wages are likely to rise and quite a bit.  ...namely that capital accumulation bids up wages.  Piketty suggests we are headed back to something resembling the 19th century.  Well, that was a pretty good time for the average working person in Western Europe"

"... the (risk-adjusted) return on capital hasn’t been that high lately and it has been falling for decades.  This combination of variables — low returns and stagnant wages — does not refute Piketty but it doesn’t exactly fit into his mold either."

2. The crude seven-word version of Piketty’s argument is  “rates of return on capital won’t diminish.”  Is that really such a powerful forecast?  I say over the next fifty or one hundred years we don’t have a very good sense of which factors will show diminishing returns and which will not.   At many points in the Piketty book he seeks to have it both ways: loads of caveats, but then he falls back into the basic model, and he and his defenders cite the caveats when it is convenient.

3. Piketty’s reasons why rates of return on capital won’t diminish are fairly specific and restricted to only a small share of capital.  He cites advanced financial management techniques of the very wealthy and also investing abroad in emerging economies.  Neither of these covers most capital, and thus capital returns as a whole may not be so robust.    Again, is there any particular reason to think either of these factors will outrace the basic logic of diminishing returns, They might, to be sure.  They also might underperform.  In any case this is pure speculation and Piketty’s entire argument depends upon it.

4. The actual increases in income inequality we observe are mostly about labor income, not capital income.  They don’t fit easily into Piketty’s story"

5. Piketty converts the entrepreneur into the rentier.  To the extent capital reaps high returns, it is by assuming risk (over the broad sweep of history real rates on T-Bills are hardly impressive).  Yet the concept of risk hardly plays a role in the major arguments of this book.  Once you introduce risk, the long-run fate of capital returns again becomes far from certain."