One of the first things on my agenda was to read
Deirdre McCloskey's 50+ (!) page review of Piketty's
Capital in the 21st Century.
Many people in the blogosphere and on Facebook have talked about it
and, on April 14, 2014, our own guest blogger, Alberto Mingardi,
presciently wrote "my ideal candidate [for a review of Piketty] would be Deirdre McCloskey.
Although I'm a big fan of McCloskey qua economist and I'm a fan of
her writing, I'm not as big a fan of her writing as many of my
free-market friends--I have in mind Pete Boettke in particular--are. I
sometimes find myself saying, when reading McCloskey, "Quit being so
cute and get to the point." So when I saw that the review was over 50
pages long, I thought, "OMG, there she goes again."
I was wrong.
McCloskey's review is a masterpiece. She beautifully weaves together
economic history, simple price theory, basic moral philosophy, and
history of economic thought. Whereas I had mentally put aside an hour
to read and think, it took only about 20 minutes. I highly recommend
it.
Some highlights:
The Data
Yet in fact his own capta, his own
things-ingeniously-seized by his research, as he candidly admits without
allowing the admission to relieve his pessimism, suggest that only in
Canada, the U.S., and the U.K. has the inequality of income increased
much, and only recently. "In continental Europe and Japan, income
inequality today remains far lower than it was at the beginning of the
twentieth century and in fact has not changed much since 1945" (p. 321,
and Figure 9.6). Look, for example, at page 323, Figure 9.7, the top
decile's share of income, 1900-2010 for the U.S.A., the U.K., Germany,
France, and Sweden. In all those countries r > g. Indeed, it has been
so, with very rare exceptions, since the beginning of time. Yet after
the redistributions of the welfare state were accomplished, by 1970,
inequality of income did not much rise in Germany, France, and Sweden.
In other words, Piketty's fears were not confirmed anywhere 1910 to
1980, nor anywhere in the long run at any time before 1800, nor anywhere
in Continental Europe and Japan since World War II, and only recently, a
little, in the United States, the United Kingdom, and Canada (Canada,
by the way, is never brought into his tests).
Lousy Predictions
The inconsequence of Piketty's argument, in truth, is to be
expected from the frailties of its declared sources. Start by adopting a
theory by a great economist, Ricardo, which has failed entirely as a
prediction. Landlords did not engorge the national product, contrary to
what Ricardo confidently predicted. Indeed the share of land rents in
national (and world) income fell heavily nearly from the moment Ricardo
claimed it would steadily rise. The outcome resembles that from Malthus,
whose prediction of population overwhelming the food supply was
falsified nearly from the moment he claimed it would happen.
Incidentally, this same point about land rents was one I made in
my criticism of Tyler Cowen's book,
The Great Stagnation.
The Pyramid (How the Rich Innovators Get Only a Small Fraction of the Value they Create)
The economist William Nordhaus has calculated that the
inventors and entrepreneurs nowadays earn in profit only 2 percent of
the social value of their inventions. If you are Sam Walton the 2
percent gives you personally a great deal of money from introducing bar
codes into stocking of supermarket shelves. But 98 percent at the cost
of 2 percent is nonetheless a pretty good deal for the rest of us. The
gain from macadamized roads or vulcanized rubber, then modern
universities, structural concrete, and the airplane, has enriched even
the poorest among us.
Piketty's Failure to Count Human Capital
For example--a big flaw, this one--Piketty's definition of
wealth does not include human capital, owned by the workers, which has
grown in rich countries to be the main source of income, when it is
combined with the immense accumulation since 1800 of capital in
knowledge and social habits, owned by everyone with access to them.
Therefore his laboriously assembled charts of the (merely physical and
private) capital/output ratio are erroneous. They have excluded one of
the main forms of capital in the modern world. . . . He asserts
mysteriously on page 46 that there are "many reasons for excluding human
capital from our definition of capital." But he offers only one: "human
capital cannot be owned by any other person." Yet human capital is
owned precisely by the worker herself. Piketty does not explain why
self-ownership à la Locke without permitting alienation is not
ownership. If I own and operate improved land, and the law prevents its
alienation (as some collectivist laws do), why is it not capital?
Certainly, human capital is "capital": it accumulates through abstention
from consumption, it depreciates, it earns a market-determined rate of
return, it can be made obsolete by creative destruction.
Elementary Economic Error
"To be sure, there exists in principle a quite simple
economic mechanism that should restore equilibrium to the process [in
this case the process of rising prices of oil or urban land leading to a
Ricardian Apocalypse]: the mechanism of supply and demand. If the
supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which would lead to a decline in its price."
The (English) words I italicize clearly mix up movement along a demand
curve with movement of the entire curve, a first-term error at
university.
I caught this too, when I read Piketty, but I didn't mention it in
my review
because I failed to see the enormity of the mistake that this one
elementary mistake of Piketty's led to. But McCloskey does see it. See
what she does with it, on pages 91-93.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.