In 1971 I went to hear Ernest Mandel give a lecture at the LSE. He talked, as always, about the contradictions of capitalism, and the global forces that would drive it on to its eventual doom. Whenever an event seemed out of place in this determinist story, he put it down to the “dialectic of history”.
Thomas Piketty is a master dialectician. At several points in his book Capital in the Twenty-First Century one can read (eg. pp. 24, 90, 58, 168) qualifications to his main argument that are simply bulldozed aside in the onward march of history. The history that he constructs has a flimsy theoretical framework, and its empirical foundation has been put through the statistical equivalent of a blender. It is a big book, but diffusely, not densely, argued.
The analytical basis seems to be elementary neoclassical economics combined with a loose grasp of the economics of Malthus, Ricardo and Marx. He fails to recognise that Malthus has an underlying mechanism that links population growth to output and prices; while he entirely misses the point that Ricardo’s argument for free trade was linked to his analysis of the long run tendency of the rate of profit to fall. A deeper understanding of the arguments advanced by Malthus and Ricardo might have enabled him to develop a rather more complex and comprehensive story.
Later on in the book there is some discussion of the idea of “human capital”. This idea is an unfortunate metaphorical blind alley given its standard form by Gary Becker’s classic work of 1964, Human Capital. Becker here deployed lifetime returns to education and training over periods in the mid-twentieth century where life-chances depended mainly on nationality, involvement or not in military conflicts, or the sheer luck of being born in the West after the 1940s and not before. But instead of pointing to the essential vacuity of seeking precise aggregate estimates for “returns” to “investment” in “human capital”, Piketty wonders rather whether more data might clarify the picture (p. 223).
The same kind of problem characterises his use of various formulations related to the long-term growth of economies. The Cobb-Douglas production function, the Harrod-Domar growth model, the Solow growth model (the “Dual Sector” model of Arthur Lewis is not mentioned, but very relevant): these are all textbook tools for training students, not instruments for practical economic analysis. Picketty treats these very elementary models as direct ways of making sense of “long-run” trends in real economies, which trends owe a great deal to the highly-aggregated nature of the data he uses. For a Professor of Economics he has a very attenuated grasp of what economic analysis might offer.
Nonetheless, the prime weakness of this book does not lie in its rudimentary analytical framework, but rather in the way data is employed to account for the flux of economic inequality since the eighteenth century. Chris Giles in the Financial Times highlighted the way in which conclusions were drawn from smoothed data involving very few countries – that, essentially, the trends identified in the empirical evidence are in some cases created out of aggregated constructs. When this highly aggregated data is plugged into his simple ratios, it is no surprise that we see stable relationships over time. That is the outcome of the aggregation, not of the “analysis”. The level of aggregation at which Piketty is forced to work means that very often we are talking about averages of averages over long periods. That is one reason why this post suggests that he is the new Kondratiev, whose cyclical “long waves” rested upon price and income data of dubious reliability.
There is another reason to introduce the name of Kondratiev in this context. Piketty’s story is about long-run trends in “capitalism”. While there is a nod to Marx in the title of his book, he largely ignores Marx’s efforts at making sense of the new business cycle of the nineteenth century. Despite recent interest in the work of Joseph Schumpeter, who thought Business Cycles (1939) to be his magnum opus, there is only one passing reference by Piketty to Schumpeter, to his 1942 Capitalism, Socialism and Democracy. Even if Kondratiev’s own long waves of fifty or sixty years were provided with a better empirical foundation, the underlying problem with such long-term trends is usually the absence of a unitary cause demonstrably and consistently producing the observed effect. And if we have a number of causes, or different combinations of causes, are we really talking about the same effect?
As with Mandel, identifying a long-term trend which turns out to be made up of all sorts of apparently random and sometimes contradictory events tells us nothing about the origin, course and resolution of each event. The grand narrative of Piketty’s r > g sheds no light at all on the real processes by which “capital” in its broadest sense is accumulated, and also suffers random destruction – as, for instance, in the Savings and Loans crisis, the severe recession in the UK housing market from 1988 to 1996, the 1997 Asian crisis, the dotcom bubble, the Argentine default of 2001, and last but not least, the near collapse of the global financial system starting in 2007. And these are only some comparatively recent financial events that relate to issues of the “accumulation of capital” and its random destruction.
None of this is to deny that the fruits of the growth of the world economy since the early 1800s have been shared unequally, within and between nations. Argument about this issue among British economic historians goes back at least to the 1950s, when the issue of economic growth versus the distribution of income took the form of the “Standard of Living Debate”. To put this in perspective, we could ask today whether Robert Malthus with his £500 per annum, free house, coal and candles was not in fact better paid than any modern economist? Of course, the question makes little sense, mainly because changes to the structure of employment over time blurs trends in individual countries, let alone continents. So long as we depend on prices and incomes as key indicators of change in the “standard of living” over long periods of time and across large numbers of countries, the results will always be inconclusive.
They can however be augmented with other indicators to make more sense of changes in social and economic structure. Jane Humphries has for example recently applied modern estimates of human nutritional requirements to historical English households of differing sizes and structures. When compared with contemporary prices, she is able to draw conclusions about the level of current income, throughout the household life cycle, required for the basic needs of its members (Economic History Review Vol. 66 (2013) 693-714). In the early nineteenth century the question of inequality among European households can more or less be reduced in this way to the life-chances represented by nutrition and mortality. Humphries shines a bright light into such problems of inequality in early nineteenth-century England. In time, other factors come to play a major part, and then in turn give way to new markers: housing, sanitation, clean water, medical care, working hours, job security, education.
Income and price data have an important part in making sense of all this, but things quickly become very complex. Sensible argument over policy, including whether there is a need for any policy, requires that this complexity be preserved and properly understood. Whether such argument is best served by the identification of putative long-run trends is questionable; and a focus on such “trends” leads inexorably to a need for comprehensive “solutions”, like the global tax on capital which Piketty advocates in conclusion. For that, you would need H. G. Wells’ “world government”.