15 May 2014

Larry Summers Unwittingly Blows Up Piketty’s Whole Book

Capital & Interest, Shameless Self-Promotion 30 Comments

…but he still thinks Piketty should get a Nobel Prize. The gory details are at Mises Canada. An excerpt:

Piketty wants to scare his readers into believing that the percentage of income each period going to the capitalists will increase over time, meaning that “the workers” will earn a lower portion of total output in, say, 2100 than they do right now. So he needs to argue that the parameters on his assumed production function are such that an increase in the capital stock of x% will lower the return to capital “r” by less than x%. In the jargon of economists, Piketty needs to argue that empirically, the “elasticity of substitution” is greater than 1.

Piketty does indeed try to show this, by pointing to some of the high-end estimates in the literature putting the elasticity at 1.25. Yet as Rognlie the MIT grad student points out, this is confusing gross with net returns. If you are a capitalist who owns a bunch of machines, your *net* income each year is equal to

==> your gross rental income from your machines

==> minus the drop in the market value of your machines, either due to a change in prices or physical depreciation.

So as Rognlie and now Larry Summers confirm, there are no empirical estimates of an elasticity in substitution being so much above 1 that the share of *net* income (after accounting for physical depreciation) going to capitalists would be expected to indefinitely increase over the coming decades, as the capital stock accumulates.

30 Responses to “Larry Summers Unwittingly Blows Up Piketty’s Whole Book”

  1. Major-Freedom says:

    The lesson kids is that if you are going to publish a book advocating for a worldwide, state coordinated theft of capital on a grand scale, and you purport to have an intellectual, economic justification for it, then you had better be darn sure you have the theory correct.

    Coming from a Marxian theoretical perspective, Piketty was guaranteed to make an egregious error, it was only a matter of time.

    Personally, I am secretly delighted that Piketty’s has become so popular. For it is a great opportunity to show the world just how absurd Marxism really is!

    • Bob Murphy says:

      Well, I’m not even sure it’s Marxist though. It’s more like, crude neoclassical mathematical economics, with none of the caveats.

      • Major-Freedom says:

        These are my reasons. Piketty believes:

        1. Capitalism is a historical category. He treats capitalism historically in his book. He does not approach it analytically.

        2. He believes capitalism suffers from “contradictions”. Piketty believes that r>g is “the central contradiction of capitalism.” Writers who use the phrase “contradiction” when critiquing capitalism, are doing so via Marx, intentional or not.

        3. This “contradiction” will, if left unchecked, build up over time until some “radical shock” takes place.

        4. The rate of profit continually falls in capitalism. Piketty doesn’t think this fall is general like Marx did, in that Piketty thinks it’s a special case, but still, you can see this is an extension to Marx.

        5. That capitalism has a force of its own over and above human intervention. Capital has an inherent life force of its own.

        Very few Marxists of today are explicit and solely devoted Marxists. Rather, they believe Marx’s ontology about capitalism is generally on the right track, and only needs some updates here and there to make it relevant to today. No drastic changes. Piketty does criticize Marx on a number of points, such as underestimating productivity growth (i.e. technological progress). But Piketty’s anti-capitalism is on a bedrock of Marxism.

      • valueprax says:


        I agree with MF. See my comments to Phil Greenspun and his “Bwa?” response (at least, that was how I interpreted his response… and “Bwa?” doesn’t imply he’s an idiot, it implies he was caught totally off-guard as to why I leveled the criticism I did.)


        • Major-Freedom says:

          In the scheme of Marx the “material productive forces” are a superhuman entity independent of the will and the actions of men. They go their own way that is prescribed by the inscrutable and inevitable laws of a higher power. They change mysteriously and force mankind to adjust its social organization to these changes; for the material productive forces shun one thing: to be enchained by mankind’s social organization. The essential content of history is the struggle of the material productive forces to be freed from the social bonds by which they are fettered.

          – Mises.

          The above is what Piketty encapsulates with “r>g”.

  2. Major-Freedom says:

    Murphy, I agree that Summers point about net as opposed to gross returns to capital is sufficient to blowing up Piketty’s thesis, however he made an additional point, and it seems you are on board with it as well, and that additional point concerns the notion of diminishing returns to capital.

    The law of diminishing returns is being misused by Summers. It is not the case that diminishing returns takes place in general when capital increases, that is to say, in the aggregate and continuously regardless of what else is taking place when capital increases. Yes, it is true to say that ceteris paribus, an additional unit of capital will enabke the production of goods that is less than the rate of increase in the production of goods that takes place with a supply of capital a unit less. For example, yes, it is true that adding more tractors used on the same plot of land with the same number of workers will have diminishing returns.

    But, in the real world economy, ceteris paribus doesn’t necessarily hold. The law of dimishing returns is structured to hold technology fixed. Diminishing returns is not actually a necessary outcome of capital accumulation. With technological progress, capitalists can squeeze more output from the same physical quantity of capital (measured in weight or volume or some other physical description). Capital can be improved with technology, and it is possible, and indeed has been taking place so far in this country for the last 300 years, that returns to capital need not ever diminish with additional capital. As long as technology progresses, we will never reach the point of diminishing returns. If for some reason technological progress stopped, then dimishing returns would be felt.

    How this relates to Summers critique of Piketty is not anything significant, since Summer’s point is that even if diminishing returns took place in the aggregate, the existence of depreciation is enough to blow Piketty’s book up.

    Just wanted to add this, because I would be dejected if everyone took it for granted that capital accumulation necessarily leads to diminishing returns as a rule.

  3. Transformer says:

    Oddly, Piketty’s theories about the possibility of the rich getting constantly richer , and r being greater than g indefinitely hold up quite well in an Austrian framework.

    • Major-Freedom says:

      Of course it does. Each and every possible history (future) holds up well with Austrian theory.

    • Bob Murphy says:

      Oddly, Piketty’s theories about the possibility of the rich getting constantly richer , and r being greater than g indefinitely hold up quite well in an Austrian framework.

      How else are the rich supposed to build the roads?

      • Transformer says:

        But apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what has capitalsim ever done for us?

        • Bob Murphy says:

          Are you doing a Monty Python thing there? (I’m genuinely asking, I am getting lost in our wit.)

          • Transformer says:

            yes, its a direct quote from The Life of Brian with “capitalist” substituted for “Romans”. (I have put a youtube link below).

        • Major-Freedom says:

          Everything you listed, at a superior rate and extent of improvement?

          I mean, surely you would not say that in the former Soviet Union, because government monopolized the production of most everything, that this means free markets could not have done so better and at a higher rate?

  4. Major-Freedom says:

    Piketty, in collaboration with others, has spent more than a decade mining huge quantities of data spanning centuries and many countries to document, absolutely conclusively, that the share of income and wealth going to those at the very top—the top 1 percent, .1 percent, and .01 percent of the population—has risen sharply over the last generation, marking a return to a pattern that prevailed before World War I. There can now be no doubt that the phenomenon of inequality is not dominantly about the inadequacy of the skills of lagging workers. Even in terms of income ratios, the gaps that have opened up between, say, the top .1 percent and the remainder of the top 10 percent are far larger than those that have opened up between the top 10 percent and average income earners. Even if none of Piketty’s theories stands up, the establishment of this fact has transformed political discourse and is a Nobel Prize-worthy contribution.

    Why can’t the gap between the top 0.1% and the top 10% also be explained in terms of “lagging skills” of the top 10% relative to the top 0.1%?

    I am not saying that this has been the actual cause for the gap, I am just saying that Summers seems to be rejecting this theory a priori as if it cannot explain such a gap, like the theory is false on its face.

    • Tel says:

      Why not explain it in terms of the very poor nations like Bangladesh, and Vietnam who are notably less poor now than they were a generation ago? Capitalism has distributed the wealth away from the ossified and self-entitled Western citizens and towards those nations willing to give their citizens some measure of opportunity.

      • Tel says:

        I honestly was not copying this guy, but anyhow…

        On a global scale, in terms of the degree of inequality which exists between nations, the past 50 years have seen a huge movement towards a much more equal world. And it is precisely the institutional structure of capitalism, of companies motivated, at least in part, by profit, operating in a market-oriented system, which has brought this about. A system which England introduced to the world in the late 18th century with the Industrial Revolution.


  5. Gamble says:

    Picketty may have okay concerns but his causes are way off.

    Tax policy sends my money to the wealthy, keeping me poor, not capitalism.

    Capitalism is the only reason I have anything. Government spending increases my wealth by nothing.

    French, other than Bastiat and Proudhon…

  6. Matt M (Dude Where's My Freedom)) says:

    I’m really beginning to wonder whether this is worth even thinking about.

    Like, I guess *someone* has to do this so I’m glad Bob is doing it, but for me, what’s the point exactly?

    The leftists are going to laud and celebrate Picketty because he comes to the conclusions they like. They don’t *care* that his framework is wrong. It doesn’t matter. His spotlight is already starting to fade from where it once was. By the time you’re all done carefully putting together the full critique of the seemingly dozens of mistakes he made, Jon Stewart will be interviewing the next leftist academic flavor of the month.

    Meanwhile, Austrians (and probably anyone with a slight sympathy towards free markets, I’ll include tea partiers in here too) never were convinced by anything he said in the first place. Everyone shrugged it off as “another leftist academic socialist who hates the rich, yawn.”

    My desire to bother learning about what this guy says is decreasing every day. I fail to see the point. Nobody on either side cares about the technical problems in his work. Everyone’s mind is already made up.

    • Major-Freedom says:

      I suggest you begin to develop a little more respect for individuals peacefully responding to academic works, the way they want.

      They are not doing this primarily for you. They are doing it primarily for themselves. If you can’t figure out how someone’s actions benefit you, it’s not necessarily in vain.

      • Matt M (Dude Where's My Freedom)) says:

        It’s not so much a criticism as it is a genuine question as to what you guys think you stand to gain from this. Who’s mind will be changed? I still feel like there’s something to all of this that I’m missing…

  7. Bob Roddis says:

    Actually, the MMTers have noted that Piketty is really more of an Austrian crank:

    In reality, the authorities control the interest rate and no amount of inflation will move it beyond the boundaries in which they set it. High inflation may be an evil in its own right but let’s not fool ourselves with some sort of old time religion. Economists like Piketty would do well to give these issues a bit more thought before spooking the general public with the boogeyman of the supposed burdens of public sector debt and the supposed unsustainability, reminiscent of the doomsday warnings of the Austrian cranks, of eroding it through a healthy inflation.


    • Tel says:

      Piketty was talking about the “real” interest rate and MMTers are talking about the nominal interest rate, and even then only in one particular currency.

  8. Bob Roddis says:

    FYI: Tom Woods podcast with Bob Murphy discussing Piketty has been posted:


    It’s also free on iTunes.

  9. Transformer says:

    This is only indirectly related to this discussion but it is so great I just had to link to it.


  10. guest says:

    consultingbyrpm blog tag piketty

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