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Scott Sumner Learns the Truth About Piketty Firsthand

I just love it when I see people first read Piketty and post their reactions (on FB or blogs) to the effect of, “Wait a second… Is he really saying that? Am I missing something?” Scott Sumner has such a post; this is truly the third such post I’ve seen from a college professor in the last two weeks.

Here are some of Scott’s reactions:

I’ve started Piketty’s new book, but just finished the first chapter (intro.)  Here are a few initial observations:
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2.  He says that “all the historical data” shows that real wages in Britain did poorly in the first 1/2 to 2/3rds of the 19th century.  I’m no expert here, but that’s not what I was taught.  I was taught (at both Wisconsin and Chicago) that the data conflicted. Some data showed what Piketty claims, and some data suggested that real wages rose, that British workers did better than peasants, and also better than people on the continent.  Does anyone know whether all the data supports Piketty’s claim?

3.  He is rather dismissive of those he disagrees with.  At Econlog I extensively discuss his mischaracterization of Simon Kuznets’ views.  That’s the post to read if you are a visitor from MR and only have time for one.
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I had read numerous reviews of the book, pro and con, before I started reading it, so I was well aware of the importance Piketty placed on the r>g relationship. When I first heard about this model it struck me as absurd. I started reading the book, thinking Piketty would provide some sort of persuasive explanation for the model. After all, the book is been very well reviewed, for the most part. And yet right after these two paragraphs, here’s what I found:

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.

This is even more absurd than I expected. It does not logically follow that inherited wealth grows faster than output and income. It just doesn’t. It’s wrong. I really don’t know what else to say, other than it’s wrong. At some level the Piketty probably understands his claim was incorrect, as he contradicts himself in the very next sentence…

…However I do think it’s a big problem for Piketty’s book. If the book is a model plus data plus policy advocacy, then in my view he’s lost one third of the book in the opening chapter. In later posts I’ll let you know whether he collects the data that is most relevant to the issue of economic inequality, and whether he has good arguments for or against the standard remedy of a progressive consumption tax, with zero taxes on capital.

PS.  After writing this I noticed a book edited by Joel Mokyr has a article by Deirdre McCloskey that claims British real incomes rose by two and a half times between 1780 and 1860, but that’s an average, and doesn’t account for changes in income distribution.  Another article by Clark Nardinelli suggests that real incomes doubled between 1760 and 1860 and the share of income going to the bottom 65% fell from 29% to 25%.  But even that suggest a substantial gain for average people.  So I’m not sure that “all the historical data” shows what Piketty claims it shows.

For what it’s worth, in the comments of Scott’s post Mark Sadowski claims:

If anything, there’s been an epic duel (well, “epic” for academics) going on between the “optimists” and the “pessimists” on this very question since the early 1980s.

Lindert and Williamson (1983) argued that real wages soared after Waterloo. Feinstein (1998) and Allen (2001) argued that real wages were stagnant from 1780 and 1830 and after that they rose much more slowly than output. Gregory Clark (2005) used new price evidence to argue that real wages grew more rapidly than Feinstein and Allen thought. Allen responded in 2007 by combining Clark’s price index with Feinstein’s nominal wage estimates to push the pendulum back towards pessimism.

Read Allen’s introduction to get a flavor of the fight back and forth:

http://economics.ouls.ox.ac.uk/12119/1/paper314.pdf
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However, I would say that the consensus is that there is no consensus. For Piketty to say otherwise is interesting.

Now normally, when you have an academic book from Harvard University press, from a guy whom Larry Summers said should get a Nobel Prize for his work on historical inequality, versus some guy in the comments of a blog…you would trust the former on what the literature on historical inequality has to say. But I hope you’ll forgive me if I put my money on Sadowski.

I think Piketty’s fans at this point are treating his book as if it’s a commercial. Nobody gets upset when the ad man says, “Come to Piketty’s One-Stop Shop for All Your Class Warfare Needs. Our Data Can’t Be Beat!”