Larry Summers’ review of Thomas Piketty’s book has finally arrived, and he savages it. Frankly, it’s hard to find any aspect of Piketty’s theory that escapes Summers’ disdain. Here are excerpts from Summers’ review:
“I have serious reservations about Piketty’s theorizing as a guide to understanding the evolution of American inequality.”
“Piketty argues that as long as the return to wealth exceeds an economy’s growth rate, wealth-to-income ratios will tend to rise, leading to increased inequality…. This rather fatalistic…view of capitalism can be challenged on two levels. It presumes, first, that the return to capital diminishes slowly, if at all, as wealth is accumulated and, second, that the returns to wealth are all reinvested. Whatever may have been the case historically, neither of these premises is likely correct as a guide to thinking about the American economy today.”
“Economists universally believe in the law of diminishing returns. As capital accumulates, the incremental return on an additional unit of capital declines…. Piketty argues that the economic literature supports his assumption that returns diminish slowly (in technical parlance, that the elasticity of substitution is greater than 1), and so capital’s share rises with capital accumulation. But I think he misreads the literature by conflating gross and net returns to capital…. I know of no study suggesting that measuring output in net terms, the elasticity of substitution is greater than 1, and I know of quite a few suggesting the contrary.”
“The determinants of levels of consumer spending have been much studied by macroeconomists. The general conclusion of the research is that an increase of $1 in wealth leads to an additional $.05 in spending. This is just enough to offset the accumulation of returns that is central to Piketty’s analysis…. [For example,] less than one tenth of the 1982 [Forbes’ 400 list of wealthy Americans] was still on the list in 2012 despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year…. In a similar vein, the data also indicate, contra Piketty, that the share of the Forbes 400 who inherited their wealth is in sharp decline.”
“The gains in income of the top 1 percent substantially represent labor rather than capital income, so they are really a separate issue from processes of wealth accumulation…. Some large part of Bill Gates’s reported capital income is really best thought of as a return to his entrepreneurial labor…. The executives who make the most money are not for most part the ones running public companies who can pack their boards with friends [i.e., Piketty’s chief theory for the cause of rising income inequality]. Rather, they are the executives chosen by private equity firms to run the companies they control.”
“By opening up for debate issues around the long-run functioning of our market system, Capital in the Twenty-First Century has made a profoundly important contribution”“…This is not to say, however, that all of its conclusions will stand up to scholarly criticism…in the short run or to the test of history in the long run.”