Finally, an economist on the left, Larry Summers, comes out and admits that the emperor, Thomas Piketty, has no clothes. In truth, Paul Krugman, Brad DeLong, and Robert Solow have already damned Piketty with faint praise. Like all serious reviewers, they acknowledge the quality of his historical data on the distribution of income and wealth. But they are far more qualified in their praise of his economic theories and policy prescriptions.
DeLong, for example, says that one serious complaint about the book is “that Piketty has no theory of what determines the rate of profit, and he badly needs one. And since he doesn’t have a real theory of the rate of profit, he doesn’t have a real theory of the rate of wages.” DeLong admits, “Piketty seems to need an additional argument here…that control over wealth shapes politics, and that politics will make sure that the rate of profit does not fall too far…. It seems to me that Piketty has a good case here. But I think he needs to make it….” In other words, Piketty fails to make an argument that is central to his thesis.
DeLong tries to make the case on behalf of Piketty by summarizing Suresh Naidu’s review of Capital in the Twenty-First Century: “Factors of production are no longer paid their marginal products. Instead, wealth controls government. Government sets barriers to keep those kinds of property that the wealthy control safe from competition and earning their rents. The government is an executive committee for managing the affairs of the ruling class.” But DeLong admits that “the problem for Piketty” is that this argument is “only plausible.”
Even worse, Piketty tries to make the related case that increasing income inequality, which is actually the chief driver of growing wealth today, is the result of crony capitalism—namely, public company boards giving CEOs undeserved pay raises. This is essentially the same dynamic DeLong evokes to explain how a surplus of capital could, nevertheless, continue to earn high returns. But Krugman, in his review, admits that “there’s a lot to be said for this diagnosis, but it clearly lacks the rigor and universality of Piketty’s analysis of the distribution of and returns to wealth”—the very (lack of) analysis DeLong criticizes. Krugman further acknowledges that the rise of the 1 percent, “it turns out, has happened for reasons that lie beyond the scope of Piketty’s grand thesis”—i.e., for legitimate economic reasons and not reasons of crony capitalism. Krugman even goes so far as to call Piketty’s analysis of growing income inequality “a sort of intellectual sleight of hand” that “detracts from [the book’s] achievement.”
In a later posting, Krugman explains “why Capital in the Twenty-First Century is having such a big impact.” Rather than praise Piketty’s contributions to economic theory and analysis, Krugman conspicuously restricts his praise to the usefulness of Piketty’s historical data of growing income and wealth inequality.
Solow takes a less obvious tack. He attempts to explain Piketty’s theoretically possible but highly unlikely scenario in which return on investment remains higher than the rate of growth, regardless of the need for investment, without commenting on its low likelihood. Then, he covers himself with a clever question, cautioning the reader about a more likely scenario, while not admitting it is more likely—i.e., that the return on investment remains higher than the growth rate only because the economy will grow faster with more investment relative to GDP. He asks, “Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income.”
Between Summers’ savaging of the book, other analysis showing Piketty failing to split productive assets from real estate (which reveals no growth in assets relative to GDP), and serious liberal economists systematically hedging their praise, the distance between Piketty’s theories and serious economics continues to grow.