Edward Conard

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Piketty Overlooks the Circumstantial Nature of Economics

Despite the implausible economic theory underlying Capital in the Twenty-First Century (as addressed here, here, here, and here), Thomas Piketty nevertheless makes a valuable contribution by questioning Simon Kuznets’ theory that income becomes more equally distributed as economies grow more prosperous. Instead, growing income equality (and inequality) appears to be highly circumstantial.

When the U.S. economy prospered in the 1950s and ‘60s by educating its previously uneducated but talented workers, mechanizing unskilled jobs, and moving its rural population to inherently more productive cities, income equality increased. Today, however, when information technologies have opened a window of opportunities that exceeds the supply of properly trained talent and reduced the need for capital-intensive investment and when open borders have exposed U.S. workers to a worldwide surplus of unskilled labor income inequality has increased. In the future, when the rest of the world becomes more highly educated and science synthesizes intelligence and reengineers human genetics, the supply of intelligence could grow significantly. This might reduce its price and flatten the distribution of income and wealth. Piketty’s theory of growing inequality appears to be no more universal than Kuznets’ theory of growing equality. They are two sides of the same coin. Both are circumstantial.

What puzzles me is how Piketty, after apparently recognizing Kuznets’ failure to see the circumstantial nature of his not-so-universal “truth,” failed to recognize the circumstantial nature of his own supposed “law.” Businessmen and chess players recognize something frequently lost on economists: “universals” are predominantly probabilistic generalizations that are dependent on the likelihood of the circumstances that make them true. A queen, for example, is more valuable than a pawn because in most circumstances it is so. Nevertheless, there are cases where a pawn is more valuable. Except in the hard sciences, generalizations may help to guide our decisions, but circumstances ultimately determine the truth.

Scott Sumner offers a clue to Piketty’s naiveté. Sumner complains that Piketty sees Kuznets’ theory as intentionally crafted propaganda—“a product of the Cold War,” according to Piketty–rather than a well-intended theory that unwittingly overlooked the circumstances that made it true. After rereading Kuznets, Sumner concludes, “Nothing could be further from the truth. If anything, Piketty himself seems more like the scholar who makes excessive claims for his model.”

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