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308 of 367 people found the following review helpful
3.0 out of 5 stars Correct about inequality but poor economics, 12 May 2014
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This review is from: Capital in the Twenty-First Century (Hardcover)
Thomas Picketty offers the disclaimer that his book is ‘as much a work of history as of economics’ (p33) which he then goes on to prove. He introduces his 2 core economic equations and asks readers not well versed in mathematics not to immediately close the book. It is in fact readers who are well versed in mathematics who might well close the book, since his equations make no sense and cannot bear the weight of interpretation he places on them throughout the book. They are core to his argument, but they fail. He nowhere derives them, proves them, or empirically tests them. He merely states them.

According to Picketty, the ‘first fundamental law of capitalism’ (p52) is that α=rxβ where α is the share of capital in national income, r is the rate of return on capital, and β is Picketty’s capital/income ratio. This is a simple identity, is no more than telling us that a/b x b = a. Picketty admits this identity and tautology but nevertheless insists that this is the ‘first fundamental law of capitalism’, a claim he simply cannot justify. His ‘second fundamental law of capitalism’ (p166) is that β=s/g where s is the savings rate and g the growth rate. His example claims that a savings rate of 12% and a growth rate of 2% give a capital/income ratio of 600%. This is simply untrue. A simple spreadsheet taking 100 units of GDP growing in row 1 at 2%/year, showing 12% saving of that GDP in row 2, cumulating that in row 3 and dividing the result by row 1 to give Picketty’s capital/income ratio in row 4, shows that it becomes 600% only in year 199. Not only does this ‘fundamental law’ take so long to be true, as Picketty admits, but it is only true in that year and thereafter continues to grow, contrary to his claim that it reaches a long term equilibrium. His third equation is his claim that r>g drives capital accumulation. r and g are however measures in different units, r is a scalar ratio, whereas g is a first differential over time. Equations and inequalities require variables on each side to be in the same units. Picketty’s comparison of the return to capital and the growth rate are like comparing one person’s height to another person’s weight. His model is bogus.

He then conflates capital and wealth (‘I use the words ‘capital’ and ‘wealth’ interchangeably’ (p47)). This obscures more than it elucidates. Capital traditionally defined in economics is the means of production. It is an input to the economic process. Wealth by contrast is an output. We might very well care differently about how much capital and wealth we have, and who owns them. More effective capital may drive up output, whilst more wealth has no creative function and attracts a moral question. Picketty is wrong, analytically and morally, to confuse the two in one measure.

Picketty is disparaging in very short measure of Marx (p227-230), Keynes (p220), mathematical economics (p32), and economists generally (p296, 437, 514, 573, 574). Only Picketty has it right (p232). He quotes Jane Austen and Honoré de Balzac, more than he does either Marx or Keynes. His book is unnecessarily long and a tedious read, due to its rambling repetitive style. It could have been far more concise.

His main point is however well taken. Ownership of wealth has become increasingly unequal. His remedy is a global progressive tax on capital. By this he means all capital. But he doesn’t say what effect a progressive tax on each form of capital would have, how it would be paid, and what should be done with the payment. Would companies owning productive assets have to hand factories to the state? Or to the poor? Would house owners have to sell their houses, or shareholders their shares, in which case would their price be sustained? Or is he assuming asset owners also have income to pay the capital tax, in which case it becomes an income tax? And what’s the point? The purpose Picketty tells us on page 518 is ‘to regulate capitalism’ and thereby to ‘avoid crises’. But he doesn’t tell us how capitalism would be thereby made more acceptable or how crises would be avoided. He also admits it will never happen!

Whilst I agree with Picketty that extremes of income and wealth are morally repugnant, my complaint is that i) he should do more to investigate and attack the processes which allow this outcome, for example regulating the software market more effectively to avoid Bill Gates becoming obscenely wealthy based on Microsoft’s extreme and unjustified monopoly rate of profit, whilst also regulating natural resource markets to avoid billionaire build up there, ii) this is not in fact the major issue facing capitalism today. Far more important is the lack of effective macroeconomic demand and the fall in real wages caused by the high productivity of automation technology. For this a citizen’s income funded by QE (ie without being added to government debt) is the only and the urgently needed solution. Maybe we could compromise and use the proceeds of Picketty’s capital tax to fund a world citizen income. He clearly has a very good PR machine promoting his book – see the low votes attached to any critical review on Amazon, a fate very likely to meet this review!

Geoff Crocker
Author ‘A Managerial Philosophy of Technology : Technology and Humanity in Symbiosis’
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Showing 21-30 of 98 posts in this discussion
In reply to an earlier post on 5 Jun 2014 15:02:48 BDT
hfffoman says:
I agree I have been slightly impolite.

However, you persist with a serious error which is accurately (if impolitely) described as a schoolboy error, even after it has been explained with abundant clarity. That is nothing short of intellectual dishonesty.

One thing we agree on: this conversation has run its course.

In reply to an earlier post on 5 Jun 2014 15:23:40 BDT
[Customers don't think this post adds to the discussion. Show post anyway. Show all unhelpful posts.]

In reply to an earlier post on 5 Jun 2014 15:38:30 BDT
hfffoman says:
"Yet another mistake"? I don't believe you have found a single mistake in my arguments.

You are correct that disagreeing with me does not equal dishonesty. I think you know that's not what I said. The dishonesty is:

a) you obfuscated with a lot of irrelevant distractions

b) your whole argument now hangs on the thread that 'delta x years' is a different unit from 'years'. Even if it is not self evident to you that that 'delta x years' is actually the same unit as 'years', it must be painfully obvious to you that I know what I am talking about and that my explanation is sound.

Telling me I am rude does not change the fact that the units are the same.

In reply to an earlier post on 5 Jun 2014 17:28:23 BDT
We clearly disagree. I maintain that a rate of change cannot be compared with a proportion. And I am correct in saying that you are rude.

In reply to an earlier post on 5 Jun 2014 18:47:28 BDT
hfffoman says:
You have now complained about the style of my posts 6 times. I have freely admitted that my tone was at times impolite and I have said why I thought it justified, leaving it to others to judge. There really is no point telling me I am rude once again

Furthermore my posts have the merit that I have always studied and responded to the substance of your arguments while you have made 3 consecutive posts ignoring my inconvenient point that delta on its own is dimensionless and you have actually proved that the units of r and g are the same.

Even further-more, you initially stated that the unit of return is a % (i.e. dimensionless). Without acknowledging the inconsistency, you have now admitted that the units of r are 1 / years.

There is no point saying "we clearly disagree" as though the question whether r and g have the same units is a matter of personal opinion. It is not. And again you are obfuscating by talking about proportions and rates of change. If you believe the units of r and g are different you have to talk units. Typically a proportion is a dimensionless number so are you now changing your mind again and saying r is dimensionless? We have already gone through this and concluded that it has units of 1 / years.

You may call me whatever you like but you are on shaky ground because you have set yourself up as an expert in units but nobody who has any understanding of units would say that delta was a unit. As I already explained, a time delta is a unit of time, a money delta is a unit of money but delta on its own is not a unit.

In reply to an earlier post on 5 Jun 2014 19:43:24 BDT
That's because you've been rude at least 6 times (I haven't actually counted so am open to correction on this point). I haven't set myself up as an expert on anything, I've just made a comment which is certainly open to critique, so I readily admit to being on shaky ground in the sense of my position being open to challenge. It's your impoliteness which has obfuscated this critique not any resistance from me. In fact I have acknowledged your point that rates of return are over time, which I had skated over rather carelessly before. Contrary to what you claim, disagreement does not imply that issues are matters of personal opinion.

I retain doubt about the r,g comparison which all your confident assertions have not assuaged. I do however remain open to persuasion. I'll try once more (as ever I am in explorative and not didactic mode).

From my previous notation

r = kO(t)/K ie the share k of output O going to capital over a time period t, divided by the capital stock K, which numerically becomes either a number eg .15 or its percentage 15%, as you point out, per year
g = (O(t+1)-O(t))/O(t) which again numerically becomes either a number eg .02 or its percentage 2%, again per year

This is your point and on this basis you win. However, I think that per year in the case of r means over the course of one year, whereas per year in the case of g means between 2 years. I regard this as a different measure. I know you don't, but please show some respect and refrain from calling my concern a schoolboy error.

Moreover r = kO(t)/K is a flow divided by a stock
whereas g = (O(t+1)-O(t))/O(t) is a flow divided by a flow

You might think this difference is immaterial whereas I think it is significant and renders r and g incomparable. I am not at all claiming to be right about this. Qualified mathematical economists may challenge and correct my interpretation but would not do so by insult. I'll get in touch with one and ask them for their comment.

You haven't answered my query as to what you thought of the other points in my review? In the meantime I have read through your review and would like to ask what your data source is for assertions you make over corruption, consultants, etc and whether you don't think it possible that high earners eg pension fund managers may be highly paid due to high level result achievement eg my pension fund manager invested so well that my pension is twice what it would have been otherwise. Perhaps these issues are more worthy of your persistent attention.

In reply to an earlier post on 5 Jun 2014 20:25:27 BDT
hfffoman says:
The position you are defending is a mathematical one. You insisted the units are different. Of course, economic growth and capital arise from different mechanisms. However, when you assert the quantities can't be compared because they have different units, that is a purely mathematical point which has nothing to do with the different mechanisms.

Your review states:

"r and g are however measures in different units, r is a scalar ratio, whereas g is a first differential over time. Equations and inequalities require variables on each side to be in the same units. Picketty's comparison of the return to capital and the growth rate are like comparing one person's height to another person's weight. His model is bogus."

This is about as incorrect as it is possible to be. You should have deleted it instead of defending it so hard. I am glad you are no longer "claiming to be right about this".

There is no need to say I have challenged your interpretation by insult. I may have been uncomfortably assertive but my explanations have been full, clear, detailed and objective - and, by the way, correct.

I have argued about the maths only because that I take issue with someone who persistently defends a mathematical falsehood. However, I also believe that Piketty's assertion about g>r, which you assert to be a mathematical trick, is not only mathematically meaningful but is broadly sound in economics, subject to the caveat I mentioned before about consumption. Though it was hardly necessary, I have already checked this point in private correspondence with a highly regarded economist.

As to the other points in the reviews, I found this issue interesting to pick up but that is all I have time for here.

In reply to an earlier post on 5 Jun 2014 20:42:34 BDT
My last post gives an admittedly more sophisticated reasoning for my claim. I am grateful to you for prodding me to refine the argument. The claim stands.

In reply to an earlier post on 5 Jun 2014 22:40:34 BDT
hfffoman says:
It's nice that you stand by your claim as though it is an act of loyalty and bravery. Unfortunately what you are standing by is a false argument. You can write some lovely vague words that may serve to confuse people into thinking you have "refined the argument". But there is no "more sophisticated reasoning" here. You call one a flow and one a stock but that can't seriously be regarded as a refinement of the argument in your review, nor does it begin to make a case against Piketty's claim.

Here's a simple example which will explain why it is the units that matter and not the nature of the quantities.

Let's say the flow of water in a river at a certain point doubles every year. Let's say the depth at that point also doubles every year. The quantities we are measuring are very different indeed. One is a distance while the other is distance cubed divided by time. But we are measuring the changes in the same units: each is doubling per year. If the units were different there would be problems in comparing them but as they are the same, they can be compared.

One day we take a measurement and find that the depth has been increasing at a different rate from the flow. We could investigate the reasons for the difference. We could actually deduce that either the speed the water moves has changed, or the density of water has changed or the width of the river has changed. It is perfectly possible to compare and reason with these growth rates because they are in the same units. It does not matter that the quantities themselves are different in nature. This is all Piketty is doing. There is no trick or cheat in it.

You might note that my example is much more extreme than Piketty's because capital and gdp are both units of money, whereas in the river example the quantities were in very different units. And yet we can still validly compare them and draw conclusions since the rates of change are in the same units.

In the meantime you have left that false argument standing in the review. I am intrigued to see how long you will continue to defend it.

Just one more point. Reviewing the discussion, I think my tone is fair. I began by politely drawing attention to the error and you replied with a false denial (and not the first). To express amazement was perfectly reasonable. In my view someone writing a gross error is entitled to one or two polite corrections and thereafter, the longer they resist reasonable argument, the more they become open to criticism.

In reply to an earlier post on 5 Jun 2014 23:21:19 BDT
Your river example doesn't work as a comparable because it is based on depth entering the formula directly for flow (as you point out flow = depth x width x length /time) but this is not true for r and g since r = kO(t)/K and g = (O(t+1)-O(t))/O(t). Doubling may always be in the same scalar unit but this cannot be read across to r and g. As I have pointed out, Piketty does not show how he considers the relationship between r and g to work. Glad to see that you consider yourself such a fair person. Time to fix the gaps in your own review now.

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