Thomas Piketty: Le Monstre Sacré

Over the last few weeks, much ink has been spilled in an attempt to refute, undermine and marginalize the book “Capital in the 21st Century” by Thomas Piketty, a French economist. In some, unsurprisingly British quarters it has even reached the level of “the lady doth protest too much, methinks.” You cannot convince people of your viewpoint by just silencing the opposition. It’s a safe bet that, had a British economist said the same things or reached similar conclusions, no British institution would have attacked him so publicly. But who knows, perhaps “Le Monde” would have done so with gusto and joie de vivre! It’s clear that the Financial Times is not a proper forum to argue about economic time-series with any seriousness. Although one can find fault with the Mona Lisa, doing so does not take anything away from its value as a work of art. Likewise, adolescent brats unable to date their high school’s bombshell after repeated, desperate attempts will go on ad nauseam to try and convince you that her breasts are too small or that she’s a “bitch.” This is just politics as usual.

Piketty’s time series of income, GDP, tax rates, etc. make a lot of sense and accord with what we all know to be true historically and, more importantly, intuitively. In fact, this is their greatest asset. Had his data shown that the Great Depression was a walk in the park, or that WWII did not really have economic consequences, he would have questioned his own conclusions and would never have published them. By and large, he got his data from other papers and websites, so there’s really no mystery here. Next, he states clearly when he had to approximate data points because raw data were missing. He is more careful, pedantic and sometimes, over the top about data sources than most people who publish papers on economic matters. In matters of empirical evidence, Hercule Poirot had nothing on him.

What is amazing is not that Piketty has somehow shown something everyone with a pulse and an IQ above room temperature already knew intuitively, but rather that it apparently took 577 pages to prove something as self-evident as the fact that inequality in America has been rising fast since the 1980’s. That they are inconvenient is not something wrong with Piketty’s time series. Yet, such inconvenience appears to be the main reason why bloggers as busy as Maytag repairmen and financial reporters manqué on somebody else’s payroll have been screaming about “mistakes” in his data series without being able to say why or how fixing such horrendous errors would actually alter his conclusions to an extent sufficient to invalidate them. As always, the reason is simple: it would not.

If Piketty talked about something else than the re-distribution of wealth, like the demand for computer parts or potato crops in Saudi Arabia, he would be left totally alone with his spreadsheets, the same way Socrates was left alone to play with his Athenian boys when he merely talked about the soul or virtue. It’s only when he started advocating Spartan-style, communal property notions that all kinds of charges were trumped up against him, ultimately leading to a sentence of death on someone who was not exactly radical. The fear with Piketty is obviously that someone from the Twitter generation might actually listen to him and that you cannot dismiss him easily as a flake or, even better, an “insurgent.

Reflections on Piketty’s Magnum Opus

Mind you, it’s not the first time a renowned economist[1] has written a book pointing out the inner fallacies and tendencies of totalitarian capitalism. The most famous of them is probably “The Great Transformation,” a largely historical work highlighting the shortcomings of linear market-making in early-industrial England, and authored by Karl Polanyi, an economist from the Vienna School who commuted from Canada to his job at Columbia because his wife was refused entry into the USA for being a communist. Yet another famous tome is “Capitalism, Socialism and Democracy” by Joseph Schumpeter, another Austrian economist whose reputation is, by now at least, fairly well established among economists of all varieties. In 1928, Schumpeter published a lesser known work entitled “The Instability of Capitalism” where he basically makes the same arguments, i.e. to the effect that, due to its capital-centralizing tendencies, unrestricted capitalism contains the seeds of its own destruction and ends up looking like crony capitalism (aka private equity) and ultimately, socialism, which is where we are clearly headed. This has happened many times before in history and will keep happening. So, what’s the big deal here? The best thing to have done with Piketty would have been to ignore him and let the tide subside. By drawing attention to his cause, his enemies are fanning the flames of outrage on the part of ordinary citizens. Things were going so well in la-la land, why didn’t you just leave him alone?

I’ve looked at his time series in detail and read his technical annex, where he explains whence he got his data. For one thing, he’s totally upfront about the missing data points and the perennial censored-data problem. The actual analysis of the data is not impressive, but that’s not what his critics are contending. Instead, they remain exceedingly shallow and simply attack data points as being “fabricated.” As for myself, I would have used analytic continuation to address the missing data issue and stated that I did so. By the way, renormalizing a time-series when there’s a break in the data is not “fabrication,” but just applying common sense if you believe that the actual phenomenon is analytic. If you don’t, you have a lot more explaining to do than Piketty ever will.

A theory should always aim to understand the underlying phenomenon, not the given data. Raw data points contain no information at all. Unfortunately, there’s no theory in his book, only a lot of data points. Darwin also had a lot of data on “the origin of species.” Yet, he constructed a theory, no matter how trivial it was, or how maligned it has since become. He’s famous for his theory, not his data points, unless you find South American lizards a truly fascinating topic. Attacking Piketty on the data will lead nowhere because doing so will be regarded as purely negative in intent, and rightly so. His detractors have nothing positive to propose. By its very essence, a negative attack can and will never succeed. This is not a political campaign preying on the fears of the general public. At best, such people will only demonstrate how desperate they are in preventing Piketty’s voice from being heard. Why is that? The main reason, it seems, is that their own arguments are weaker than Piketty’s, not to mention unsupported by any credible data.

It is true that capital (being) and income (becoming) are not the same. On a capital basis alone, Sweden appears very unequal. However, this apparent unfairness in capital-asset ownership is largely compensated by a massive re-distribution via taxes, with the result that the average Swede is living very well indeed and can afford to take 2 months off each year. That’s the socialism I can live with! Of course, the reverse can also happen. Given the total GDP of 19th Century Jamaica and its population, one would think that the streets of Kingston were paved with gold, but reality was otherwise. All that cash was being shipped back to London to repay agricultural and other loans. Only a few people were rich, and they didn’t live in Jamaica. Historians called this “imperialism” because the Romans did it too. For instance, Seneca the Stoic was worth more than 200 million sesterces, which is a lot more than it sounds ladies and gentlemen, when he committed suicide in 65 AD at the request of Nero. He also wrote books on how to control one’s temper (I haven’t read that one) and how to enjoy life. I wonder what he thought of the 99%.

Docteur Piketty would have done us all a much greater service had he shown constructively how to measure net welfare rather than use linear analysis to show what does not need to be shown. On the contrary, what to do about the current situation does need some serious thinking. It’s only when you make use of both fundamental notions of finance, i.e. principal (linear) and interest (non-linear) that you start making progress with this type of analysis and that a useful theory can emerge from the primordial soup. Of course, that would require more than an endless succession of basic charts and tables. Otherwise, it sounds too much like class warfare. As expected, the upper class is fighting back.

His main conclusion is very easy to follow: the rich are getting richer on the backs of the rest of us, and that ain’t cool! Therein lay its basic social appeal. Unfortunately, a more nuanced approach would have been wasted on the average citizen. We would have gotten lost in minutiae very quickly, getting essentially nowhere.

Using linearity to resolve a non-linear problem is a non-starter, and yet this is the best economics can deliver today. This is usually why people make fun of economics and economists. You don’t need 500+ pages to show that inequality in America is rising, that the middle class is getting squeezed from both ends or that more and more people cannot make ends meet while so-called hedge funds titans “make” a billion a year, which is patently false since no money has ever been made in the secondary market, only transferred. Even “Gordon Gekko the Great” knew better than to say that.

On the other hand, it did take a “study” to demonstrate that mother’s milk is better for babies than cow milk, so I guess Piketty’s contribution is par for the course. The idea of taxing inheritance (capital) is not new, but resolves nothing because inheritance per se is easily avoided. If you don’t believe me, just ask Henry VIII. It’s OK to have a lot of capital if you make it go around, creating more of it along the way, not to mention giving jobs to those who can’t give themselves one. What’s not cool is just sitting on it as too many people are wont to do nowadays. In that case, the powers that be are totally justified in grabbing it to help these lazy capitalists make up their mind. This is what fiscal policy is all about.

Closing Thoughts

The most disappointing part of Piketty’s work is that it is backward-, not forward-looking, i.e. he talks about what has already transpired without being able to prescribe anything else than to raise taxes on the rich as a solution. One gets the feeling that, were he a lawyer, he would simply say we needed to sue, or use tax shelters if he were an accountant. To say that soaking the rich is the solution to a real problem is too facile, and in that assessment of his conclusions, I believe his detractors are correct. But as far as it goes, such facility afflicts all economic “science,” i.e. it is great at retrodiction but pathetically inept at prediction. To be really dangerous to the status quo, an economic theory should first be able to make a priori predictions from observable initial-boundary data, i.e. it would have to do what all other scientific theories have had to do in order to become respectable and therefore, respected.

No economic theory has ever been able to do that, essentially because economists do not understand cybernetics, i.e. feedback control systems. The founder of the Federal Reserve System, Paul Warburg, was not an economist but an aerospace engineer. Of course, specifically because of their inability to incorporate feedback loops, many economic theories have been able to impress the average worker who feels that life is unfair and that it must the fault of fat cats on Wall Street, for that too is easy to grasp. The reason why people believe life is unfair is usually because it is, but how it could be made fairer is never explained or discussed because any such discussion quickly degenerates into a bar-room brawl. The poor simply want to replace the rich, not end poverty, i.e. in their eyes what’s wrong with poverty is that they themselves are poor. As soon as they make a few bucks, the last thing they want to do is raise taxes.

None other than Karl Marx himself had “good” intentions when he started writing “Das Kapital.” Good intentions are nice, except that the road to Hell is paved with them. Marx was interested in ending the abuses of early English capitalism, mainly child labor. Today, no one would advocate for making twelve-year old children work twelve hours a day, but this is not self-evident if “maximizing profits” is capitalism’s sole raison d’être. In fact, unrestricted capitalism has never been either tried or worked for long, because one always runs up against moral dilemmas like slavery and minimum wage issues. Of course, if human beings are mere objects to be discarded when no longer needed, there is no fundamental problem with this Orwellian world, but none of us seriously believes this to be the case. Marx did not want to cause the death of tens of millions on communist collective farms, but there are always unintended, largely negative consequences to any magic-bullet philosophy with mass appeal.

Unfortunately for Piketty’s detractors, he’s right as far as he goes, even though that isn’t very far. They will never defeat him playing his game, for playing catch-up ball is much harder, not to mention that, to be successful at it, you first need to be a player.

In France, “un monstre sacré” is someone who stands above middle-class morality and who has earned the right to speak his mind without losing his job. For instance, Alain Delon (pictured above) acquired this coveted status long ago. It now looks like St Thomas Piketty is well on his way to being canonized specifically because he’s being crucified, not in spite of it.

Is Piketty the monster they make him out to be or, on the contrary, about to become the sacred cow of liberal thought? Messieurs, faites vos jeux parce que rien ne va plus!

[1] People who know me also know what I think of economists in general. Just so you know, it really pains me to take a side in in this silly debate in favor of any economist, renowned or not, because he’s being unfairly attacked simply to silence and marginalize him.