Thomas Piketty’s Capital in The Twenty First Century, has spawned a cottage industry of dissent. Piketty uses masses of data to illuminate a growth in inequality, that he surmises is an inevitable result of capitalism and can only be resolved by painfully high taxes on the rich. For the left it is a pivotal work that brings data and credentialism to their ideology that capitalism is so flawed that it requires constant and strong control from the state.
Anti-Piketty is a collection of noted economists and political thinkers that find significant flaws with Piketty’s work. These critiques include serious flaws with the data itself and how it is used, the difficulty of measuring the forms of income and inequality itself, conclusions that are not supported by the data, and a philosophically flawed concept of wealth, growth and capitalism.
From Anti- Piketty Chapter 17. Get Real: A Review of Thomas Piketty’s Capital in the 21st Century by Donald Boudreaux
Here’s an even deeper mystery that escapes Piketty’s notice: if current patterns of executive compensation serve no purpose except to further enrich unproductive corporate oligarchs, what explains the rising market value of the capital that Piketty believes to be the central driver of increasing wealth inequality? Piketty doesn’t ask this question because, for him, wealth perpetuates itself. It grows automatically. So any amount of wealth that is “claimed” by Dick could otherwise have been “distributed” to Jane without reducing the total amount of wealth available to all.
Of course, wealth doesn’t grow automatically. It must be created. And to grow— indeed, even to be sustained— wealth must be skillfully managed. If Piketty’s theory of executive compensation were correct, corporate boards’ inattention to the productivity of their management teams would cause the market value of corporations to plummet. Piketty’s ‘r’ would fall to zero. So, too, would ‘g’. Fortunately, neither the rich nor the rest of us are suffering any such lamentable impoverishment.
Had Piketty examined more carefully the empirical literature on executive compensation he would have discovered that compensation is indeed tied closely to managerial productivity. As University of Chicago professor Steven Kaplan reported not long ago in Foreign Affairs, having analyzed 1,700 firms, he “found that compensation was highly related to performance: the companies that paid their CEOs the most saw their stocks do the best, and those that paid the least saw their stocks do the worst” (Kaplan 2013).
Yet, an observer perched too high above reality can easily miss what really matters. And that’s the ultimate problem with Piketty’s narrative. Like Marx, Piketty writes passionately about big, all-encompassing social forces that allegedly spell doom for humanity unless wise and good government intervenes. 1 But also like Marx, Piketty’s disregard for basic economic reasoning blinds him to the all-important market forces at work on the ground— market forces that, if left unencumbered by government, produce growing prosperity for all.
If wealth earns a return automatically then the people who manage it deserve no credit for their success. It is the ultimate ‘you did not build that’ finger to the entrepreneur. Another critic in this illuminating volume notes that he assumes wealth automatically delivers a specific return, when in fact he gets it backward; the return determines the value of the capital. Thus the federal control of interest rates has more impact on the distribution of wealth than Piketty attributes.