Hartwich on Piketty

Oliver Hartwich writes in the NBR:

This year’s global publishing sensation has been Capital in the 21st Century, a tome on the alleged rise of inequality in developed countries. 

Written by French economist Thomas Piketty, it argues that over long periods of time, capitalist societies had become more polarised. He claims the cause of this growing gap between the rich and the poor is the rate of return on capital exceeding the rate of economic growth. To correct this development, Piketty then proposes targeted state intervention of a redistributionist nature.

After an initially glowing international reception of the book, led by economists such as Paul Krugman and Joseph Stiglitz, a Financial Times investigation into Piketty’s data sources revealed some serious flaws in his argument. 

Chris Giles, the FT’s economics editor, concluded Piketty’s spreadsheets were riddled with “transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.” 

Having corrected for these errors, Giles concluded, Piketty’s central thesis of rising wealth inequality collapses.

It’s like the Spirit Level – they try and pick the data to fit the thesis.

The FT was not the first publication to point out the data issues in Piketty’s work. Last September, economist and historian Nicolas Baverez already pointed out in Le Point magazine there were serious doubts about the data used in the original French edition of Capital. 

You don’t like my data, I’ll just invent it!

Regardless of these methodological questions, there are a few things that are odd about Piketty’s approach. His analysis of a widening gap between rich and poor in developed, capitalist countries (if it holds) may be interesting but it ignores a much more important development. 

While there may be growing inequality within countries, on a global scale we are observing the very opposite between countries.

To understand this development, it is instructive to consider a few figures. In 1980, China’s per capita GDP was 1.5% of US per capita GDP. By 2012, this had risen to 10.5%. 

The increase in South Korea was even stronger over the same period: from 13.2% in 1980 to 39.1% in 2012. Meanwhile, Malaysia made the journey from 14.3% to 20.1%; Peru from 9.5% to 13.1% and Botswana from 8.4% to 14.0%. 

How did North Korea go? They have almost no income inequality.

By embracing globalisation, these formerly less developed countries have thus played catch-up with the developed West. The more economically liberal they have become, the faster and stronger was their convergence. 

Sadly, the same cannot be said for other countries, mostly in Africa, that did not make the transition toward liberal, open economies and have remained poor as a result. However, the convergence – especially of Asian countries – is a remarkable success story.

It is instructive to consider Piketty’s claims in this context. Even if he were right about economic polarisation happening within developed nations, he would have to concede that globally inequality is diminishing between those countries adopting the capitalist model. 

The evidence is beyond dispute.

As countries move toward a free market system, their productivity improves, their incomes shoot up and incidentally they also improve on most other measures such as education, health and life expectancy. 

On this global scale, the spread of free market capitalism is a gigantic development programme. It produces results that decades of government aid could not deliver. And it is closing the gap between the world’s rich and poor.

Indeed.

As developing countries become more free market, developed countries’ response cannot be to become more regulated and redistributionist. Yet this is what Piketty recommends. 

If implemented, such policies would only render developed nations less competitive against their newly developed challengers. This in turn would exacerbate the problem he seeks to address.

Whoever cares about (global) inequality should support capitalism, not fight it. 

Well said.