Krugman Reviews Piketty

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He sticks to economics, which makes the review quite readable. He drops this sentence into the end of a minor paragraph:

the fact is that the most conspicuous example of soaring inequality in today’s world—the rise of the very rich one percent in the Anglo-Saxon world, especially the United States—doesn’t have all that much to do with capital accumulation, at least so far. It has more to do with remarkably high compensation and incomes.

In fact, that is one of the more damning criticisms of Piketty that one is likely to read. Krugman stops short of calling the book an intellectual swindle, but it appears to be one (I have yet to read it).

Suppose we know two things: First, wealth at the high end of the wealth distribution has increased a lot. Second, the share of wages and salaries in GDP has decreased. Do these two things tell us that capital is gaining at the expense of labor?

The swindle here is to treat “capital” and “labor” as homogeneous, separate categories. You are either a worker or a coupon-clipper. In fact, most people are labor-capitalists. They invest in human capital. They decide how much to save and how much risk to take with their savings. And there is a lot of heterogeneity among these labor-capitalists.

Bill Gates, Jeff Bezos, and Mark Zuckerberg are not coupon-clippers. Their wealth comes from a combination of skill and risk-taking.

Looking at the 21st-century economy through the filter of the Marxist categories of “capital” and “labor” is not particularly insightful. This is not a good era for either a plain coupon-clipper or an ordinary worker to accumulate great wealth. For that purpose, it is better to be a successful entrepreneur or a high-skilled worker.

I think that Krugman correctly views Piketty’s scenario dominated by inherited wealth as offering a speculative analysis of the future. It does not well describe the present.

For example, suppose you look at the Forbes 500 or somesuch, meaning a list of the wealthiest Americans. Compare the list in 2010 to the list in the supposedly egalitarian era of 1950-1970. I will wager that the 2010 list has a smaller fraction of inherited fortunes as opposed to fortunes that were amassed by the wealthy themselves.

Moreover, looking at the low interest rate on risk-free assets today, I would say that the near-term future is one in which the inheritors shall be meek. The next generation of great entrepreneurs should easily surpass the heirs of current fortunes.

UPDATE: Steve Sailer has links to some papers on the Forbes 400. In particular, one paper by Kaplan and Rauh, says

We find that the Forbes 400 in recent years did not grow up as advantaged as in decades past. Those in the Forbes 400 today are less likely to have inherited their wealth or to have grown up wealthy.

14 thoughts on “Krugman Reviews Piketty”

  1. On the inherited versus self made wealth issue, some evidence from Britain: http://www.bbc.com/news/business-22188762:

    “Wealth that is self-made is becoming more and more evident,” Mr Beresford told BBC News.

    “When I first started 25 years ago about two-thirds of the rich list were people who had inherited their wealth.

    “Today, approaching 80% are self-made and that’s really a legacy of the Thatcher years.”

  2. Feel free to delete this comment if I’m right. In paragraph 3, shouldn’t the sentence be, “Second, the share of wages and salaries [in, not and] GDP has decreased.” And in paragraph 4, shouldn’t the sentence be, “They decide how much [to, not too] save and how much risk to take with their savings.”

  4. “Bill Gates, Jeff Bezos, and Mark Zuckerberg are not coupon-clippers. Their wealth comes from a combination of skill and risk-taking.”

    I think this statement brushes a bit under the rug about where their skill, access to monetary capital, and access to the right networks came from. Simply saying “skill and risk-taking” simplifies too much.

    • That’s a fair point. But it does not at all invalidate the thesis.

      Yes, those named may not have been able to do what they did had they come from parents in the bottom quintile. But certainly what they did was available to anyone from the top two quintiles, and probably the top three: Coming from the top 1% was not at all required.

      • I was only commenting on that statement, not the entire thesis. It was an intellectually lazy statement and it bothers me when Arnold Kling makes them. It does, however, weaken Kling’s thesis in the sense that Kling is only lightly touching on how wealth opportunities are given to succeeding generations.

        I don’t think your comment has any better reasoning. Using income as a filter irrespective is incomplete. For example, it ignores region effects, network effects, and education levels.

  5. One thing to be aware of when discussing income inequality is that the BLS does not include stock options in its calculations of wages and labor compensation.

    I do not have any idea how much this distorts the wage and compensation data, but I cannot help but think that it plays a significant factor in the divergence of productivity and labors share or compensation since the early 1970s.

  6. So Krugman describes Picketty’s book as “magnificent”, “truly superb”, “a tour de force of economic modelling”, “a book that will change both the way we think about society and the way we do economics”.

    And you say Krugman “stops short of calling the book an intellectual swindle”???

  7. You need to stop spelling this guy’s name wrongly: Piketty (not Picketty). I know it is nitpicking, but a lot of people are nitpickers and like to dismiss substantial points on ephemeral grounds as these.

    • The share of Forbes 400 fortunes that were inherited fell sharply after 1982. However, there may be a reasonable methodological quibble that the first edition of the Forbes 400 may have been overweighted with famous old names.

      But certainly, there were fewer new fortunes made from 1930-1980 than from 1880-1930, so Old Money would have likely have been more highly represented at the top of the list in 1982 than in later years. We are likely to see more scions on the list in the future simply because so many great fortunes have been made recently.

  9. Piketty focuses on how in 19th Century novels it was easier to get rich through inheritance or marriage than through building a fortune in business and then suggests we may be returning to that era. That could turn out to be true, but that’s certainly not what recent decades have been like. In Jane Austen novels, most wealth is agricultural land, and as real estate agents will tell you: land — they’re not making any more of it! Moreover, the British system of primogeniture tended to concentrate its ownership in relatively few hands.

    Personally, I’m more worried about historical parallels like debt peonage in Mexico in the late 19th Century, but there aren’t as many good Masterpiece Theater series about how the rich in Mexico got so rich at the expense of everybody else as there are about the more decorative rich in Britain.

  10. Fred Wilson, the prominent venture capitalist, in http://www.businessinsider.com/fred-wilson-interview-2014-4

    “I think there are a few people in the venture business in New York who come from families that have the resources to start their venture capital careers.

    In New York, because of the media industry, the real estate industry and Wall Street, there are a lot of families with large capital bases. It wouldn’t surprise me that we’d continue to see young people getting out of college and deciding that this is what they want to do and having their families support them in that. That could be an emerging trend. In the Bay Area, too. I’m sure something like this has happened in the Bay Area as well.”

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