“Piketty should have said that”

Political institutions and civic participation shape how incomes are divided — so why did Piketty pay no attention to them?

Good question.

We can find the answer right inside Piketty’s book.

In the last couple of weeks, a few articles came out claiming that Piketty’s book, Capital in the 21st Century, neglected key political forces and, ergo, gave its readers a misleading picture of the economy. Two influential social scientists, argue in their last working paper that

Piketty goes wrong … [because he] ignores that it is the institutions and the political equilibrium of a society that determine … how the gains from various different economic arrangements are distributed.

In other words, Piketty’s analysis of income inequality is flawed because it is a-institutional. In a shorter article, and also in his Lindau lecture, Jospeh Stiglitz said that the issue is not the concentration of capital itself, but the fragility of our democracy: “[t]he main question confronting us today is not really about capital in the twenty-first century. It is about democracy in the twenty-first century.”

Forgetting about institutions?

In this post, I will use about a dozen direct quotes from Piketty’s book which contradict the charge that he ignores political institutions. In principle, critics may have meant that Piketty did not pay enough attention to politics. But even that charge would be inaccurate, given that Piketty talks at length about the current policy landscape, outlines ideas for reform, and also admits the blank spaces where no satisfactory institutions have been invented (e.g. coordinated fiscal policy in a monetary union, or an efficient payment system for higher education).

Below is a handful of examples taken straight from the book.

Giving citizens voice

Piketty clearly believes that new forms of political participation, beyond casting a vote every four years, are needed: “When it comes to organizing collective decisions, the market and the ballot box are merely two polar extremes. New forms of participation and governance remain to be invented.”

At the end of the book, he highlights the importance of democratic deliberation (“It is not the purpose of social science research to produce mathematical certainties that can substitute for open, democratic debate in which all shades of opinion are represented.”) which also contradicts the caricatural notion that he wishes to impose utopian policies on everyone.

Reforming European institutions

Specific proposals from the book include:

[T]o decide how much public debt the Eurozone should carry, one would need to empower a European “budgetary parliament” to decide on a European budget. The best way to do this would be to draw the members of this parliament from the ranks of the national parliaments

I enjoyed the passages of this type, because they were unlike the general complaints about the European Union that we are used to reading — too many commentators simply say that ‘Brussels suffers from a democratic deficit’ and stop there.

Criticism of budgetary rules that several countries have recently added to their constitutions

From page 566:

To leave it to a constitutional judge (or committee of experts) to judge such decisions [emergency budgets] case by case is to take a step back from democracy.

Don’t let firms shop for lower tax rates

Concerned about distorted playing fields when corporations choose headquarters strategically? A proposal to overhaul the way corporate taxes are collected is the book: “one can apportion the revenues of the corporate tax on the basis of sales or wages paid within each country.”

Make accounting standards more transparent

The accounting data that companies are currently required to publish are entirely inadequate for allowing workers or ordinary citizens to form an opinion about corporate decisions … Information must support democratic institutions; it is not an end in itself.

A narrow focus?

The claim that Piketty advocates a narrow approach—because he talks about laws/tendencies of capitalism—can be negated with many quotes. Here is one (more are coming below): “It is possible, and even indispensable, to have an approach that is at once economic and political, social and cultural, and concerned with wages and wealth. The bipolar confrontations of the period 1917–1989 are now clearly behind us.”

Further, some critics have used a case study of South Africa as a datapoint in support of the idea that Piketty is blind to the importance of institutions. Ironically, Piketty discusses — very early in his book, and then again later — the violence against striking miners in a platinum mine near Johannesburg which took place only a few years ago. This graphic example of a distributional conflict brings home the message that differences in compensation are driven by both political and economic forces.

“But he should have proposed these policies”

In his latest op-ed, Joseph Stiglitz wrote that “Piketty’s forecast of still higher levels of inequality does not reflect the inexorable laws of economics” and contrasted his views with Piketty’s supposed position in his Lindau Nobel lecture when he said:

It’s not just a question of economic forces – economic forces are the same on both sides of the Atlantic … but the outcomes, including the structure of opportunity are markedly different, [so] it’s not just economic laws, it’s political forces. And so, what’s at issue here is not capitalism in the 21st century, as Piketty said, it’s really about democracy in the 21st century.

The emphasis on democracy seems to be intended as a correction of Piketty, as if broad political participation of an informed electorate was neglected or ignored in the book. Stiglitz’s remedies include 1) higher capital-gains and inheritance taxes, 2) broadening access to education, 3) stronger enforcement of anti-trust laws 4) corporate-governance reforms and financial regulations.

A reader of any review of Capital will know Piketty is advocating higher taxes on capital. What about the other three sets of policies? Are they actually absent from the book?

Access to education

First, does Piketty believe education is a side-issue? In Capital, he writes: “The public debt … is not our major worry. The more urgent need is to increase our educational capital and prevent the degradation of our natural capital.”

He criticizies the existing systems of payments for higher education:

Australia and Britain offer “income-contingent loans” to students of modest background ... This is tantamount to a supplementary income tax on students of modest background, while students from wealthier backgrounds received (usually untaxed) gifts from their parents.

While admitting that he does not have an easy way to allocate seats in university lecture halls in a manner that is both efficient and equitable, he emphasizes that reform is urgently needed: “there is no easy way to achieve real equality of opportunity in higher education. This will be a key issue for the social state in the twenty-first century, and the ideal system has yet to be invented.”

Fighting monopolies?

Piketty does not devote a lot of space to discussing anti-trust, but there are critical discussions of monopoly power, for example:

it is rather common to contrast the man who is currently the world’s wealthiest, Carlos Slim, a Mexican real estate and telecom tycoon who is of Lebanese extraction and is often described in the Western press as one who owes his great wealth to monopoly rents obtained through (implicitly corrupt) government favors, and Bill Gates, the former number one, who is seen as a model of the meritorious entrepreneur. At times one almost has the impression that Bill Gates himself invented computer science and the microprocessor

Piketty laters speculates that “the veritable cult of Bill Gates is an outgrowth of the apparently irrepressible need of modern democratic societies to make sense of inequality,” probably overstating the admiration enjoyed by Gates.

As it happens, most descriptions of Gates that I see on social media tend to be negative. Still, Piketty is not only critical of monopolies but also clearly conscious of the fact that social and cultural factors, like fandoms, allow some economic outcomes to persist even if, at first glance, they might not be politically palatable.

Executive pay

Here is another direct quote:

It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously … To behave in this way is only human … This does not mean that senior executives and compensation committees can set whatever salaries they please and always choose the highest possible figure. “Corporate governance” is subject to certain institutions and rules specific to each country. The rules are generally ambiguous and flawed, but there are certain checks and balances.

Later, he writes: “[t]o be clear, I am not claiming that all wage inequality is determined by social norms of fair remuneration” and reiterates that “the theory of marginal productivity and of the race between technology and education offers a plausible explanation of the long-run evolution of the wage distribution, at least up to a certain level of pay…”

A political theory?

Others have already pointed out that Piketty is taking politics very seriously:

Piketty’s obvious awareness of institutions is presumably the reason he spends four chapters documenting the kinds of political institutions that might be put in place to counteract a rise in inequality … Piketty is well aware that there are offsetting tendencies to his laws, which themselves are historically contingent and which he thinks can and should be directly counteracted by political institutions

Here is Branko Milanovic’s reaction:

I have dubbed Piketty’s approach “a political theory of income distribution”. So I really fail to see any validity in this critique [that Piketty neglects institutions].

Indeed, political questions are discussed prominently in the book (and some commentators actually criticized Piketty for allegedly believing that “democracy is infallible”). Most reviewers of Capital in the 21st Century seem to have agreed that “r>g” is the gist of the book, possibly the sole take-away message. Understandably, book reviews cannot be deep enough to discuss all the layers of Piketty’s book, but the unfortunate consequence is that potential readers will think the book is all about returns to capital, even though it is richer and more interesting than a typical review can communicate. In fact, even somebody who does not care about income inequality at all will learn a lot from the book. (Passages on demographic projections, monetary policy, history, politics, or limitations of economics as seen by a member of the profession, come to mind).

That said, when papers and speeches suggest Piketty spends too few pages on political questions then, given the edition I read, I just cannot share those concerns. Wouldn’t it be fairer to consider Piketty’s book in its entirety?

Not everybody can be happy

Obviously, people will have different opinions: some may say that the extent to which Piketty deals with politics is not sufficient.

I am reminded of a story about a husband and a wife who bought a donkey. When an onlooker saw them walking next to it, he said: “Very stupid. Why would neither of them ride on the donkey?” So, the wife climbed the donkey, but a judgmental pedestrian mocked her for doing so. When the wife and the husband changed places, someone else said: “How can that brutish man ride on the donkey but let his wife walk?” To avoid further criticism, the couple decided to ride the donkey together, doubling the weight — and then someone yelled: “How can both of you ride on that poor creature?”

In the version of the story I found on-line, the wife and the husband carry the donkey and end up all falling into a river. But we can image an alternative ending where the donkey dies from exhaustion.

The husband and the wife had good intentions, but listened to too many critics. They should have realized that not everybody would be satisfied, no matter the riding arrangement. Given that Piketty’s book has not been read with great care with its current parameters, just imagine the commentary if he had doubled the length…

Jan Zilinsky is an economist specializing in financial literacy and inequality. Photo credit: Shreyans Bhansali.