March 11, 2015 Print

Illustration: David G. Klein for the Wall Street Journal

When French economist Thomas Piketty released his immense text arguing that the steady growth of economic inequality is inevitable in capitalism, the thesis and its apparent empirical foundation quickly gained traction with progressives who echoed Piketty’s calls for greater redistributionist taxation.

Other economists have spent a great deal of time combing through the data and have found substantial problems, but now Piketty himself is taking pains to add layers of qualification to his own thesis, reports financier and economist Robert Rosenkranz in an article for the Wall Street Journal.

Rosenkranz, who is also a member of the American Enterprise Institute’s National Council, explains that the centerpiece of Piketty’s book is his r>g equation, which holds that “the return on capital (r) outpaces the growth rate of the economy (g) over time, leading inexorably to the dominance of inherited wealth. Progressives such as Princeton economist Paul Krugman seized on Mr. Piketty’s thesis to justify policies they have long wanted—namely, very high taxes on the wealthy.”

In a forthcoming paper for the American Economic Review, though, Piketty argues that his thesis has been carried too far by its ideological supporters.

“For example, I do not view r > g as the only or even the primary tool for considering changes in income and wealth in the twentieth century, or for forecasting the path of inequality in the twenty-first century,” Piketty writes. “Institutional changes and political shocks—which to a large extent can be viewed as endogenous to the inequality and development process itself—played a major role in the past, and it will probably be the same in the future.”      

Piketty continues, “In addition, I certainly do not believe that r > g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, e.g., supply and demand of skills and education.”

In his Wall Street Journal article, Rosenkranz explains why Piketty’s thesis never seemed convincing to him or to the many economists who argued against its simplistic and inaccurate formulations, and calls for humility on the part of the progressives who used Piketty’s work as an intellectual foundation for their own political advocacy.

“Mr. Piketty is willing to stand up and say that the material in his book does not support all the uses to which it has been put, that ‘Capital in the 21st Century’ is primarily a work of history,” Rosenkranz writes. “That is certainly admirable. Now it is time for those who cry that we are heading into a new gilded age to follow his lead.”

Read Robert Rosenkranz’s full article, “Piketty Corrects the Inequality Crowd,” at the Wall Street Journal.

Read “Challenging Piketty’s inequality empirics.”

Read “Challenging the Empirical Contribution of Thomas Piketty's Capital in the 21st Century,” by Phil Magness and Robert Murphy.

Read “Defeating Piketty’s Charge — A working paper,” by Brad Lips.

Read “5 remaining problems for Thomas Piketty in the wake of the FT controversy,” by Phil Magness.

Read “Join the Inequality Debate,” by Brad Lips.

Read “What Piketty Misses,” by Herbert Grubel.

Read “The Irony of the American Left’s Love Affair with Thomas Piketty,” by Guy Sorman.