Pieria: Capital in Piketty’s ‘Capital’

I have a new post on Pieria, where I finally get round to commenting on Thomas Piketty’s Capital in the 21st Century. My focus is on capital itself, how Piketty defines this and whether or not critics such as Jamie Galbraith are right to attack him for his choice of definition:

An important but perhaps under-discussed aspect of Thomas Piketty’s Capital in the 21st Century is Piketty’s definition of capital itself, and the implications this has for his thesis and its critics. Capital is a notoriously tricky to define concept, and many have taken issue with Piketty’s definition and the framework he builds around it. Typically, the implication is that a more Correct understanding of capital leads to vastly different conclusions to Piketty’s, especially with regards to his conclusions on inequality.

The verdict is that Piketty’s definition of capital is a lot more nuanced than critics make out, and typically (though not always) their critique just reflects a pet peeve of theirs, whether this is human capital, the CCCs or what have you. It’s not that Piketty’s definition is ‘correct’, or that it chimes well with other historical usages of the term (such as Marx’s); it’s merely that Piketty’s own definition is sufficient for showing what he wants to show: the dynamics of inequality under capitalism.

I’m also not really sure about Paul Krugman’s contention that Piketty “relies mainly on conventional, mainstream economics” – sure, he uses some mainstream concepts, but begrudgingly, and only as one angle of support for his broader historical, political and statistical analysis. This analysis stands or falls apart from frameworks like the production function, marginal productivity theory or the Solow Growth Model, even if some economists are eager to interpret it entirely within such frameworks. The fact is that while Piketty’s work cannot be construed as purely ‘heterodox’ or ‘mainstream’, it’s definitely far closer to how economics should look in the future: holistic, empirical, and using mathematics only when needed. Hopefully economists of all stripes can recognise this instead of focusing too much on unimportant details.


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  1. #1 by Roman Plotnikov on June 20, 2014 - 1:08 pm

    I’ve read a lot about this book in the last month and It surprises me a bit how it became such a center of discussion. It appears to me (probably wrongly) that the thrust of the book is that rich get richer. Not exactly world-shattering news here.

    Well, as you’ve read the book, is it good as a historical overview of capital and its owners? I am not interested in social critique of wealth, but I enjoyed Braudel and his insightful glances into the pre-Industrial revolution economics. Maybe I should order Piketty just to find what all this discussion is about.

    • #2 by Unlearningecon on June 20, 2014 - 2:03 pm

      I initially had the same reaction – how can somebody write a 571 page book stating the obvious? However, it’s important to realise that what is “obvious” to those of us on the left is equally ridiculous to many on the right. While many take it for granted that capitalism creates and perpetuates inequality, there have been few detailed analyses of the mechanisms by which this occurs, even by Marxists, so it’s actually not as well established academically as some seem to think.

      Piketty’s analysis covers a lot of ground, and highlights some deceptively simple mechanisms by which inequality manifests itself. He is an excellent writer and the book deftly weaves between historical, political, economic and statistical analysis. Because of this, you find yourself absorbed in what is a relatively dry subject, and all the better equipped to enter debates about inequality. Piketty’s views are also relatively unique (or very French): a sort of simultaneous acceptance of, and disdain for, capitalism itself (and something similar for mainstream economics).

      Overall, I doubt anybody could read the book without taking a lot away from it, and I expect everyone would take something quite different. To me, that is the mark of a classic.

      • #3 by Roman Plotnikov on June 20, 2014 - 10:19 pm

        Thanks! Well, that settles it. Guess that’s what I’ll be reading in the next days.

  2. #4 by Boatwright on June 20, 2014 - 3:35 pm

    “using mathematics only when needed” ???

    I hope by this you mean:

    1) Using mathematics when modeling complex and chaotic economic systems has its limitations. Starting with the premise that economies have these characteristics does not mean that they are inaccessible to math, but only that a simple mathematical model does not tell us much about real events.

    2) We need to make a distinction between the moral discussion of how our economic choices effect human futures, and abstract economic theory. Too often this or that mathematical model is presented as a moral circular argument and just-so lesson — as if the social world is necessarily the way it is because this is the way it is.

    • #5 by Unlearningecon on June 21, 2014 - 10:25 am

      What I really mean is that mathematics should be used when it allows us to see something we could not see previously, whether this maths is simple (as in Piketty) or more elaborate (as in neoclassical economics, complex systems etc). The point is that maths can be a powerful tool, but all too often I find it’s used in economics to formalise things we already knew, rather than to advance our understanding.

  3. #6 by Rob Rawlings on June 20, 2014 - 3:44 pm

    That was a neat review of the main criticism of Piketty’s definition of Capital.

    One criticism that you didn’t cover is his treatment of depreciation of capital. As has been pointed out by Krusell and Smith Piketty ignores depreciation and assumes that all savings is additions to the capital stock. This has the effect of magnifying the effect that slower growth has on the capital/income ratio. It also means that as the capital stock grows gross savings have to grow as a percentage of income, which seems a bit of a stretch.

    Do you have any views on this part of this capital theory ?

    • #7 by Unlearningecon on June 21, 2014 - 10:19 am

      I almost included this point, but decided that it was more about savings than capital. In any case, Piketty’s definition of savings is net of depreciation:

      I should also be clear that the notion of savings relevant to the dynamic law beta = s / g is savings net of capital depreciation, that is, truly new savings, or the part of total savings left over after we deduct the amount needed to compensate for wear and tear on buildings and equipment (to repair a hole in the roof or a pipe or to replace a worn-out automobile, computer, machine, or what have you). The difference is important, because annual capital depreciation in the developed economies is on the order of 10–15 percent of national income and absorbs nearly half of total savings, which generally run around 25–30 percent of national income, leaving net savings of 10–15 percent of national income (see Table 5.3). In particular, the bulk of retained earnings often goes to maintaining buildings and equipment, and frequently the amount left over to finance net investment is quite small—at most a few percent of national income—or even negative, if retained earnings are insufficient to cover the depreciation of capital. By definition, only net savings can increase the capital stock: savings used to cover depreciation simply ensure that the existing capital stock will not decrease.

      It’s also worth noting that KS misinterpret Piketty’s ‘second fundamental law’ as an equality, rather than a dynamic tendency. Overall their review is pretty lazy in my opinion.

    • #8 by Rob Rawlings on June 21, 2014 - 2:50 pm

      I haven’t read Piketty yet, so perhaps I am missing the context but when he says:

      “In particular, the bulk of retained earnings often goes to maintaining buildings and equipment, and frequently the amount left over to finance net investment is quite small—at most a few percent of national income—or even negative”

      How does that fit in with his overall thesis? Wouldn’t that prevent or minimize the build up capital that leads to the inequality that his book is about ?

      • #9 by Unlearningecon on June 21, 2014 - 2:52 pm

        Sure, it would counteract the mechanism, as would a number of other things (such as conspicuous consumption by the rich). However, it’s still entirely plausible for the mechanism to prevail despite these things.

  4. #10 by Dan Kervick on June 21, 2014 - 2:29 am

    I agree with the comment about conventional, mainstream economics. A lot of economists have been drawn to chapter 6, where Piketty trots out the production function business. But in my view, that chapter has mainly an ad hominem purpose. It seems to me that what he is trying to do is argue that to the extent one takes that framework seriously, one should conclude on the basis of historical evidence that elasticities in the 19th century were greater than 1. Picketty doesn’t use the Solow model framework to predict the future, but just to argue that there does not appear to be any mechanism within capitalism that necessarily leads to a balanced growth path. In the online lecture notes and technical appendix he emphasizes how “simplified” that framework is, and speaks skeptically of the idea that substitution can be measured with a single parameter. He is also disparaging later in the book about the marginal productivity account of labor income inequality, so it is hard to believe that when subject is capital, he is enthusiastic at bottom about a framework that relies on the marginal productivity of capital. Also, the Solow framework then seems to disappear from the book, and doesn’t play any further role in the crucial chapters on the structure of inequality that follow. I have heard it said that Piketty uses that model to “derive” some kind of prediction for the future, but I think his projections about the future really depend more on extrapolation from robust historical trends and interpretations of the historical causes of those trends, not deductions from a formal model.

    • #11 by Unlearningecon on June 22, 2014 - 10:12 pm

      to the extent one takes that framework seriously, one should conclude on the basis of historical evidence that elasticities in the 19th century were greater than 1.

      This is a great way of putting it: he’s saying, look, we can approach this from any number of angles, but in every case it seems diminishing returns to capital will not outweigh the increase in the capital/income ratio. Sadly, I think a lot of economists are conditioned to think of things only in terms of their models, so as soon as they see a whiff of a production function, they think Piketty’s model can be interpreted as a purely Solow-style one.