Measured, unmeasured, mismeasured, and unjustified pessimism: a review essay of Thomas Piketty's Capital in the twenty-first century

Measured, unmeasured, mismeasured, and unjustified pessimism: a review essay of Thomas Piketty's Capital in the twenty-first centuryKeywords: Piketty, capitalism, inequalityJEL Classification: B40, B50, I32, N30, P10Thomas Piketty has written a big book, 577 pages of text, 76 pages of notes, 115 charts, tables, and graphs, that has excited the left, worldwide. "Just as we said!" the leftists cry. "The problem is Capitalism and its inevitable tendency to inequality!" First published in French in 2013, an English edition was issued by Harvard University Press in 2014 to wide acclaim by columnists such as Paul Krugman, and a top position on the New York Times best-seller list. A German edition came out in late 2014, and Piketty-who must be exhausted by all this-worked overtime expositing his views to large German audiences. He plays poorly on TV, because he is lacking in humor, but he soldiers on, and the book sales pile up.It has been a long time (how does "never" work for you?) since a technical treatise on economics has had such a market. An economist can only applaud. And an economic historian can only wax ecstatic. Piketty's great splash will undoubtedly bring many young economically interested scholars to devote their lives to the study of the past. That is good, because economic history is one of the few scientifically quantitative branches of economics. In economic history, as in experimental economics and a few other fields, the economists confront the evidence (as they do not for example in most macroeconomics or industrial organization or international trade theory nowadays). When you think about it, all evidence must be in the past, and some of the most interesting and scientifically relevant evidence is in the more or less remote past. And as the British economic historian John H. Clapham said in 1922-rather in the style of Austrian economists, though he was a Marshallian-"the economist is, willy-nilly, an historian. The world has moved on before his conclusions are ripe" (Clapham 1922, 313). True, economic historians are commonly concerned with the past also for its own sake (I am, for example), and not only as a way of extrapolating into the future, which is Piketty's purpose. His book after all is about capital in the twenty-first century, which has barely gotten under way. But if you are going to be a scientific economist, or a scientific geologist or astronomer or evolutionary biologist, the past should be your present.Piketty gives a fine example of how to do it. He does not get entangled as so many economists do in the sole empirical tool they are taught, namely, regression analysis on someone else's "data" (one of the problems is the word data, meaning "things given": scientists should deal in capta, "things seized"). Therefore he does not commit one of the two sins of modern economics, the use of meaningless "tests" of statistical significance (he occasionally refers to "statistically insignificant" relations between, say, tax rates and growth rates, but I am hoping he does not suppose that a large coefficient is "insignificant" because R. A. Fisher in 1925 said it was). Piketty constructs or uses statistics of aggregate capital and of inequality and then plots them out for inspection, which is what physicists, for example, also do in dealing with their experiments and observations. Nor does he commit the other sin, which is to waste scientific time on existence theorems. Physicists, again, don't. If we economists are going to persist in physics envy let us at least learn what physicists actually do. Piketty stays close to the facts, and does not, for example, wander into the pointless worlds of non-cooperative game theory, long demolished by experimental economics. He also does not have recourse to non-computable general equilibrium, which never was of use for quantitative economic science, being a branch of philosophy, and a futile one at that. On both points, bravissimo. …