One thing I noticed while reading Thomas Piketty’s new book was the topics that were not covered; progressive consumption taxes, Singapore (or indeed any of the 4 Asian “tiger economies”), and the link (if any) between ethnicity and great wealth. In an earlier post I discussed progressive consumption taxes—here I’ll focus on ethnicity.

Piketty is quite dismissive of the idea that great wealth and/or high incomes are generally associated with “merit” (or productivity, the term I prefer.) He tends to emphasize that many of the very wealthy have inherited their fortune. Or that out-sized CEO pay packages are not closely linked to productivity. Indeed this is a theme Piketty repeats frequently. Others have had doubts about this CEO claim, noting that elite pay has also risen rapidly in areas where incomes are clearly linked to productivity, such as managing hedge funds. A paper by Steven Kaplan and Joshua Rauh contrasts the Piketty argument with the productivity argument, and concludes:

Our results tend to support the second broad category of explanations more than the first. For example, one version of the managerial power or extraction hypothesis argues that corporate governance has deteriorated in a way that allows top executives to have increased their compensation substantially (Bebchuk and Fried (2004). But our evidence suggests that poor corporate governance cannot be more than a small part of the picture of increasing income inequality, even at the very upper end of the distribution other groups that do not report to a potentially compliant board of directors, particularly private company executives, have experienced equal or larger increases in their contribution to the top income brackets. Furthermore, the Forbes 400 lists include virtually no public company chief executives who are not founders or who became the chief executive officer after the company went public.

Interestingly, I don’t recall any Piketty reviews discussing the role of ethnicity and great wealth. One of the wealthiest people in the world is Mexican telecom owner Carlos Slim, who is of Lebanese descent (a fairly small minority in a mostly Hispanic culture.) In many Southeast Asian nations the wealth is disproportionately owned by a relatively small group of Chinese immigrants. America has many examples of immigrant success, perhaps none more famous than Jewish immigrants from Europe.

According to Forbes, of the 40 Americans with more than $10 billion in wealth, 12 are Jewish. (And a 13th was described as Russian-American.) So it looks like about 30% of the very rich in America are Jewish. I couldn’t find data on the proportion of all US billionaires that were Jewish, but some sources suggested roughly 25%. (The global figures seems closer to 11% of all billionaires being Jewish, although of course Jews make up a much smaller share of the global population that the US population. Roughly 0.2% globally vs. 2.0% in the US.)

Even accounting for data problems (what counts as Jewish when there is intermarriage?) it looks like Jewish immigrants to American have been considerably more successful than average. What does any of this have to do with Piketty’s book? Very possibly nothing. However given that Piketty is quite dismissive of the idea that great wealth and/or high incomes are associated with “merit”, I wonder what would be the Piketty explanation of ethnic differences in wealth. One factor might be discrimination, but that doesn’t seem to apply to cases where small immigrant communities have done very well—indeed they often face adverse discrimination, just the opposite of what you would expect.

It seems to me that the most straightforward explanation for the success of minority immigrant groups is high productivity. And it’s not hard to find independent evidence of for that hypothesis. For instance, about 25% of Ivy League students are Jewish. That suggests that the proportion of highly talented students in America who are Jewish is roughly equal to the proportion that are billionaires. There is also evidence of high achievement in education among Chinese immigrants to America, which might have some bearing on their success in other parts of the world.

Now in fairness to Piketty I think one could construct a plausible theory explaining over-representation of certain immigrants groups among the very wealthy, which does not involve a productivity story. Even Piketty would (presumably) not attribute business success to random luck. I am quite certain that I don’t have the skills required to be a CEO, for instance, even if CEOs are grossly overpaid. And of course he does view the inheritance channel to wealth as representing the luck of being born into the right family.

If I could hazard a guess, it might be that the lack of discussion of ethnicity in the Piketty debate might partly reflect the fact that explanations of disproportionate ethnic success that are not merit-based might seem slightly non-PC. I’m not sure that would be fair to those on the other side—my own view is that we have become so sensitive to these issues (mostly a good thing!) that the charge of prejudice is somewhat overused in contemporary American intellectual debates. Still, I feel slightly better finding myself on the “merit” side of the question of ethnic success, than having to defend some sort of non-merit theory of disproportionate ethnic success (where discrimination is clearly not the deciding factor.)

I think this relates to a point that Tyler Cowen has made. If we think of billionaires as faceless people, it has somewhat different implications for our sympathy than if we think of them as plucky immigrants that have historically faced discrimination and who triumphed against great odds. As always in economics, framing effects get in the way of clear thinking.