Henderson on Piketty, Part 1
By David Henderson
My long review of Thomas Piketty’s Capital in Twenty-First Century is finally out. It is titled “An Unintended Case for More Capitalism.” Over the next few days, I’ll be highlighting various parts of my review. Here’s the first highlight:
Unlike many free-market critics of Piketty’s book, I find his big-picture statistical analysis somewhat compelling, although like the other critics I see some serious problems with it. But even if his analysis is correct, I still find it much less important than he does, and I find his policy proposals appalling. Beyond his big-picture analysis and policy proposals, he discusses many issues: Social Security, the history of tax policy in the United States and France, global warming policy, immigration, and many others. On some of these, his analysis is good. On others, it is weak or outright wrong. Sometimes he gets his history wrong, and in important ways. Finally, he has a bad habit of questioning the motives of those with whom he disagrees.
Start with the big picture. “It is long past the time,” he writes in the Introduction, “when we should have put the question of inequality back at the center of economic analysis and begun asking questions first raised in the nineteenth century.” The center? Really? But if we put inequality at the center, we can easily miss the tremendous growth in well-being for a huge percentage of people in the world and for almost everyone in the United States and Western Europe. Much later in the book, Piketty shows that he is aware of those improved conditions, writing:
Nevertheless, according to official indices, the average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 to 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5-10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today.
In his own way, he is pointing out, albeit less dramatically, what University of California, Berkeley economist Brad DeLong noted in a study aptly titled “Cornucopia.” In that well-argued and documented paper, DeLong examines the 20th century and shows that the price of almost every item we buy–if stated in hours of labor required to earn enough to pay for it–has fallen to a fraction of its cost in 1900. Moreover, that reduction in cost understates the improvement in well-being because many crucial items that we buy today did not exist in 1900. Antibiotics, for example, are a 20th century invention. Their price in 1900 was effectively infinite.