Thursday, April 24, 2014

Thomas Piketty I

For many years I've had an interest in investing, which sprang from my desire to retire. I would have retired at age 30 if I could have afforded to, because I never much liked any of my jobs or considered them a meaningful use of time. Investing is related to economics, which did not interest me until recently. As an undergraduate, it seemed to me that the people who studied economics were conventional, unimaginative and materialistic: they were conforming to their parents' expectations and only wanted high-paying jobs when they graduated.

My academic path provided little intersection with economics majors. By nature I'm an empiricist, but I am also interested in aesthetic matters, which meant that I was not a perfect fit for either science or the arts. I ended up majoring in Philosophy, which in many ways is a compromise field that lies somewhere between art and science. Looking back, Philosophy was not a particularly good fit for me either. Part of that may have had to do with the fact that the course offerings at my college were limited. The relevant department was the Department of Philosophy and Religion, and several of its members had received divinity degrees prior to receiving their PhDs. The coverage of continental philosophy in the department was weakened when the one professor specializing in it left for an administrative position elsewhere. In hindsight, I was in a state of ignorance and denial as to my fit with Philosophy. I was exposed to British and American analytic philosophy, which I didn't enjoy much, find relevant to anything or consider to be of much intellectual importance. These days, philosophy departments are fighting to avoid being labeled obsolete, and, given their syllabuses, I'm not surprised.

When I later entered business school (an even worse fit, though I liked some of the courses and completed an MBA), I took two semesters of economics. It was hard for me to relate to the subject, because from the start I noticed that economists made assumptions about the world and proceeded from there even though the assumptions seemed highly dubious. My attention to economics increased in 2004, when I began to manage my mother's assets because of her Alzheimer's disease. For investors, some knowledge of market cycles has become crucial in recent years. My interest heightened after the 2008 collapse of Lehman Brothers and the start of the Great Recession. I followed Paul Krugman closely and read This Time is Different, by Carmen Reinhart and Kenneth Rogoff, which is the first major empirical study of financial crises. The fact that This Time is Different was published in 2009, after the crisis had begun, and that no comparable studies had ever been made, confirmed to me that economics as practiced in academia has an agenda that is largely disconnected from reality in a manner not entirely unlike that of academic philosophy.

Over the last few years, there has been a constant battle between liberals and conservatives over the causes of the 2008 financial crisis and the appropriate governmental response. I have found this disappointing, because the economists involved rarely cite any convincing studies, and the two camps go on their merry ways without addressing any fundamental issues. Finally we have a significant study, which has just been published in the U.S. It is Capital in the Twenty-First Century, by Thomas Piketty. I believe this book has the potential to change the debate for the better by infusing it with empirical data and a theoretical approach that exceeds the limited scope of American economics.

Piketty is a precocious French economist who completed his PhD at age 22 and then taught at M.I.T. However, he became frustrated with the way economics is studied in the U.S. and returned to France after two years:
To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.

The central thesis of Capital is that the rate of return from wealth usually surpasses the rate of return from labor, meaning that the rich usually become richer, gaining ground over the ordinary workers who make up most of the labor force. Simply put, investments provide a higher return than employees can obtain in the form of wages. We are seeing this today especially in the U.S., where the wealthy are becoming exceedingly wealthy and the middle class is just treading water. As obvious as this may be even to a casual observer, it is not a view accepted by many economists, policy makers or politicians. Piketty documents his claims with carefully compiled data covering longer historical periods than have been studied by other economists.

At a glance, this may not sound particularly exciting, but I think it may prove to be the most important publication on policy issues in several decades. Moreover, it seems doubtful that conservatives will be able to quickly whip up a counter-study, since this one took many years to complete and is unlikely to contain serious flaws. My hope, then, is that it will have a positive influence on political discussion and put to rest some of the myths that have been lingering from the Reagan-Thatcher era.

I've only just started to read the book and will probably have more to say about it later.


  1. Piketty, eh? To my way of thinking, a book getting as much publicity as this one is is necessarily suspect. If people are still talking about it in two years maybe I'll read it.

    Your views of work, expressed here and elsewhere, are of more interest to me, as they don't really coincide with mine. My impression is that, after the great moments of a life, few and fleeting, a person's work is likely to be his greatest source of happiness. Obviously, not all work is rewarding, but it seems to me that the nobler struggle would be the struggle that attempts to make work more rewarding, more fulfilling, not the one that attempts to make it unnecessary. Primo Levi says all these things much better than I do in La chiave a stella, a book I'm fairly certain I'll go back to long before I can ever be bothered to pick up the Piketty.


  2. It's hard to get excited about an economics book, but if you have been following the economics wonks over the last few years, this is a breath of fresh air and perhaps the first chance in decades that new ideas will get a serious look from policy makers. Although I tend to agree with Paul Krugman and Joseph Stiglitz on many policy issues, I think they have been ineffectual as public intellectuals, in part because the education of economists is too narrow and they are unable to communicate beyond a narrow spectrum of ideas. Liberal economists take liberalism for granted and conservative economists take conservatism for granted. This wouldn't necessarily matter, but these are the people who are supposed to be supplying rational arguments to the decision-makers in government. As it is, the process has been a free-for-all for years, with people like Paul Ryan, who has a weak to nonexistent background in economics, given as much credence as Paul Krugman, who has a PhD and a Nobel in economics.

    As for work, my situation was partly the result of ignorance, lack of guidance, indifference to money, dislike of the economic system, failure to set appropriate goals, etc. I don't know exactly what your work is, but I get the impression that there was continuity between your parents' interests, your interests growing up, your formal education, and your eventual career path. In contrast, I grew up in a dysfunctional family that went through a gradual unraveling starting the moment we set foot in the U.S.

    My work wasn't all bad, and I certainly learned something from it. However, if you believe in such things, it did not result in "self-actualization." The main problem was that I had little in common with the business people or factory workers I dealt with daily.

    You might also say that on some level connecting with people is more important to me than work or ambition. Note that high achievers divorce frequently and have subpar relationships with their spouses and children. I was recently reading about Richard Feynman, the physicist; his second wife, whom he divorced, said "He begins working calculus problems in his head as soon as he awakens. He did calculus while driving in his car, while sitting in the living room, and while lying in bed at night." You might say that I have devoted time and energy (more than Feynman, anyway) to maintaining crucial relationships instead of work. To this day I notice instantly when my absorption in reading or writing is having a deleterious effect on an important relationship - it happens quite easily. This may not be an issue if someone doesn't care to have a significant other, children, etc.

  3. I could be wrong, but I suspect the Piketty book is a flavor of the month; last month's flavor, which everyone seems already to have forgotten, was Michael Lewis's book on high-frequency trading. That book, unlike Piketty's, was written for a popular audience, and the readers' comments in places like the New York Times were all too predictable. Maybe I'm misunderstanding something, but I simply didn't get the indignation at these traders. It seems to me--and I have never been anywhere close to rich, unless you want to compare me with the average inhabitant of sub-Saharan Africa--that far too much Wall-St. bashing is informed by resentment and envy.

    In the early nineteenth century, there was a banker here in Geneva who bought a large telescope and trained it on the Col de la Faucille, a pass in the Jura Mountains. He made an agreement with a postilion on the coach from Paris, who would wave a white flag if the rate on a particular note traded in Paris had gone up. The banker used this information to his advantage, and he is generally celebrated for his cleverness. I don't really see how the high-frequency traders are doing anything different.

    None of that has anything to do with the Piketty, I realize, but maybe it suggests something about my outlook on much of what, to my mind, is the lazy anti-capitalistic discourse that's so prominent in, say, the readers' comments on the NYT website.

    I wouldn't set much store by this book's (or Lewis's, for that matter) prompting any sort of useful change, either. What usually results is yet another misguided piece of regulation. One that's causing me a good deal of grief at the moment is FATCA, if you know that is. Its sponsors get to claim that they are going after the fat cats who are hiding their money in offshore accounts, but what they are really doing is creating huge problems for ordinary Americans who happen not to live in the U.S. It's pure demagoguery.

    Comments on work and relationships will have to wait.


  4. Michael Lewis appeared on "60 Minutes," which sensationalizes everything it touches, for which reason I no longer watch it. His claim that the little guy is at a disadvantage compared to high-frequency traders is correct, but he doesn't present the full context, in which the little guy benefits from lower transaction costs and greater market efficiency because of the new technology used by high-frequency traders and others. Trusted financial figures such as John Bogle have spoken out against Lewis's claims, and, from a regulatory standpoint, I doubt it will have any repercussions for the small investors who supposedly are being taken advantage of. In any case, they have been outgunned for years, and nothing will change that.

    Piketty's book, on the other hand, has the potential to change the focus of economic research in the U.S. It remains to be seen how much of an effect it will have, but it might, for starters, legitimize questioning the dogma about the compatibility of laissez-faire capitalism with equality. I think just a small shift toward empirical research could deflate much of the conventional wisdom about the viability of the American model. If nothing else, Piketty's critique of the practice of economics seems to be causing some soul searching in economics department in the U.S.

    On these and many other issues I am increasingly finding myself to be too radical an anti-capitalist to engage in discussion at the level of a conventional liberal. I have so little faith in mankind's capacity for self-governance that some sort of automated government system looks like the best long-term solution to me.

  5. On at least one point we agree. I, too, find it increasingly difficult to engage in discussion with conventional liberals.



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