Kokomo Tribune; Kokomo, Indiana

June 1, 2014

MICHAEL HICKS: Piketty in 21st century

Is income inequality tied to capital investments?

Kokomo Tribune

---- — Four or five years ago, a producer from an hour-long, Sunday night TV news magazine called to talk to me about income inequality. I recommended she speak with French economist Thomas Piketty. Fast-forward to today; the segment hasn’t yet been made, but given the enthusiasm over Piketty’s new book, “Capital in the Twenty-First Century,” I suspect that producer will have a hard time booking the professor.

Piketty’s book has taken the talk shows and national columnist circuit by storm. Much of the enthusiasm is well-deserved. From a great deal of painstakingly collected data, and much of his earlier research, he proposes and defends a simple thesis: The rate of return on capital investment is greater than the rate of economic growth. Thus income inequality is destined to expand dramatically. This space is too small for a full review, but some comments are needed.

First, this book is not about the income inequality that animates much of today’s domestic debate for the simple reason this book is about the role of accumulated and inherited capital. Clearly many of Piketty’s admirers haven’t actually read his book.

Piketty is no closet Marxist, but, like any good economist, understands what Marx said about the role of capital in the world. One inference from Karl Marx that Piketty extends is that accumulation of capital amplifies economic inequality. Ironically he lambastes government debt as a primary source of capital inequality. Government bonds are historically the source of vast wealth bequeathed to heirs. I don’t know how The New York Times missed that part of the book.

The book runs on past 600 pages with an online supplement, but the central idea of capital accumulations is the heart of this tome. As the author intended, this book will animate much research and a great deal of policy debate. However, the actual policy recommendations (like a global wealth tax) are intended only to foster discussion and sell books.

There are two major, and a few minor, problems with this thesis. The first is the United States has just three centuries of real economic growth to examine. Over much of that time, the return to capital has been below that of economic growth. The dearth and quality of data argues against grand conclusions, and Piketty’s ideas are ambitiously grand.

Second, the way capital and labor now interact to produce goods and services benefits specialized human capital. This is a very different world than the factory of 1890 where much labor was a commodity. So, much of earnings income differences are necessarily due to the way highly skilled people use capital, not the returns to capital itself. Piketty dislikes the term human capital itself, yet this is where much inequality is now rooted. That is a different issue for a different, better and ultimately more important book.

Michael J. Hicks, Ph.D., is director of the Center for Business and Economic Research and economics professor at Ball State.