Inequality has been rising, and to see it well, one should study “top incomes,”: those of the top 1% or even, in a variant which we might call SuperOccupy, the top 0.1% or 0.01%. This is an extremely important observation. There are lots of people in the top 1% (more in India, for instance, than in a good-sized European country), and they cast a long and enviable shadow...Even a large sample survey will often fail to pick these people up, so Piketty’s meticulous examination of tax records (along with co-authors) in different countries is to be applauded. This is data work at its best, with a well-defined reason for doing it, and when I read the papers with Emmanuel Saez and Tony Atkinson that put these findings together, I felt I had learnt something.--D. Ray, on Piketty's Capital. [HT Hülya Eraslan]
One of the most important economists today that you probably have never heard of, Debraj Ray,* wrote a careful, amusing, and -- as one ought to expect -- very insightful response to Piketty's Capital. Ray matters in economics: he is the co-editor of the leading journal. Ray is one of the intellectual leaders of the new generation of 'theorists' that combine mathematical sophistication and data with a focus on policy relevance.* Ray is also an important figure in development economics, which he has helped move to the center of the discipline. You might think such sociology is irrelevant, but as Ray notes, Piketty's Capital has a self-presentation and narrative which is a form of "positioning" that appeals to his once-inside now purported outside-status in the profession. Part of Piketty's rhetoric is to rail against "simplistic mathematical models" (16; 574, and, especially, the autobiography on p. 31-2 culminating in an indictment against "petty mathematical problems.") This is not just a matter of mere positioning within economics; for, -- and Ray does not comment on this -- at crucial junctures, Piketty relies on a contrast between the esoteric mathematical models of the experts and democratic decision-making under conditions of transparency (e.g., 480, 513; recall also this post; Vallier also picks up on this [3E/3P] and will blog about in the future). But it is also a matter of positioning oneself as being the privileged expert with the public. Even if Ray's irritation were wholly self-interested, he has put his finger on on a non-trivial feature of Piketty's rhetorical strategy. (Don't get me wrong lots of economists become such privileged experts with worse strategies: i.e., they are bought by some interested party, or they get chosen by a politician who likes what s/he hears, etc.)
That Piketty's is, in part, a rhetorical strategy is clear from two facts: first, when it suits him he, too, relies on fairly simple mathematical models (often he is disarmingly upfront about this, e.g. 364). Second, he relies in non-trivial ways on existing economics. I had pointed to this in my second post on Piketty, but I am really an amateur and Ray's post adds a lot more detail, insight, and depth to what I had said. In particular, what becomes clear is that in some non-trivial respects Piketty is working with commitments that are found in the old economics work-horses (that is, the descendants of the "models of Harrod and Domar") and some so-called "dynamic efficiency" assumptions (see Ray's slightly more technical appendix here.) Piketty is a world-class economist, so this should not surprise. But as I pointed out before, it is unclear what constraints are driving his partial appropriation of existing economic theory.
Now, the core of Ray's piece is actually applied philosophy of science:
Piketty’s very long opus...can be viewed as having the following main components:
- The empirical proposition that inequality has been historically high, and apart from some setbacks, has been growing steadily through the latter part of the twentieth century (with capital incomes at the heart of the upsurge), and
- A theoretical apparatus that claims to explain this phenomenon, via the promulgation and application of three “Fundamental Laws of Capitalism.--Ray.
In effect (and to simplify), Ray is inclined to agree on 1, and to suggest that Piketty's data-driven approach is not capable of delivering explanations on 2.** This is where it gets interesting for the outsider. For, Ray, first relies on a bit of pop-Popperianism by treating falsifiability as a necessary condition for any explanation:
Law 2, which links the savings rate, the capital-output ratio and the growth rate, is the famous Harrod-Domar equation. This goes further than mere tautology, unless we allow all these three variables to freely move, in which case it is not much better than Law 1. Law 2 turns into a falsifiable theory once we impose further restrictions: Harrod did so by presuming that the capital-output ratio is constant. Solow did so by presuming that the capital-output ratio evolves along a production function. Piketty, as far as I can tell, does neither.
My fellow philosophers often cannot believe (i) that philosophical images of science may be influential in some science, and consequently (ii) that even if we philosophers have discarded it, it might still be influential within a science. (That is, philosophy of science matters in science.)
Ray contrasts such falsifiability with "an accounting identity, a simple tautology that links variables." (This is the criticism of Piketty's first Law.) Now, my fellow philosophers are, in fact, very fond of true tautologies. But Ray (correctly!) notes that they are not informative if they do not have "explanatory significance." Ray does not quite explain what he has in mind, but he means is that these particular variables "are all outcomes or “endogenous variables.”" That is to say, they track effects but NOT causes (nor mechanisms--a term Ray does not use, but which might have helped the discussion). Moreover, they do not -- and I am inclined to think cannot -- point to the crucial policy issue: "to tell us anything about the distribution of income or wealth across individuals or groups." What's needed is more fine-grained theory and probably more fine-grained data to explore possible mechanisms. It is the responsibility of economists to develop tools to do this; given that considerations of distribution had been somewhat ignored in economics, in part because it didn't fit with the apparent (but misleading) technocratic policy neutrality that was so profitable to its growth in popularity since the Samuelsonian revolution of the 1940s. Absent those tools it is unclear if any proposed policy can really responsibly address the problem at hand (without causing lots of unintended harms).++
All of this is not meant to suggest that Ray is really all that far apart from Piketty. For he does propose a mechanism which might explain some of Piketty's results:
Capital, in the physical and financial sense that Piketty uses it, has something to do with it. But it has something to do with it because it is a vehicle for accumulation. It is probably the principal vehicle for accumulation by the top 1% or the top 0.01%, simply because there are generally limits on how high the compensation to human capital can be in any generation...physical capital — land and financial assets — can be steadily and boundlessly accumulated. In this sense Piketty is right in turning the laser on capital.--Ray.***
Piketty says as much in his book. But it's not part of the official theory, so it cannot really be tested. Some fellow philosophers would here appeal to inference to the best explanation, but the better stance -- and I would expect Piketty and Ray to agree -- is to see Piketty's work as a call to develop more fine-grained models and simulations.
** This move revisits an old debate in economics. Recall that I compared to Piketty to Kuznets/Friedman. Now, Kuznets/Friedman were following in the steps of Mitchell, who was criticized by Koopmans and defended by Vining in a celebrated debate recall this post.
++Ray implicitly seems to agree with this. He does not seem to advocate a global tax, but rather "all [the world's] inhabitants must ultimately own shares of physical capital."
***I ignore the role of human capital Stateside; the economists do not, but they are not skeptical enough about this concept and the (normative) uses they put to it.