The history of income and wealth is always deeply political, chaotic, and unpredictable. How this history plays out depends on how societies view inequalities and what kinds of policies and institutions they adopt to measure and transform them. No one can foresee how these things will change in the decades to come. (Piketty, Capital 35)
In fact, neither economic liberalization that began around 1980 nor the state interventionism that began in 1945 deserves such praise or blame. France, Germany, and Japan would very likely have caught up with Britain and the United States following their collapse of 1914-45 regardless of what policies they had adopted (I say this with only slight exaggeration.) The most one can say is that state intervention did no harm. Similarly, once these countries had attained the global technological frontier, it is hardly surprising that they ceased to grow more rapidly than Britain and the United States or that growth rates in all of these wealthy countries more or less equalized....Broadly speaking, the US and British policies of economic liberalization appear to have had little effect on this reality, since they neither increased growth nor decreased it. (Piketty 99)
The first quoted passage urges us to take political control ("transform") over our economic destiny (see also p. 234 where Piketty endorses the claim that "political forces were central.") In Piketty's book 'chaotic' tends to be used to describe unstable, ad hoc political decision-making in context of great disruptive, social upheaval (war, inflation, "shocks," etc.). (His 'chaotic' is unconnected to the stochastic view of randomness beloved by mathematical economists.) It's precisely because politics has an influence on the economy that the world becomes unpredictable. The italicized passage is the central dogma of the political historian's craft.*
Yet, in the second quoted passage, Piketty embraces a form of technological determinism on growth in which much macro-policy has no discernible influence at all on growth. I am not claiming that the two passages contradict each other. For, Piketty's position seems to be that (a) macro-economic policy is largely impotent on growth; (b) governments can make macro-economic mistakes (embrace too much autarky; embrace too much capital liberalization (71);+ (c) governments can impact the distribution of wealth; (d) ensuring the diffusion of technology and education is key to long-term growth (71; 572; see also the emphasis on productivity at 234). So, while governments can invest in education (307), the impotence of traditional macro-economic policy on growth is also emphasized in the conclusion: "countries at the world technological frontier--and thus ultimately for the planet as a whole--there is ample reason to believe that the growth rate will not exceed 1-1.5 percent in the long run, no matter what economic policies are adopted." (572)
Clearly, the crucial concept in Piketty's analysis here is the 'technological frontier.' Amazingly enough I have just quoted two out of four mentions of the term in the whole (long) book, and these are the most detailed descriptions of it. Curiously, the term is introduced on p. 97 without a footnote or explanation. It is one of the few places in his book where Piketty assumes a background in economics in his reader. But its meaning is clear from context: (i) a country's (world's) technological frontier clearly limits the possibilities for growth. (As we philosophers like to say, it's a modal concept.) And (ii) growth can be faster toward the frontier than being on the frontier, where a "relatively slow pace" is "characteristic" (97).
Now, to see the significance of this, I quote Pikkety on his “fundamental inequality" which is "r > g (where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value, and g stands for the rate of growth of the economy, that is the annual increase in income or output)" it "will play a crucial role in this book. In a sense, it sums up the overall logic of my conclusions." (25) If g is doomed to a relatively slow pace at the technological frontier, Piketty's crucial arguments go through rather easily.
Now, that Piketty introduces the concept of a technological frontier goes against the official spirit of the book. For that concept is a sub-set of the so-called production function. I mention this because Piketty has a trenchant methodological criticisms of the so-called Cobb-Douglas production function (217-9) and the so-called "Cambridge Capital debate" in which Solow and Samuelson "defended the production function with substitutable factors," 231). His criticisms can be summed up as follows: [i] these functions can be easily used for political manipulation/ideology (the treatment of Samuelson's embrace of "a fairly peaceful and harmonious view of the social order" (218) is very important)** and [ii] that absent a great deal of empirical data these disarmingly "simple" (218) functions only "confuse" the debate (232). There is a good reason to be suspicious of these functions--they abstract too much away from history and institutions (recall).
Oddly, two pages before he first introduces the very idea of a 'technological frontier,' Piketty writes, "it is as difficult to predict the pace of future innovations as to predict future fertility," but he immediately adds "the history of the past two centuries make it highly unlikely that per capita output in the advanced countries will grow at a rate above 1.5 percent per year." (95) So, ultimately, this is straight historical induction (from the period 1820-2012). But note that even if we grant that the induction is an induction about the technological frontier (and this is by no means obvious), the data being used is not and cannot be informative about what determines the particular modal features of the frontier.++ These macro-economic data are uninformative about the possible (institutional) mechanisms (or laws) that determine the technological frontier.*** As Piketty himself notes in strikingly modal terms, "the inequality r>g should be analyzed as a historical reality dependent on a variety of mechanisms and not as an absolute logical necessity." (361)
So, the idea of a technological frontier is a kind of window dressing to give a historical induction a theoretical veneer. It is especially striking that Piketty would resort to it because he is extremely sensitive to the fact that economists will use precisely such constructs in the service of political ideology, not science; note not just the comment on Samuelson above, but recall Piketty's comments on Kuznets in my earlier post on his book.**
Now, Piketty has other arguments for his pessimism about r>g; I don't take my post as a refutation of his general framework. Rather, all I claim is that (a) Piketty's technological determinism on growth is assumed, and (b) that claims about the possibilities for future growth are as strong as any social scientific historical induction I have seen (that cuts two ways). More importantly, (c) Pikett's book does not provide us with a theory to develop research on the mechanisms of growth or the modal properties of the technological frontier. So, to connect this to the theme of my first post, there is a sense in which Piketty's framework returns us to a way of thinking about historical political economy that I associate with Hume and Adam Smith (as practiced by Kuznets/Friedman--again no small achievement), but he does not offer hope yet on an understanding of the nature and causes of economic growth that goes beyond those available in the eighteenth century.
*For all I know this dogma may be a universal empirical truth.
+I return to Piketty's analysis of the political consequences of international capital flows on poor countries before long.
++ Modal economics is no laughing matter, after all.
**In effect, Piketty claims that in Kuznets it's fairly easy to distinguish the ideological from the scientific, but that this much less so in Samuelson. I may be projecting my own prejudices here, but I agree with Piketty's claim. (Some other time I will explore this issue more fully in the context of Samuelson's work.) I postpone to another post, Piketty's engagement with Solow.
***The economist, Steve Durlauf, was kind enough to share slides of his commentary on Piketty with me; Durlauf also points to absence of mechanisms in some of Piketty's other crucial claims.