Piketty’s assault on silly neoclassical economic models

from Lars Syll

The French economist Thomas Piketty arrived in Washington, D.C., on Sunday for a week of talks at some of the nation’s leading policy-research centers but which might as well have been billed as a victory lap up the East Coast. The English translation of Piketty’s new book, Capital in the Twenty-first Century, a formidably rigorous, 700-page history of wealth, out barely five weeks, had just made The New York Times’s best-seller list. But even before it appeared, on the strength of a handful of advance reviews and a surge of Internet buzz, Piketty’s transformation was complete: from respected researcher on income distribution to ranking heavyweight, a scholar who, armed with reams of data and charts—and, unusual for an economist, a gilded tongue—proposed to upend decades of mainstream wisdom on inequality though an unprecedented analysis of the past.

Apparently bedazzled by the book’s arguments, few reviewers mentioned its assault on the field. Yet Piketty’s disdain is unmistakable, the lament of a scholar long estranged from the mainstream of his profession. “For far too long,” he writes, “economists have sought to define themselves in terms of their supposedly scientific methods. In fact, those methods rely on an immoderate use of mathematical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content. Too much energy has been and still is being wasted on pure theoretical speculation without a clear specification of the economic facts one is trying to explain or the social and political problems one is trying to resolve” …

In one sense, critiques of the discipline are nothing new. Economists, a voluble lot, seem to occupy a disproportionate amount of the blogosphere, and spend a good deal of their time there engaged in heated methodological debate. In a high-profile spat in March, Paul Krugman and Lars P. Syll, an economist at Malmö University, in Sweden, posted rival views of IS-LM (for investment saving-liquidity money), a model that has been a mainstay of macroeconomic theory for decades. Syll dismissed IS-LM as a “brilliantly silly gadget.” Krugman defended it as “a simplification of reality designed to provide useful insight into particular questions. And since 2008 it has done that job, yes, brilliantly.” (In a follow-up post, Krugman was more circumspect: “You should use models, but you should always remember that they’re models, and always beware of conclusions that depend too much on the simplifying assumptions.” )

Still, it’s one thing to trade barbs online, and quite another to present your magnum opus as an act of methodological sedition. Capital in the Twenty-first Century, Piketty makes clear, is his notion of what economics scholarship should look like: combining analyses of macro (growth) and micro (income distribution) issues; grounded in abundant empirical data; larded with references to sociology, history, and literature; and sparing on the math. In its scale and scope, the book evokes the foundational works of classical economics by Ricardo, Malthus, and Marx—to whose treatise on capitalism Piketty’s title alludes. The sizable recent literature on various aspects of inequality earns barely a mention. “There is a fair amount of empirical work out there,” says James K. Galbraith, of the University of Texas at Austin who studies wage inequality and who published one of the few skeptical reviews of the book to date, in Dissent. “He has a tendency to make deferential reference to mainstream thinkers while ignoring the critiques that already exist” …

Whether Capital in the Twenty-first Century survives its spectacular debut to become an inspiration for future scholarship—let alone future policy—will depend in part on how Piketty’s data and interpretation hold up over time … Even detractors agree that the World Top Incomes Database, which Piketty and his collaborators have assembled at the Paris School of Economics, where he now teaches, is invaluable. Covering 30 countries to date, it is by far the largest international database on inequality.

Less likely to endure is Piketty’s remedy for inequality: a progressive global wealth tax on fortunes over 1-million euros.

In Washington, a policy town, remedies were what many of Piketty’s commentators wanted to talk about, and they tended to dismiss his proposal, while taking the opportunity to promote their own ideas instead. Even Piketty concedes that enforcing a global wealth tax would require unprecedented levels of international cooperation and, at least in the United States, where higher taxes are widely believed to lead to lower growth, overcoming entrenched political opposition.