thomas piketty’s capital a critical review
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Thomas Piketty’s Capital A Critical Review. Professor Hannes H. Gissurarson European Students for Liberty, Bergen 18 October 2014: 14–14.45. Piketty Replacing Rawls as Prophet. Rawls, and the Poor. - PowerPoint PPT PresentationTRANSCRIPT
Thomas Piketty’s CapitalA Critical Review
Professor Hannes H. GissurarsonEuropean Students for Liberty, Bergen
18 October 2014: 14–14.45
Piketty Replacing Rawls as Prophet
Rawls, and the Poor
• Main proposition: Income distribution just if poor are as well off as they can be: maximum of minimum (maximin)
• Let us look at Index of economic freedom, with data from long time and many places
Which Country Better, A or B?
A
B
0 100 200 300 400 500 600 700 800
Income of PoorIncome of Rich
Four Worlds of Freedom
Free
Semi-Free
Semi-Unfree
Unfree
$0 $10,000 $20,000 $30,000 $40,000
Average GDP/capita 2010
Lowest Incomes in Four Worlds
Free
Semi-Unfree
Semi-Free
Unfree
$.000
$2000.000
$4000.000
$6000.000
$8000.000
$10000.000
$12000.000
Average Income of Bottom 10% in 2010
Productive Power of Capitalism
5 135 265 395 525 655 785 915 104511751305143515651695182519550
1,000
2,000
3,000
4,000
5,000
6,000
7,000
World Average GDP per capita 1–2003 AD in $1990
Much Less Violence than in Past
1350 1450 1550 1650 1750 1850 19500
5
10
15
20
25
30
35
40
45
Homicide Rate in Europe per 100,000
Clean Water: Saving Lives
19121916
19201924
19281932
19361940
19441948
19521956
19601964
19681972
19761980
19841988
19921996
020406080
100120140160180200
US Deaths per Million, Water-related Diseases 1912–98
Malaria Typhoid and paratyphoid fever
The Green Revolution
19611964
19671970
19731976
19791982
19851988
19911994
19972000
20032006
20092012
010000002000000300000040000005000000600000070000008000000
World Production of Cereals
Area (Acres) Production (Tonnes)
Escaping the Malthus Trap
1950-1955
1955-1960
1960-1965
1965-1970
1970-1975
1975-1980
1980-1985
1985-1990
1990-1995
1995-2000
2000-2005
2005-2010
0
5.0
10.0
15.0
20.0
25.0
Rate of Natural Increase of Population per 1,000
Similar Countries, Different Paths
• Four Chinese economies: mainland China, Hong Kong, Taiwan, Singapore
• Australia and Argentina, similar natural resources, European immigrants
• Singapore and Jamaica, small tropical islands under British rule
Four Chinese Economies 2011
Singapore
Hong Kong
US
Taiwan
EU
China
0 10000 20000 30000 40000 50000 60000 70000
GDP/capita $
Parting Ways: Australia and Argentina
19301935
19401945
19501955
19601965
19701975
19801985
19901995
20002005
20100
5,000
10,000
15,000
20,000
25,000
30,000
GDP/capita $1990
AustraliaArgentina
Parting Ways: Jamaica and Singapore
19601963
19661969
19721975
19781981
19841987
19901993
19961999
20022005
20080
5,000
10,000
15,000
20,000
25,000
30,000
35,000
GDP/capita $1990
JamaicaSingapore
Seven Nordic economies 2010
Minnesota
South Dakota
Manitoba
Sweden
Iceland
Denmark
Finland
0 10000 20000 30000 40000 50000 60000
GDP/capita $
Swedes in Different Economies
Swedes in Sweden
Average US
Swedish-Americans
0 10000 20000 30000 40000 50000 60000
GDP/capita 2008 $
Gini Coefficient and Lorenz Curve
0 1 2 3 4 5 6 7 80
10
20
30
40
50
60
70
80
90
100
Equal DistributionFactual Distribution
Income Distribution in Four Countries
Iceland
Sweden
UK
US
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45
Gini Coefficient 2011 Disposable Income
Country of Immigrants
• US subject to waves of immigrants, first from Europe and Asia, now from Mexico and Central America
• Brings down US averages, even if only temporarily
• Creates a statistical illusion
Problem with Gini Coefficient
• Compare two countries with same Gini C.• One then changes in two ways: more people get
educated and more people live longer• Both changes increase Gini Coefficient because
ranks of temporarily poor (students and pensioners) swell
• Does not reflect increased income inequality between groups, only between periods in individual lives
Resurrection of the Dead?
• Data should be critically evaluated• Example: World Bank accepted data on economic
growth from Ceausescu’s Romania which would have had Romanians below starvation level, if extrapolated backwards
• Example: ICP (International Comparison Program) 2005 data cut Chinese and Indian prices by 40%
• Same error, if extrapolated backwards: below existence minimum in 1950
Piketty, and the Rich
• Main proposition: poor do not gain from capitalism
• Capital accumulated by rich, because r > g
• Need for Confiscatory international taxes on wealth and top income
Piketty’s Income Share of 1% Top
19031910191719241931193819451952195919661973198019871994200120080
5
10
15
20
25
30
Sweden United Kingdom United StatesFrance Germany
Problems with Piketty’s Numbers
• Financial Times: Errors in calculations of wealth distribution in the UK
• French economists: inflated real estate prices cause overestimate of wealth
• Neither criticism very relevant to Piketty’s income distribution
• However: no correlation between the redistributive welfare state and income inequality
Problems with Piketty’s Method
• Underestimates bottom income: uses income before transfers
• Overestimates top income: ignores changes brought about by changed taxation, top income becoming more visible
• Method suffers from same problems as Gini coefficient: relative share of top increases if more people study longer or live longer
Impact of Globalisation
• Piketty possibly right that bottom income stagnant or even slightly decreasing
• Competition from China and India: Massive migration into middle class
• Global income distribution become more equal, while income distribution in West less equal
• West only 1 of 7 billion people on earth
Income Share of 90% Bottom, China
0
2000
4000
6000
8000
10000
12000
Average income in ¥2000
Do Data Reflect Reality?
• Data on bottom or average income in West show stagnation in equalised $
• But living conditions of bottom group (and all groups) much better than before
• Takes fewer hours to work for most goods, not only lightbulbs, vacuum cleaners and food, but also books
Why the Super-Rich?
• People with special, non-replicable skills (i.e. earning rent from abilities), innovators, entrepreneurs, entertainers, athletes
• By definition, supply (almost) fixed, while demand flexible
• Suddenly find demand, the market for their services, going from 300 million people to perhaps 3 billion, impact of globalisation
What’s Wrong With Inequality?
• Country with an income distribution D1
• Milton Friedman comes to give a lecture• 1,000 attend, each paying $50• Friedman $50,000 richer, 1,000 people each
$50 poorer: less equal distribution D2
• No problem: everybody is happy• Distribution by choice: from each as she
chooses, to each as she is chosen
More Problems with Piketty’s Ideas
• Rate of return of capital not always higher than economic growth
• Capital not immobile and unbreakable• Capital not in hands of rentiers, landowners and
bondholders, also innovators, entrepreneurs, investors, funds, third sector organisations
• Dispersed by children, divorces, risks, uncertainties
Challenge to Retain Wealth
Barbara Hutton Charles Koch
Reading Balzac
• Piketty quotes Balzac, Old Goriot
• Story of fragile wealth• Goriot penniless• Anastasie’s lover with
gambling debts• Delphine’s husband
failed speculations
Economic Growth
• Piketty’s confiscatory taxes would become a self-fulfilling prophecy
• Immense creative powers of capitalism• Almost unlimited possibilities of economic
growth• Capitalism needs innovators, entrepreneurs
and investors• Welfare state needs taxpayers
Sustaining the Welfare State
Lowest Quintile
Next-lowest Quintile
Mid-Quintile
Next-highest Quintile
Highest Quintile
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Proportion of US Total Tax Payments in 2000
Laffer Curve for Switzerland and Sweden
0 10 20 30 40 50 60 70 80 90 1000
5000
10000
15000
20000
25000
30000
Tax Revenue per capita in $
Tax Rate % of GDP
SwitzerlandSweden
Rand’s Thought Experiment
• The rich contribute most of tax revenue
• What happens if they emigrate (as they sometimes do)?
• What happens if they choose to disappear: Theme of Rand’s Atlas Shrugged
Further Benefits of the Rich
• Pay for experimental process to turn luxuries into necessities
• Provide risk capital; 1,000 experiments instead of 10
• Have means to fight bureaucratic aggression and government oppression
The Challenge of the Red Queen
19921994
19961998
20002002
20042006
20082010
20122014
20160
5
10
15
20
25
30
Proportion of Gross International Product
EUUSChina and India