Piketty and his critics, the undeniable debate over inequality

Valeria Puga lvarez

PhD (c) in International Relations
Corvinus University of Budapest
November 11, 2016

Since the global financial crisis triggered in 2008, a prominent debate over the
inequality has been gaining ground. Not only politicians and scholars have started to lay
out their thesis about the disparities across the globe, but also, common citizens in many
countries have seen that as one of the greatest dangers in the world1.

In this chiaroscuro scenario, Thomas Piketty published his 577-page book: The capital
in the Twenty-First Century2 in 2013, and as The Economist then claimed it was an
overnight sensation 3 . No one remained indifferent to this book. Some has
enthusiastically embraced this painstaking contribution while others have harshly
criticized it.

To summarize, Piketty in order to explain the historical variations in wealth inequality,

establishes an important correlation between two variables: rate of return on capital (r)
and the growth rate (g). Accordingly to the author, when r exceeds g the inequality
increases. Of course, as he clarifies, its one of the important forces4 With that
equation in mind, Piketty analyses three centuries and over 20 countries since the
Industrial Revolution. For the author, inheritance its at the centre of this
dysfunctional capitalism. As a conclusion, Piketty sketches a policy response to tackle
with this phenomenon: a progressive global income tax.

Having said that, in a brief way, this essay will intend to assesses the main critics to the
Pikettys book taking into account the statements of two high qualified experts: the
Nobel Prize-winnning economist, Joseph Stiglitz and those of Mark Warshawsky,
senior research fellow at the Mercatus Center.

Other factors in the diagnosis of world inequality

Stiglitz, often referred as a progressive economist, has claimed that Thomas Piketty
[got] income inequality wrong5. Stiglitz states that a large fraction of the increase in
wealth is an increase in the value of land, not in the amount of capital goods.[] in
addition to an increase in the wealth/income ratio, is a capitalization of the increase in
other kinds of rents, like monopoly rents.

1
Pew Research Center (2014). Greatest Dangers in the World. October 16. Retrieved November 20,
2016, from http://www.pewglobal.org/2014/10/16/greatest-dangers-in-the-world/.
2
Piketty, Thomas (2014). El capital en el siglo XXI. Fondo de Cultura Econmica, Mxico DF.
3
The Economist (2014). A modern Marx. May 3rd. Retrieved November 20, 2016, from
http://www.economist.com/news/leaders/21601512-thomas-pikettys-blockbuster-book-great-piece-
scholarship-poor-guide-policy.
4
Piketty, Thomas (2015). Putting distribution back at the Center of Economics: Reflections on Capital
in the Twenty-First Century. Journal of Economic Perspectives, Volume 29, Number 1, Winter, Pages
6788.
5
Stiglitz, Joseph (2015). Joseph Stiglitz: Thomas Piketty gets income inequality wrong. Salon. Lynn
Stuart Parramore (interviewer). January 3. Retrieved November 20, 2016, from
http://www.salon.com/2015/01/02/joseph_stiglitz_thomas_piketty_gets_income_inequality_wrong_partn
er/

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As Piketty has highlighted, institutions have played an important role in widening the
gap between haves and have-nots. In the same direction, Stiglitz reinforces that
perspective by illustrating his assumption over monopoly rents: weve had monetary
authorities allowing [] banks to lend more. But this lending has not gone for
creating new business [] it has gone to increase the value of land and other fixed
resources. Inevitably, the consequence is that wages don`t have chance to increase
if at the end of the day landing has not gone to productive activities.

Furthermore, for Stiglitz, the study that Piketty and his associates did on the effect
of an increase in taxes on the top 1 percent is useful to understand the
characteristics of that 1%. For example, it enables us to identify if the wealth of that
group comes from a hard work and/or from inheritance, as Piketty has often
commented.

Stiglitz in his recent book The price of inequality6 attempts to go further than
Piketty. He asked: what can we do to reduce inequality of before-tax and transfers
income, and what can we do to improve the after-tax and transfers income? In that
sense, Piketty only essays a before-tax policy, that is, the progressive global income
tax. In this part, Warshawsky marks a hiatus from the idea of taxation as an
outstanding solution for reducing inequality7. To this author, income tax rates no
necessarily have had an impact on income shares, even if they have steadily
increased. Additionally, Warshawsky considers Piketty is also quite concerned that
tax competition between countries in Europe has led to cuts in corporate tax rates and
to the exemption of capital income from the progressive income tax (11).

As Stiglitz, Warshawsky recognizes the importance of the empirical basis provided

by Pikettys work. Notwithstanding, this author notes some internal differences in
that capital, in his words: Piketty looks at the role of inheritance versus saving in the
accumulation of private wealth (8). Upon that outlook, Piketty in certain way, is
stigmatizing the wealth accumulation. To support that idea, Warshawsky notes:

It is surprising that Piketty does not give retirement savings a greater

role in explaining recent trends and in projecting the future.
[]Retirement savings may explain (by rough estimate) at least half
of capital accumulation in the United States, which undercuts
Pikettys explanation that the primary motive of the rich is stockpiling
a large inheritance for future generations (9).

In addition, Warshawsky underlines that Piketty severely understates the role of

entrepreneurs and overstates the role of inheritance in the creation of wealth(10).
He gives an example: in the United States, mega-billionaires like Bill Gates and
Warren Buffet did not inherit their assets and are setting up charitable foundations to
receive those assets for the benefit of future generations. However, both Piketty and
Stiglitz have desmystify the self-made man legend. Piketty attributes the rise of top
income shares in the United States over the 19802010 period mainly to rising

6
Stiglitz, Joseph (2012). The price of Inequality: How Todays divided society endangers our future.
W.W. Norton & Company.
7
Warshawsky, Mark (2016). Review and Critique of Pikettys Capital in the Twenty First Century,
Mercatus Research, Arlington.

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inequality in access to skills and higher education (17). Stiglitz in a more precise
way, has remarked that some entrepreneurs have amassed their wealth through
monopolies: Gates got his money through monopoly power, and Slim got his money
through monopoly power in Telemex.
In general terms, it can be told that Stiglitz and Piketty have more coincidences than
differences. Stiglitz its not far from the Pikettys thrust, rather he complements the
points that Piketty suggests. At the end, both consider institutions and redistributive
policies as core variables of tackling inequality. Meanwhile, regarding to
Warshawsky, it can be stated that they have a more evident tensions, mainly that
involves the debates over inheritance and entrepreneurship and over taxation as an
effective tool against inequality.

The validity of the critics

In certain way, it has been suggested the validity of those critics. Although, the
Pikettys work is impressive, painstaking and sound, it has some limitations. Of course,
its impossible to pretend an omni-comprehensive book and in the case of inequality
particularly its an illusion to take into account all the variables at stake. For sure,
inequality is an endless reflection.

On the one hand, as it was mentioned before, concerning to the Stiglitz assessment, that
doesnt pose deep difference respect to Pikettys thrust. It can be said that Piketty and
Stiglitz have the same starting point: questioning the capital as an immutable concept;
also, they share the same arrival point, that is, the necessity of an effective policy design
to tackle inequality and to regulate wealth accumulation.

Notwithstanding, as Stiglitz has underpinned the increase in the value of land and
monopolies have constituted serious factors in deepening inequality. If the Pikettys
book its carefully read it can be observed that less than ten times the word monopoly
appears in it. In that sense, it can be assumed that this factor have been disregarded by
Piketty. And, it has been remarked by Stiglitz, the new era of monopoly is here.
Monopolies have promoted the rapid concentration of income and wealth.8

On the other hand, the Warshawskys example of retirement savings as a demonstration

of non inheritance-oriented capital accumulation is fairly misguided. First the Pikettys
main thesis is not essentially about the use of that accumulated wealth, even though he
establishes some patterns in the accumulation process and underlines the predator role
of an sort of patrimonial capitalism. Second, in the case of retirement savings could be
said its only anecdotal evidence that limits the possibility of a comprehensive
generalization.

Finally, the desirable results of entrepreneurship as a variable to reduce inequality are

still marginal, as several reports, surveys and rankings have demonstrated. Being a rich
entrepreneur is more an exception than a general law. Of course, its needed to
encourage that idea, but that depends more on institutional conditions than individual
tenacity.

8
Stiglitz, Joseph (2016). The new era of monopoly is here. The Guardian, May 13. Retrieved
November 20, 2016, from https://www.theguardian.com/business/2016/may/13/-new-era-monopoly-
joseph-stiglitz

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Inequality as the undeniable debate

The most conservative economists have interpreted the book as a sort of an

ideologicized research. They have insisted on the existence of social mobility across the
centuries. Nevertheless, historical data has contradicted those assumptions or at least, it
has cast them doubt.

Certainly, its undeniable that inequality has steadily growth in last ten years. An
OXFAM Report, presented in January 2016, has clearly depicted that reality: The
richest 1% now have more wealth than the rest of the world combined9. Therefore, its
not surprising that the Pikettys book have set out some guidelines for the debate.

Its not an outlandish hypothesis to say that an unregulated free-market have had a
natural tendency to promote the increasing of wealth concentration as Piketty suggests
throughout his book. Rather, it can be easily tested around the world. The free-market
for some economists has become more a dogma than a paradigm, and its not the case of
Piketty.

Also, what its clear is that inequality in wealth and inequality of opportunities, are
strongly intertwined. As Stiglitz and Piketty have depicted, the top universities in the
United States have elevated its tuition fees in an astronomic way. Nowadays, those
institutions are more unaffordable than ever. Education is a public good and it must not
be privatized.

Although, Piketty attempts to go further in giving a new response to tackle this soaring
inequality, namely, the progressive global income tax, it could be quite utopian.
Certainly, new regulations and limits to wealth accumulation are essential, but first, they
must be implemented at domestic level.

However, in the international arena, some initiatives have started to gain ground, for
example, the United Nations, some NGOs and governments have started a crusade
against tax havens. In the same direction of the Pikettys claim, they have demanded
for more transparency. As most of Pikettys critics have pointed out the data collected
by him are not exact. For sure, one of the reasons could be that most of part of
accumulated wealth has been created under shadows; therefore, its difficult to trace
back the capital accumulation patterns. Undoubtedly, lack of transparency has become
a hindrance in the struggle against inequality and Piketty has given strong evidence to
continue this pathway.

9
OXFAM (2016) An Economy for the 1%. January 18. 210 OXFAM Briefing Paper.