Home > Economics - General > Piketty and nitpicky (updated with link to Piketty’s refutation of FT)

Piketty and nitpicky (updated with link to Piketty’s refutation of FT)

May 30th, 2014

I have a couple of pieces up on the topic that’s likely to consume much of my attention for some time to come: Piketty’s Capital in the 21st century.

Here’s a long review article at Inside Story focusing on the conditions that have made Piketty a bestseller. And here, at The Drum is my take on claims by Chris Giles at the Financial Times that Piketty’s data is fatally flawed.

Update Piketty has responded to the Financial Times. To sum up, as I said in the Drum piece, the criticisms are (mostly incorrect) nitpicks except for the point about UK wealth inequality. Here Piketty’s demolition is convincing. The FT hasn’t used a consistent series. Rather, it’s taken a recent survey estimate (likely to underestimate wealth) and spliced it onto older estate data to produce the counterintuitive finding that the inequality of wealth hasn’t increased.

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  1. J-D
    June 6th, 2014 at 08:18 | #1

    @yuri
    And more abuse!

  2. yuri
    June 6th, 2014 at 08:37 | #2

    @Julie Thomas
    That’s the spirit lassie!

  3. yuri
    June 6th, 2014 at 09:12 | #3

    @patrickb
    OMG! I suspected J-D of being a troll with his apparent concern for what would satisfy him as precise but now I find the real disease is spreading. You seem to think J-D made a good point about Oxbridge that I didn’t answer.

    His “point” – question – was to the effect of “why would you want to motivate Oxbridge dons to become CFOs of a Widget Manufacturer?” to which I replied, with the preface to my answer being “Wrong question” hoping that it might stir a little time saving neural activity amongst those capable of it.

    Short answer: I DIDN’T FOR ONE MOMENT SUGGEST THAT I WOULD WANT TO MOTIVATE OXBRIDGE DONS TO BECOME CFOs OF WIDGET MANUFACTURERS.

    Now do we get an apology from you for a supercilious denigration of something which didn’t happen based on your failure to show the courtesy of taking the trouble to attend to and understand what you were purporting to criticise?

  4. Midrash
    June 6th, 2014 at 11:40 | #4

    @yuri
    “That’s the spirit lassie”! And I am sure she is a bonnie lassie. But you give me a clue to chew on. Are you Yuri the McTavish from Glasgow – known in the Gorbals as the Russian Enforcer? Or would that be your father? And how then would your sainted White Russian noble grandmother be? No longer with us I suppose

  5. J-D
    June 6th, 2014 at 13:29 | #5

    @yuri

    You wrote: ‘If business needs people of the kind of intelligence and work habits which qualifies them for stimulating and otherwise pleasant academic posts then it will have to offer them incentives to choose one rather than the other.’

    Do you have any reason to think that business needs the kind of people who qualify for academic posts? Do you have any reason to think that the supply of such people is so low as to create serious competition for them between business and academic employers?

    You also wrote: ‘It must certainly right that the average academic job today – in some quite important respects anyway – is less attractive than the typical position in 1950. That’s because the grand old universities remain the few grand old universities with their ancient charns, traditions and prestige. And while I don’t think the same applies to art gallery directorships, museum curatorships, film production and directing orchestras, dance and opera, the pleasantness of such positions might now be reduced by the fierceness of competition and the rate if change. I would accept that I have raised an empirical question but I think it is well worth considering when the favoured alternative explanation for higher pay for executives has something of the flavour of conspiracy theory (albeit in a spirit of scepticism which Adam Smith would not have disavowed). Not that any one simple explanation suffices.’

    Do you have any reason to think that the pay of executives is only just high enough to exceed the pay of academics, art gallery directors, museum curators, film producers, and orchestra, dance, and opera directors?

  6. yuri
    June 6th, 2014 at 15:04 | #6

    @J-D
    In a rush, I think you are suggesting a test for my (tentative) argument/hypothesis in the shape of the question “aren’t the salaries of executives much higher than they need to be in order to tip the balance in the case of someone who could have walked into a tenured lectureship at a sandstone university (as you will remember I do like to make my examples as concrete as possible) but chooses a fast track trainee position with a banl offering almost immediate elevation to well paid executive ranks?”

    Much more complicated and multifactorial and I may have to break off and resume. My instinct is supported by observation and prrsonal acquaintance with the level of difference in money it took to induce e.g. a friend to become a Gulf State legal adviser with an oil company rather than wait perhsps 2 years for a full professorship; or the MIT physicist from an academic family who really looked forward to the academic life but made so much money writing and selling software that he went entrepreneurial.

    And remember that we are not talking about independant contractors or people, for the most part, on individual contracts but people used to the idea that, if Buggins is paid $Y that’s the floor – for various different cultural or other reasons. The factors would include state of the economy, questions of prestige, issues of financial security, and- v. Important – control over one’s own time and work.
    Tbc perhaps

  7. Midrash
    June 6th, 2014 at 17:18 | #7

    @yuri
    You might want to throw in to a very complex mix the additional calculation of future benefit that a successful academic who is Dean, Pro-Vice Chancellor and perhaps V-C material might factor in. Housed like his peers and with his children sble to go to good schools, he can look forward to all sorts of appointments to interesting and sometimes remunerative bodies public and private to help them ease into old age amongst the great and good and prosperous. Examples are legion: think former Monash V-C Ray Martin as chairman of Optiscan or Sir Gustav Nossal one the board of RIO (or wasit still CRA?). So why would the cleverest boy in the school feel much attraction to taking the risks involved in a business career, giving up the research he wanted to do, giving up control of his time and work procedures, maybe having to move to countries or cities which didn’t suit him or his family? etc etc.

    Also, a tenured academic post at Newcastle to which you commuted from your little vineyard while your wife taught at your children’s school mightn’t be Oxbridge or Ivy League life but it wouldn’t make you want to be a bank manager like Dad.

  8. J-D
    June 6th, 2014 at 17:42 | #8

    @yuri
    I can readily believe that there are instances of people who were attracted to the academic life but who were tempted away from it by the attraction of much higher remuneration in some other career.

    I find it much harder to believe that this is a major factor in determining the general salary level for corporate executives, and would need to see a much stronger case made to persuade me of that conclusion. All I’ve got at the moment is ‘it makes sense to yuri, plus yuri actually knows a couple of people like that’, which falls a long way short.

    If I had to guess, I would guess that the majority of academics don’t have what it takes to be major successes in the corporate world, and that the majority of corporate executives don’t have what it takes to be major successes in academia. I am not persuaded that the typical requirements of the two domains are largely interchangeable.

  9. J-D
    June 6th, 2014 at 17:48 | #9

    @Midrash
    I don’t know what sort of careers the ‘cleverest boy in the school’ is most likely to pursue, but I don’t see how that can be a major factor in determining general salary levels in academia, the corporate sector, or anywhere else. No realistic employer can expect to fill all, or most, or even many of the top jobs with the cleverest boy in the school; the supply of such boys is never going to be sufficient for that. The supply still won’t be sufficient if you take the obvious step of doubling it by considering the cleverest girl in the school as well. If you think that the motivations of the cleverest boys and girls are the biggest factor in determining general salary levels, you haven’t made your case.

  10. yuri
    June 7th, 2014 at 01:37 | #10

    @J-D
    You seem to be taking much the same line (your guess against mine) in your reply to me and your reply to Midrash. Well, I suppose credit for consistency is due.

    You contest my suggestions on empirical grounds but before I come to your guesses on that let me point out that whatever I have suggested as a possible factor, or factors, in a general rise in executive remuneration – to which I might have added another informed guess such as the effect of removing layers of hierarchy and cutting the proportion of lower paid junior and middle management jobs – should simply be regarded as giving plausible reason to pause before leaping to adopt the latest fashionable explanation du jour, or any simple explanation, and to enlarge the reach of one’s imagination for explanatory factors which one might find some way of researching more accurately.

    I have no problem with your supposition that there would not be a large overlap at age 22 (say) between those who are good academics (in most fields anyway) and those who create or run businesses well. But, if you are looking almost exclusively at high cognitive ability – considered as providing at least a threshold test beyond which other characteristics become salient – then I think Midrash’s “cleverest boy in the school” can be called in aid.

    Forget his rhetoric and consider all young men and increasing numbers of women who might aspire to the highest paid jobs in business or, because we are talking of cognitive abilities to good academic careers. At the 2 standard deviation level you have 12,500 people in every cohort of 500,000. If you accept 1 in a 100 as likely to be worth considering you have a pool of 5000 from your cohort of a few years school leavers. And nearly all in the First World will have the education to be competitive members of the pool if they wish. So it comes down mostly to the reasons they choose what they do. While you seem to suggest that the schools’ clever boys (and girls) couldn’t provide the numbers needed for the top jobs, that seems to support the idea that employers would have to bid salaries up. Unless perhaps you argue, and are correct in arguing, that cognitive abilities as measured by e.g. SAT scores or HSC marks, or honours degrees are not of much relevance in selecting executives or in their subsequent performance. But that is just plainly and undeniably wrong.

    Despite ridiculous rejections of the use of IQ tests by employers in the US (see SCOTUS case Griggs v. Duke Power Company from memory) there have long been thesholds set and advantages gained in business employment by reference to proofs of academic prowess or general cognitive ability.

  11. Julie Thomas
    June 7th, 2014 at 17:55 | #11

    Yuri,

    This article is a few years old and the person ‘speaking’ is a quant who gave up academia for the money.

    “After a long academic career I ended up doing theoretical physics for my PhD, and spent a couple of years at Cern in Geneva. Many people I know from back then are still at universities, doing research and climbing the slippery slope to professorships and fellowships.

    They work the same astonishing long hours as I do, yet get paid a fraction and, from a purely scientific perspective, get to do some really, really interesting science.

    I often say (only half jokingly) that I “sold my soul” – I make a little over £200,000 a year, including my bonus.”

    I have been in banking for over 20 years, and for several years I was with one of the major international investment banks. I discovered that I am just not enough of an arsehole to make it there.

    Why the top people at investment banks are like that? Well you have a thousand vice-presidents vying for 10 managing director posts. What do you think will happen? People will do anything to get ahead, back-biting, back-stabbing, the whole nine yards.

    For those of us who find life surrounded by other people difficult enough as it is, the requirement to network is hellish.”

    http://www.theguardian.com/commentisfree/2011/dec/01/quant-voice-of-finance

  12. J-D
    June 8th, 2014 at 16:29 | #12

    @yuri
    Piketty’s book is not just about economic inequality, but about increasing economic inequality. If economic inequality is a function of other variables, then changes in economic inequality over time should be explained in terms of changes in those over variables over time.

    Whether unequal distribution of intellectual abilities explains nothing about economic inequality, or a little about economic inequality, or a lot about economic inequality, or everything about economic inequality, the only way it can provide a direct explanation for changes in economic inequality over time is if the unequal distribution of intellectual abilities is also changing over time. Is there any reason to think that the unequal distribution of intellectual abilities is changing over time? Why would that be happening?

  13. yuri
    June 11th, 2014 at 11:07 | #13

    @Julie Thomas
    An interesting and, within the limits of anecdotal evidence, a relevant anecdote. (I wonder btw what his colleagues would say about him).
    It does logically support the idea that you have to pay a lot to get people as bright as that to give up the academy.

    I must ask my friend who gave up being a Wall Street quant to write books, both fiction and non-fiction, and opinion pieces, satire etc. He is reliably right wing if one could call someone so individual reliably anything. I suspect his take on it would have reference to the Philistinism of the New York equivalent of London’s “barrow boys” – even those with Ivy League degrees.

  14. yuri
    June 11th, 2014 at 11:19 | #14

    @Julie Thomas
    ….and I forgot to add that I am amused at the writer’s disaste for networking, though I sympathise, because not only is academic life full of it (who do you think gets the good jobs in universities, the extra funds for their departments, research grants etc.?).

    Also it is notorious that academic politics is a snakepit. I enjoy both the major explanations
    1. that the issues are so trivial that a fight couldn’t help resembling a bad tempered domestic barney;
    2. (comment from a well-informed real politician) the participants are so unpracticed and narrowly self-interested that they practise none of the skills or conventions which makes real politics work amongst the decent sophisticated professionals. (G help us with Palmer’s crew and some of the other weirdos who become Senators on 1st July!).

  15. yuri
    June 11th, 2014 at 11:35 | #15

    @J-D
    Interesting logical point that you take though not central to what I have been saying. Indeed I would add to your point the suggestion that the Flynn Effect draws attention to the relatively static distribution of genetic advantages in cognitive ability. However there are the logical possibility that the nature of paid work has itself changed the relative value of high cognitive abilities over the last X years (or indeed, it might, like global warming rates over a century or so, be up then down then up again). Not only technology and its proper use might be involved but the way work is organised locally or globally, the tendency of people to retire to enjoy their wealth (analagously to universties holding on to many of the brightest), the changeing cultural norms as, for example, the modest expectations and soldarity norms of the 30s and 40s dissipated in favour of raw and natural human nature, even Japan ceasing to be quite so tribal/feudal in its approach to the money that went with high places in the hierarchy…..

  16. J-D
    June 11th, 2014 at 12:44 | #16

    @yuri
    Let’s say we’ve got a hypothesis that says that the way income is distributed has changed because the way the economy is organised has changed and that has changed the relative economic value of variable intellectual abilities.

    Why shouldn’t we just simplify that to a hypothesis that the way income is distributed has changed because the way the economy is organised has changed?

    If the research strategy is to look for changes in the organisation of the economy that have changed the economic value of variable intellectual abilities, doesn’t that amount to ruling out, before the start and without any evidential basis, the possibility of important changes in the organisation of the economy independent of anything to do with intellectual abilities? Why should research be stultified in that way?

  17. Midrash
    June 11th, 2014 at 20:13 | #17

    @J-D
    I wouldn’t blame Yuri for giving up on following up your somersaults. Hasn’t it been you all along that has attempted to stultify any research programs that might look at his hypotheses by ruling out his willingness to entertain alternative and/or contributing hypotheses.

    Incidentally I don’t know why you would get into a tangle about possible changes in work requirements which might help explain a new premium paid to some rare talents, not least where the possession of those talents correlated highly with conventional measures of cognitive ability.

    If you need a simple concrete example to illuminate your understanding consider an economically vigorous country with no intellectual property laws. A complete modern suite of such laws are introduced. What a bonanza for the new breed of IP lawyers. Quite conceivably the average income of partners in leading law firms soars and stays high for many years….

  18. J-D
    June 12th, 2014 at 14:12 | #18

    @Midrash
    In the unlikely scenario of the introduction of a complete modern suite of intellectual property laws in a country it would be natural to expect a lot of work for intellectual property lawyers and teachers of intellectual property law. It’s not so easy to say to what extent this would increase (or even possibly reduce) general economic inequality.

    But Piketty’s subject is not a hypothetical change in economic inequality in a hypothetical scenario, but rather an actual change in economic inequality in our actual history, and I think we have enough information to rule out the possibility that this change was caused by the sudden introduction of a complete suite of intellectual property laws where none had existed before.

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