Piketty Trips Over Data Errors

Readers may already have heard that critics have found fault with the much-vaunted 'data' in Thomas Piketty's bestseller “Capital in the 21st Century”. Here is the critical article by Chris Giles in the FT in which these errors are discussed in detail (it is a pretty devastating critique). As is always the case in such instances, the data errors all seem to lend support to Piketty's arguments, natch. This is especially ironic because the book was praised far and wide for its allegedly convincing collection of empirical data. Yes, it may be Marxist propaganda, but will you look at all these data making his case!

As Robert Murphy points out, the Left has already begun a curious rearguard battle to preserve the book's suddenly tarnished reputation. Their new argument is that it is not the data that's important, but the theory! Well, they are actually right about that, the problem is only that Piketty's 'theory' is even worse than his data.

Writes Murphy (we encourage readers to read the entire article and also check out the links in the excerpt below for further edification on the topic):

“Thomas Piketty’s Capital in the Twenty-First Century is a moving target. The book contains foundational theoretical  problems , a misreading of the empirical literature that blows up his whole case , sloppy and absurd factual errors concerning tax rates  and minimum wage hikes , and shocking quotations  that reveal he has no desire to actually raise government revenue with his massive soak-the-super-rich schemes, but instead merely wants to prevent the formation of fortunes in the first place.

I am now beginning to suspect that this is the Frenchman’s rope-a-dope strategy. By this point, after I (and others) have been harping on one problem after another, the poor blogosphere reader is too fatigued to take it seriously when Chris Giles at the FT  alleges that Piketty’s most important scholarship–the thing that supposedly warrants Piketty a Nobel Prize, according to Larry Summers – is not only wrong, but contains deliberately fudged data.  Uh oh.

After explaining a bit more about the details (apparently, some of Piketty's data were off by 27%, so we're not looking at just small errors), Murphy comments on how Piketty's fans are now trying to blow the whole thing off. Regarding the defense that is mounted by the left he concludes:

“Summers was absolutely devastating in his critique of the theory underlying Piketty’s book. Yet Summers overall kept coming back to praise it, because Piketty gosh darn it had done “meticulous” work documenting the disturbing accumulation of wealth among the super rich over the last few decades. Except, as it turns out, that maybe a big chunk of those results were due to stupid mistakes or worse. (Be careful not to conflate wealth and income; that’s part of the confusion behind the various volleys of statistics from one camp to another in this debate.)

So that’s where we now stand: Plenty of progressives up till literally yesterday were saying yes yes, Piketty’s theoretical framework leaves much to be desired, but he’s a top scholar when it comes to the trends he’s documented. And now that much of that empirical work might be totally bunk, the defense is to argue that yes yes, the historical data might be the exact opposite of what Piketty claimed, but boy he offers some compelling theoretical predictions with which we must grapple.”

Obviously, Piketty's fan club is making things up as occasion demands.

Diverging data sets, a chart from Chris Giles' critical essay on Piketty's data – click to enlarge.

The Theory is no Good Either

So what precisely does the theory we 'must grapple with' consist of? As Robert Wenzel remarked after starting to read the first chapter of the book:

“I am just starting to read Thomas Picketty's new book, Capital in the Twenty-First Century. He doesn't take long to signal that his book is going to include a lot of bad economics.

This is  from the second paragraph in Chapter 1:

[T]he question of what share of output should go to wages and what share to profits—in other words, how should the income from production be divided between labor and capital?—has always been at the heart of distributional conflict.

First, there is no "distribution" going on at a macro level in free markets, which is implied here by Picketty. This phrasing suggests some type of central planning must go on. But, this is not the case. In a free market economy, each individual (or group of individuals, e.g. corporations) make decisions as to how much they want to allocate their funds, some funds may go to savings, that is, capital, some may be held as cash balances and some, by individuals, may go to consumption.

Second, there is no "distributional conflict." All decisions are solved at the individual micro level.

There is an implication here by Picketty that too many funds can be allocated to capital (or possibly consumption). This is absurd, especially when considering capital. The more capital in an economic region, the greater will be that regions standard of living.  There are no conflicts. I repeat, all allocation decisions in a free market occur at the individual level, which makes distributional conflicts impossible. Individuals put their money where they want it to go, no conflict, no problem.”

Even to those who know nothing about economic theory, it should be clear that prosperity and capital accumulation are quite closely correlated and that this is probably no coincidence.

A Case of GIGO

Charles Gave of Gavekal also made a comment on Piketty's ideas that is worth relaying:

“Thomas Piketty is one of France’s great (self-)anointed. Like the rest of his cohort, he eagerly supported François Hollande in the run-up to the 2012 presidential election. Once voted in, the great man started to follow Piketty’s advice, and massively raised taxes on capital. Naturally the policy failed miserably, so Piketty has published a book which explains — predictably — that his recommendations only failed because they were not applied on a worldwide basis. Apparently this book has now become a best seller.

The extraordinary thing is that Piketty’s analysis is based on a massive logical error. His thesis runs as follows: if R is the rate of return on invested capital and if G is the growth rate of the economy, since R>G, profits will grow faster than GDP, and the rich will get richer and the poor poorer. This is GIGO (garbage in, garbage out) at its most egregious. Piketty confuses the return on invested capital, or ROIC, with the growth rate of corporate profits, a mistake so basic it is scarcely believable.”

So we have a mixture of bogus data, muddled theoretical thinking along Marxist lines (the nonsensical Marxist 'iron law of wages' which supposedly proved that workers will never earn more than bare subsistence and would grow poorer all the time under capitalism is shimmering through quite clearly), and to top it all off, a case of GIGO.

No wonder the Left loves Piketty's tome. What is a bit mystifying to us is how it managed to become a bestseller, but envy sells in elections too, so perhaps it isn't such a great mystery after all.

As Ludwig von Mises said: “The history of capitalism in Great Britain as well as in all other capitalist countries is a record of an unceasing tendency toward the improvement in the wage earners' standard of living”.

(Photo via Wikimedia Commons)

Theory and 'Data'

As a brief additional remark, theory and history are two pairs of shoes. Even if Piketty's data were 100% correct (and anyone who knows even a smattering of history should instinctively realize that there must be something wrong with them), they would not 'prove' anything, because they concern the field of sociology, or better, praxeology.

Social relations cannot be 'explained' with 'data'. In the field of human action, theory is perforce antecedent to the data, in short, the proper method works the other way around: correct theory coupled with historical 'understanding' must be employed to explain why the data look a certain way, not vice versa. In this sense it is actually far more legitimate to defend Piketty's book on the basis of what he has to offer in terms of theory rather than the data, if not for the pesky fact that his theory is garbage as well.

The old saying about 'lies, damned lies and statistics' probably reflects a well-founded distrust of attempts to explain sociological relations by means of statistics and base arguments for intervention on statistical data (Hong Kong's former governor Sir John Cowperthwaite famously refused to collect economic statistics so as to not to tempt anyone to meddle with the economy. Under his governorship, Hong Kong advanced from one of the poorest to one of the richest places on the planet. QED).

As to the alleged evils of capitalism, just consider: 200 years ago, a nobleman would live in a drafty castle that couldn't possibly be heated properly in wintertime. There was no running water, no sewer and no water boiler. There was no computer, no internet, no radio, no car, no TV, and most certainly no smart phone. There wasn't even electricity (imagine, the only light at night coming from candles!), not to mention modern medicine. If one could make any of today's poor from a typical industrialized nation switch places with said nobleman for just one or two days, they would probably soon beg to be sent back.

And yet, here we have intellectuals like Piketty (or others of his ilk, such as Paul Krugman in the US) spending their whole life condemning capitalism. The German term for such people is 'Salonbolschewiken', which is actually more colorful than the US term 'limousine liberals', but essentially conveys a similar meaning. Socialist armchair revolutionaries, surrounded by the fruits of capitalism, often themselves quite well-off (definitely not 'poor' in any sense of the word), preaching the blessings of socialism and condemning free markets.

If not for the primacy of the non-aggression principle, one might be tempted to propose sending such people off to some rainforest, far away from civilization. Then they can adopt the lifestyle of 'noble savages', unperturbed by the iniquities of capitalism, while leaving the rest of us alone. Note that those supporting interventionist statist dogma are a lot less accommodating with regard to non-aggression: they advocate coercion every step of the way.

As a final remark, we have previously discussed inequality and why it should not be regarded as a problem per se. However, there are numerous types of interventions that do have a negative effect on those on the lower rungs of the socio-economic ladder, with the most obvious represented by inflationary policy (which results in the redistribution of wealth from later to earlier receivers of newly created money). There are also taxes and regulatory burdens that weigh disproportionately on small business and start-ups operating on a shoe-string and are as a result inhibiting capital accumulation by small entrepreneurs. All of these policies are obstacles to people making full use of their talents and achieving their aspirations. The problem in short is is that under the state-capitalistic system of modern regulatory democracies there is no longer equal opportunity. Obviously this cannot be remedied by raising the burden on capital further and instituting even more interventionist policies based on what seems little more than envy.