economist Edmund Phelps on inequality

Last Friday, Edmund Phelps ,Nobel Laureate in economics and professor at Columbia, wrote an op-ed column in the Financial Times that addresses the topic of the day since the publication of Thomas Piketty’s Capital in the Twenty-first Century–namely, inequality.

Professor Piketty’s argument (see my earlier post on Piketty) is as follows:

–empirical evidence shows (although the FT has subsequently written a front-page article alleging serious errors in Piketty’s data) that over the past fifty years the percentage of total wealth in developed countries that’s in the hands of the super-rich has increased

–this is a straightforward result of capitalism at work,

–it’s unfair, and

–the best (only?) way to fix the problem is to tax the wealthy heavily and redistribute the proceeds to the rest of us.

Professor Phelps, who got his Nobel Prize for his work on entrepreneurship, begs to differ.  His points:

–strong increases in productivity, e=leading to robust economic growth, have been a hallmark of capitalism since its inception

–the innovative spirit of entrepreneurs has waned since WWII, causing the low-growth environment we’re in now–and the consequent concentration of economic gains in the hands of the wealthy.  It’s harder today to become wealthy.

–this is not the result of capitalism, but of corporatism.  As Phelps puts it, in the name of solidarity, security and stability, “Politicians have introduced regulation that has stifled competition; patronized interest groups through pork-barrel contracts; and lent direction to the economy through industrial policy.  In the process, they have impeded those who would innovate, or reduced their incentive to try.”

–in addition, in an attempt to secure their own personal fortunes, corporate CEOs have become obsessed with short-term results, eschewing innovation in favor of immediate stock price rises.  The obsession with wealth for its own sake is a sickness, which is doing grave damage to overall growth prospects.

In Phelps” view, egalitarians like Piketty have fundamentally misassessed the malady affecting mature western economies.  More than that, their policies are actually causing what’s wrong.  Raising tax rates on the income of entrepreneurs who are lucky enough to become very wealthy won’t restore dynamism to the US or EU economies.  Quite the opposite.  And increased dynamism is what the west needs to restore lost productivity growth.

my take

Personally, I’m skeptical of analyses that boil down to following a single principle, whether it be “leave entrepreneurs alone” or “redistribute the wealth.”

I also think that in order to survive in French academics you have to end up with the kind of conclusion Piketty does–that France is the high point of modern economies and that it can only be improved by having more of the same.  I also don’t have a great deal of faith that the extra taxes would end up being put to productive use.  And the exodus of entrepreneurs from France since the Hollande administration took office gives a hint of what effect higher taxes will actually have.

So, although I think there are serious issues with hereditary wealth and I don’t think nineteenth-century capitalism is the way to go, I’m with Phelps on this one.



Piketty on inequality

Capital in the 21st Century

Last year,  Le Capital au 21e Siècle, authored by Thomas Piketty, a researcher on economic inequality who teaches at the Paris School of Economics and who has been publishing academic articles for the past 15 years, came out in France.   Virtually no one (me included) read it.  But then it was picked up and translated into English.  It has become a runaway bestseller in the two months since then for that most unlikely of places, the Harvard University Press. Last weekend I even saw Capital in the 21st Century displayed prominently in the Bestseller rack of the only book kiosk in the San Francisco airport.

To be clear, I haven’t read C21C,  and I have no present intention of doing so.

But I have seen it and I thought about buying it.  That’s the next best thing to having it on my bookshelf  …which is pretty close to having turned the pages   ….which is the next best thing to having understood the arguments.   That’s why I don’t feel so bad about writing about Prof. Piketty’s work this morning.

The book is almost 698 pages long in English, close to 1,000 in French–and probably a zillion as an e-book.  It also has a technical annex available online that contains all the supporting data used (whose validity has been questioned in a front page, above-the-fold article in the Financial Times–no response from M. Piketty yet).  The detailed annex is thought to be the book’s best feature.

The main theses of C21C are:

–over the past fifty years there has been a steady rise in the percentage of a given country’s wealth being captured by the already rich.   This can be seen everywhere there are records of wealth available.  The rich continue to get richer, the poor, poorer

–this phenomenon is just the way it is in the capitalist system

–the best (only?) way to remedy this bad situation (for 99% of us) is for government to tax the rich heavily and redistribute the money it collects to everyone else.


What grabs my attention is the uproar that C21C has created in the English-speaking world. I think this shows that inequality is a much bigger hot-button issue than I had realized.

I can understand why C21C is popular.  Prof. Piketty presents a simple, universal framework for understanding the complex problem of how to provide equal opportunity for all citizens.  More than that, no one is at fault for the way things are now.  Inequality isn’t due to bad schools or discrimination, to the failure of corporate boards to rein in CEO pay, or to regulators’ failure to thwart the perfidy of crooked traders at commercial banks.  It’s just the way capitalism works (just as churning out 700-1000 pages to present a few simple ideas is the way academia works).

There’s also a simple, politically popular solution–redistribution.

It may well be that C21C will prove a flash in the pan, and that the book will take its place on bookshelves alongside other unread (I typed “undead” initially–must be my unconscious in overdrive) tomes like Alan Greenspan’s The Age of Turbulence or the Steve Jobs biography.

On the other hand, it may stimulate a useful public policy debate on inequality in the US.  The only worrisome outcome, to my mind, would be that its conclusions might be taken uncritically as a justification for policies that don’t seem to have done a whole lot of good so far for France.  Great for the US, though, if all the French techies who have decamped to Silicon Valley are any good.