Piketty, Inequality, and a Call for Data

In his Arrow lecture on Friday, October 23, Thomas Piketty emphasized the use of data to guide both economic theory and policy. His recent book, Capital in the 21st Century (2014), does exactly that. The book is an in-depth look at the history of wealth and income inequality in Europe and the US since the 1700s. Piketty unearthed new data on measures such as income taxes in various countries, and uses the data to make empirically-driven economic and policy claims. Much of the book is historical. “I’m much better at talking about the past than the future,” Piketty admitted in the beginning of his talk.

Piketty noted that he considers himself more of a social scientist than a pure economist. Capital in the 21st Century is not just a summary of economic trends over the past few centuries—it also includes social and political history. This type of history is crucial to Piketty’s take on inequality, as he believes trends in inequality depend on the existent policies and institutions. Contrary to Marx (who argues that inequality naturally rises as an economy develops), and the Kuznets Curve (which says that inequality naturally falls as an economy develops), Piketty does not believe there are natural laws of inequality. Whether inequality rises or falls will depend on what type of policies and institutions are in place.

To demonstrate this point, Piketty compares data on inequality from multiple countries. He argues that the US and Europe have traded places with respect to inequality over the last century. In the early 20th century, inequality was much higher in Europe than in the US. Over the course of the century, however, the trend reversed, and inequality is now much higher in the US than in Europe. He attributes this reversal to policy and institutional differences, such as the relative rise of top managerial compensation, falling minimum wage, and rising college tuition in the US.

Piketty also stressed the importance of scrutinizing political claims—such as the existence of meritocracy or a lack of need for taxation. The data does not always support the claims. He displayed a graph showing a strong linear relationship between parent income and college attendance rates, noting that the, “hypocrisy when talking about equal opportunity is striking.”

Piketty believes that his data support the need for more progressive taxation. He found higher rates of return for greater amounts of wealth, although theoretically everyone should get the same rate of return. This phenomenon is difficult to study for individual wealth, since individuals don’t have to release this type of information. Therefore, he looked at the endowments of universities in the US and found that the larger the endowment, the higher the rate of return. This makes sense once you realize that wealthier universities can devote a lot more money to wealth management.

However, Piketty thinks that this could be a harmful trend, especially if it turns out that the same thing is happening at the individual level. It would mean increasing wealth inequality, with more and more wealth going to the top 10%, which he believes will create difficulties in the long-run. More progressive taxation, he argues, could help reverse this trend, although he admitted that this is unlikely to happen anytime soon.

True to his scientific values, however, Piketty readily conceded that he would change his mind if new, better data pointed to a different conclusion and course of action. He remarked that it is “always difficult to have quiet conversations about taxation,” but it is time to revisit assumptions and draw verifiable conclusions based on data.

More photographs from the event.

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Sara Altman '16 is an Ethics in Society Honors student majoring in Symbolic Systems.