Blume and Durlauf Review Capital in the 21st Century

Professors Lawrence Blume and Steven Durlauf have a very critical review of Capital in the 21st Century in the August Journal of Political Economy. I think they may have taken the bait Piketty dangled in front of the economics profession by couching his explanation for inequality dynamics over time in the costume of neoclassical macroeconomics. The more I consider Capital in the 21st Century, the more I think Piketty may have executed the most brilliant matadorial maneuver in the history of economics by using neoclassical machinery to argue that capitalism generates high inequality. That induced the economics bull to charge Piketty's red cape, but when the dust finally settles, it's the neoclassical machinery that's been gored.

Blume and Durlauf spend a lot of time attacking Piketty's neoclassical model, but then on pg. 761 they concede the crucial point by saying there are all sorts of reasons why factor prices need not be determined by marginal conditions in reality. They return to the theme in the discussion of the "supermanagers" in the wage inequality section, where they contort the meaning of marginal productivity to be consistent with any observed wage bargain.

The authors also make a play for the argument that inequality doesn't matter under current circumstances because the absolute wellbeing of the poor in rich countries is adequately high, and that certain absolute advances will be reversed only under "bizarre scenarios." They elaborate:

Fogel (2004) makes an argument that improved nutrition played a major role in the attenuation of economic inequality because it allowed the disadvantaged to qualitatively increase labor force participation and effort at work. These phenomena are not going to be reversed any more than mass vaccination or other medical advances will be.

Durlauf is usually among the most historically informed of prominent contemporary economists (unlike some people), and his references to history are, on the whole, probative. But that statement is profoundly ahistorical. I was planning to list examples of past demographic collapse arising from economic dislocation, but then Case and Deaton came along last week and brought a case of it to public attention for me. [Though the truth sounds like it might be less disastrous than Case and Deaton make it out.]

 

More generally, people have gotten absolutely worse off all the time in history--specifically, when they lose power to rapacious conquerors and other agents of exploitation. That not only could happen--it is happening right now. The return of aristocracy is an empirical phenomenon we observe! To say "this could never happen, which I conclude because we don't have Dukes and Earls" is just stupid. It's also bizarre for Durlauf to say it, because he has written about the "puzzle" of why inter-group inequality has not attenuated over time. Well if gaps stop closing, wouldn't you think it might be possible for them to re-open? Blume and Durlauf accuse Piketty of engaging in "Whig History," a false comparison, but their own strange arguments about the impossibility of historical retrogression suggest a similar tendency in themselves.

Returning to the wage inequality section, the authors seem not to be aware of Piketty, Saez, and Stantcheva (2014) (the "three elasticities" paper), since they say Piketty has done no original research on wage determination of top incomes, and that he is "careless with theory, and empirical evidence is presented in an unreflective and selected fashion." Piketty is nothing EXCEPT reflective, and the research he doesn't present is the stuff he thinks is crap. This isn't a Handbook of Inequality Economics, because if it were he'd have to include a lot of shit.

In the Policy section, Blume and Durlauf say Piketty considers no policies beyond capital taxation and ex-post redistribution. That just fails to even consider the arguments he makes throughout the book that taxation affects the ex ante distribution of both capital and labor income. In fact, the whole book could be interpreted as making that argument.

In short, Blume and Durlauf's review reads like it was written in a fit of pique, and it's a little tough to see why, though part of it is sensitivity to Piketty's own public questioning of the economics establishment, and specifically the work of Gary Becker. There have been other attempts to write Capital in the 21st Century out of respectable academic debate, a maneuver attempted once again at Piketty's appearances at the University of Chicago on Friday. I'd wager they won't be successful, thank God.