On what would normally be a very quiet Friday evening, the Financial Times has managed to stir up a significant controversy involving Thomas Piketty’s widely-lauded book, Capital in the 21st Century. Unlike many economists, Piketty provided an online annex and his spreadsheets, which showed the sources he relied on.
According to authors Chris Giles and Ferdinando Giugliano:
An investigation by the Financial Times, however, has revealed many unexplained data entries and errors in the figures underlying some of the book’s key charts.
These are sufficiently serious to undermine Prof Piketty’s claim that the share of wealth owned by the richest in society has been rising and “the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945”.
After referring back to the original data sources, the investigation found numerous mistakes in Prof Piketty’s work: simple fat-finger errors of transcription; suboptimal averaging techniques; multiple unexplained adjustments to the numbers; data entries with no sourcing, unexplained use of different time periods and inconsistent uses of source data.
Together, the flawed data produce long historical trends on wealth inequality that appear more comprehensive than the source data allows, providing spurious support to Prof Piketty’s conclusion that the “central contradiction of capitalism” is the inexorable concentration of wealth among the richest individuals.
Once the data are cleaned and simplified the European results do not show any tendency towards rising wealth inequality after 1970.
The US source data are also too inconsistent to draw a single long series. But when the individual sources are graphed, none of them supports the view that the wealth share of the top 1 per cent has increased in the past few decades. There is some evidence of a rise in the top 10 per cent wealth share since 1970.
The article discusses the sorts of errors it found in more detail, including what look like data entry errors, unexplained one-off adjustments to data, weightings used in averaging different data sets, and inconsistent time periods used in comparisons. The pink paper argued that two major claims in Piketty’s book, that the concentration in wealth had increased after 1970, and that the share held at the top was greater in the US than in Europe, was absent when his data was corrected.
The Financial Times story had more of a “gotcha” tone that one expects to see in the mainstream media, and compared the mistakes to the famous spreadsheet errors in Carmen Reinhart’s and Kenneth Rogoff’s work on debt to GDP ratios. But at least so far, there is a key difference: only one other study had found results similar to the those claimed by Reinhart and Rogoff. By contrast, Piketty is far from alone in finding rising concentrations of wealth at the very top; Demos points out that a new study published by Garbriel Zucman and Emmanuel Saez paints a post-war picture similar to Piketty’s. Thus the FT’s assertion that their corrections of Piketty’s data show no increase in wealth concentration is an awfully bold claim, and will likely be scrutinized as much as the errors and possible methodological shortcomings that Giles found.
Piketty issued a response that may strike some readers as unduly general, but it isn’t clear whether the Financial Times gave him a complete list of their errors and points of disagreement. But his response isn’t defensive (a contrast with Reinhart and Rogoff), so he at least gets points for being willing to engage in a discussion.
My bet is that the Lance Taylor critique will in the end do much more to undercut Piketty’s findings than the Financial Times corrections and recalibrations, as useful as those are. Taylor challenged the widely-touted Piketty’s assertion that r > g (the rate of return on capital exceeds the growth rate of the economy). NC reader Ben Johannson provided a helpful summary of Taylor’s paper:
1) Taylor makes the point that Picketty’s determinations of the rate of profit and the capitalists’ share of those profits assume a fully employed global labor force due to his use of the neoclassical production function (the one trashed back in the 1950s during the Cambridge capital controversies). This is THE critical error in Picketty’s work, that capital can be aggregated and differences simply assumed away while the reality of effective demand is ignored.
2)The rate of profit and share of net profits will vary over time depending on the business cycles, employment level, monetary policies, technical changes, etc. The neoclassical production function referenced above does not take this into account.
3) The accumulation of wealth at the top is not an autonomous product of “capital”, some natural law of economics which states that it will always produce growing inequality, but rather a product of specific policies which can be reversed. Altering the ratio of output/capital and the share of profits taken by the capitalist class is the better and more easily implemented choice for reducing inequality rather than taxation. In other words rising real wages is more effective in sustaining aggregate demand and attenuating capitalist power, while relying on taxation will fail to address stagnating wages and continue the current trends.
While it is critically important that errors be unearthed and examined for their seriousness, some of the FT’s “gotchas” are clear mistakes, while others appear to be disagreements about how to deal with complex and inconsistent data sets. For instance, as Neil Irwin at the New York Times notes (boldface original):
Some of the issues identified by Mr. Giles appear to be clear-cut errors, and others are more in the realm of judgment calls in analyzing data that may not be fully explained by Mr. Piketty but are not necessarily wrong….
But does it matter? Mr. Giles attempts to reconstruct estimates of wealth inequality, correcting for what he describes as Mr. Piketty’s errors. He finds significantly less evidence of a rising disparity.
Speaking of Britain, for example, Mr. Giles writes, “There seems to be little consistent evidence of any upward trend in wealth inequality of the top 1 percent.” He further writes that if one incorporates the different British data into numbers for Europe as a whole, and weights by population instead of weighting Britain, France and Sweden equally, “there is no sign that wealth inequality in Europe is rising again.”
That is a damning conclusion, and if it holds up to scrutiny, would significantly undermine the case Mr. Piketty mounts. But Mr. Giles himself writes that “while this post is clear about what is wrong with Piketty’s charts, it is much less certain about the truth.”
The two most serious-looking types of errors that the Financial Times found were arbitrary data adjustments and data with no source and no explanation as to why/how it was created. This may be simple failure to document adequately or in a worse-case scenario could look a lot like data-diddling.
With Piketty’s book having gotten so much attention over the last few weeks, it’s a given that there will be a lot of eyes on the Giles findings and considerable debate over how much of an impact they have on Piketty’s conclusions. So hold tight and see how this shakes out.