Over the weekend, the Financial Times (FT) made the stunning accusation that French economist, Thomas Picketty’s, best selling book, Capitalism in the Twentieth Century, has made fundamental errors which undermine its findings.
According to the FT, some of the data points that Piketty has used to support his arguments about massive inequality in the UK and Europe are spurious or inexplicable, and that “some numbers appear simply to be constructed out of thin air”. Moreover, “the conclusions of Capital in the 21st century do not appear to be backed by the book’s own sources”.
The story has dominated headlines around the world (see this morning’s Links for a sample), and led to widespread debate. If correct, the FT’s allegations could be as damaging as those leveled last year last year at Harvard economists, Reinhart and Rogoff, which studied the relationship between growth and debt and was subsequently found to have been based upon a flawed spreadsheet, thus undermining its legitimacy.
Indeed, many right-wing commentators have jumped upon the FT’s accusations and joyfully claimed that it will scuttle Picketty’s chances of landing the Nobel Prize in economics.
Others, like The Economist magazine, claim that whilst the FT’s analysis of Picketty’s findings is impressive, it “does not seem to support many of the allegations made by the FT, or the conclusion that the book’s argument is wrong”.
For his part, Picketty has told the FT that: “I have no doubt that my historical data series can be improved and will be improved in the future … but I would be very surprised if any of the substantive conclusion about the long-run evolution of wealth distributions was much affected by these improvements”. Moreover, as noted by The Guardian, “It was Piketty who made the data freely available so that others could check his work and influential publications and think tanks have given him their backing”.
In any event, there is no denying that inequality has worsened materially, as argued by Piketty.
Earlier this year, Oxfam released a report, entitled Working For the Few, which also highlighted the extent that inequality has grown across the globe.
According to Oxfam, the world’s richest 85 people own as much wealth as the poorest 50%, with the top 1% holding 65 times the total wealth of the bottom half of the world’s population. Moreover, the richest 1% increased their share of income in 24 out of 26 countries for which Oxfam had data between 1980 and 2012, with the wealthiest 1% in the US capturing 95% of post-financial crisis growth since 2009, whereas the bottom 90% became poorer (see below charts).
Oxfam also claimed that the increasing concentration of economic resources in the hands of fewer people presents a major threat to political and economic systems. In particular, people are becoming increasingly separated by economic and political power, leading to heightened social tensions and increasing the risk of societal breakdown. Laws are also increasingly favouring the rich, driven by a “power grab” by wealthy elites, who have co-opted the political process to rig the rules of the economic system in their favour.
Oxfam’s and Piketty’s view has also received support from the Internationally Monetary Fund, which earlier this year highlighted the threat posed to the global economy by growing income inequality:
“…in far too many countries the benefits of growth are being enjoyed by far too few people. This is not a recipe for stability and sustainability,” [Christine Lagarde, managing director of the IMF] told the Financial Times…
Unfortunately for everyone who cares about this issue, inequality is likely to worsen before it gets better, as improvements in technology and robotics place at risk a large number of skilled jobs, hollowing-out the middle class and increasing returns to owners of capital at the expense of labour.
