“The major contribution of Piketty, often together with Emmanuel Saez, has been to bring to the table a huge amount of new data on inequality (Piketty and Saez 2003)”
-Daron Acemoglu, James A. Robinson
The objective of this entry is to open the discussion to a different point of view of Piketty’s work on inequality. The main source of information hereby explained is a paper by Daron Acemoglu and James A. Robinson called “The rise and decline of the general laws of Capitalism” which will be attached at the bottom of this article for further readings.
The main idea brought by Acemoglu and Robinson, also authors of the bestseller “Why Nations Fail” is that basically, Piketty’s analysis is not complete and leads to the wrong conclusions for not fully taking in to account the role of the endogenous evolution of technology and of institutions and the political equilibrium which not only influences technology and how markets function but also how the gains from different economic arrangements are distributed.
The first attempt to establish some “general laws” of capitalism was done by Karl Marx and basically he predicted that as time passes, capital accumulation would have at least three general consequences; the first being that real wages are stagnant; the second, as capital accumulates, the rate of profit falls and a third, which implies that capital accumulation leads to industrial concentration or reduces competition. Unfortunately for Marx predictions, history proved them wrong. As Marx was writing, real wages were in fact rising, and had being doing so for about two decades. According to Allen(2009a) the real rate of profits had also been increasing and the third law was not being fulfilled either. But why did this laws fail to explain reality? In Acemoglu and Robinson’s opinion, due to the fact that they ignored the endogenous evolution of technology and also the role of institutions and politics that shape markets. To mention some examples, real wages in Britain raised due to technological improvements, which also increased the demand for labor, this technological change was enhanced in part by the rationalization of property rights. Another legal framework changes were the abolition of the corn laws which lowered prices and raised real income of the population.
Addressing Piketty’s work, the most important critique that is considered by the authors of the paper is that whenever Piketty mentions endogenous technological or institutional evolution, their role is ad hoc but according to the authors it must be systematically introduced in the analysis. Perhaps anyone who is familiar with Piketty’s work will identify his third general law of capitalism as the most important of the three, which implies that whenever the rate of interest exceeds the growth rate of the economy capital income will grow faster than national income (r>g) and thus, inequality will rise. In other words, Piketty says that whenever the rate of return of capital significantly exceeds growth rate of the economy, it follows that inherited wealth grows faster than output and income.
Acemoglu and Robinson’s main arguments focus on the idea that Piketty rules out institutional, political and technological change and centers his forecasts in some kind of fundamental laws as is r>g. It’s shown in the paper that r and g cannot be taken as given and are in fact subject to adjustments due to changes in policies, technology and capital stock it is even proven that r>g is consistent with decreasing inequality.
Another main argument against Piketty’s analysis shown by the authors is that he does not show even basic correlations between r-g and changes in inequality, and much less any evidence of a causal effect. Giving two examples of Acemoglu and Robinson’s most important findings, they first run a regression of the top annual 1% share of national income against different proxies for r-g and find that in countries with higher g there’s a negative statistically insignificant coefficient as opposed to Piketty’s predictions. Moreover, taking into account larger periods of observations, they also find no evidence of lower inequality with higher g’s. The authors perform more experiments with Piketty’s data but find no concluding evidence of the laws proposed.
As mentioned before, Acemoglu and Robinson conclude that the failure of Piketty’s laws, accounts the lack of inclusion of institutional, technological and political evolution, the proposal of the authors is that any plausible analysis on inequality must include the endogenous evolution of this aspects of the society at the center of the study.
Rogelio Antonio Melo Juárez