peristaltor | Megan McArdle: Definitely Part of the Problem

Hello, LJ. How've ya been? I've been busy doing things. One of those things is trying to digest Thomas Picketty's Capital in the Twenty-First Century. It's thick, almost as thick as I am. Which is why it is taking a while.

While I'm letting some time hopefully help stew the meaty data and theories found within, I wrongly decided to look up some thoughts on the book from other readers. Big mistake, I guess.

Anyone out there know who the hell Megan McArdle is?

I just finished Ms. McArdle's snarky synopsis over on Bloomberg. She seems to do a lot of liberal bating—no, I did not misspell that. "Bating" in Shakespeare's time was to abate a beast, to hold a beast in restraints, usually a bear and usually with chains, and turn other beasts on it. The bated beast, though larger, had only so much reach of claw, while the mobile smaller beasts had, well, mobility. If they fought as a pack, they could theoretically win. Bets were made. It was quite the popular sport.

Were the author to "bait" liberals, she would undoubtedly throw out goodies for them to find as a lure to her trap. Ah, but it isn't a trap so much as it is a swipe. In the argot of the intertubes, a good bating means throwing out snarky bits while the target of your snark is safely bated, locked behind their own viewscreen and distant enough from criticism that the mobile McArdle can attack from many different directions over time. Ignore their IMs and emails, and you can swipe, swipe, swipe, along with the rest of your anti-liberal attack dogs.

Here are some good examples. (The online edition of this story has multiple pages; I'll mark which of the seven pages below.)

Booksellers have been unable to keep Capital on their shelves. (The physical version is vastly more popular than the Kindle edition; people apparently prefer to haul around the 700-page tome, or maybe leave it on the coffee table where guests can see it.)

(p. 1)

Ooh, nice slam. Rather than note how inferior and silly electronic readers generally are, we pretend that a physical edition will wow and impress! Conspicuous intellectualism!

Liberals love its affirmation of their sense that the rich have never been richer, while conservatives worry it is an attempt to steal a base in the ongoing battle to tax private wealth.

(p. 1)

That's a problem with reality, the darned liberal bias. Conservatives should be worried.

At the end of page 1, there is some very, very incomplete quoting from the book—the only quoting McArdle bothers with, which is revealing. I'll return to that in a bit.

The book is long because Picketty is systematic. He is trying to build a thesis into the book, a thesis pretty much unknown to most of economics. Back to McArdle.

When Capital in the Twenty-First Century turns to analysis, Piketty deftly works in Honoré de Balzac and Jane Austen. But the heart of this section is more algebraic than literary: r > g has become a somewhat unlikely catchphrase among many left-leaning commentators.

(p. 3.)

Well, yeah. Picketty has given people a good short-hand to use. Why not use it? The snark toward "left-leaning" is just plain silly. The math on this section seems quite sound, sound enough for conservatives to use as well. Why hasn't it become a catchphrase among them?

The answer gets back to that incomplete citation. Throughout the book, Picketty returns to his adventure in academia American style. Let me quote what McArdle bothered to quote, found in Picketty's book on pp 31-32.

In the introduction to Capital in the Twenty-First Century, he writes, “My thesis consisted of several relatively abstract mathematical theorems. Yet the profession liked my work. I quickly realized that there had been no significant effort to collect historical data on the dynamics of inequality since [Simon] Kuznets, yet the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained. And it expected me to do the same.” He returned to France and “set out to collect the missing data.”

(p. 1.)

Here is the opening to the very next paragraph from Picketty:

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all to often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.

(Thomas Piketty, Capital in the Twenty-First Century, President and Fellows of Harvard College, 2014, p. 32.)

"Acquiring the appearance of scientificity!" What a beautiful and damning mockery of the US edifice of orthodox economics! Seriously, folks, those three sentences had me laughing and cheered out of the funk induced by considering the daunting slog of a 700+ page read ahead! If the author could make such a poignant poke even through the fog of translation—Picketty wrote Capital in French, and translator Arthur Goldhammer allows my feeble single language to absorb it—what wonders can he do with data and new, empirically-based theories!?!

But obviously, McArdle is too tuned into the ooky-spooky wiz-bang gizmography that is the Economics Edifice. When she challenges Picketty's points later in her article, she does so after consulting an economist, Harvard University economics professor Kenneth Rogoff! I'm not saying Rogoff is a slouch who deserves no attention—this time—but his contributions to McArdle become all too obvious anyway. Let me demonstrate.

The idea that r is greater than g itself is not so disputed. “Of course r is greater than g,” says Rogoff. Winship says it’s “basically noncontroversial, because you have to have some compensation for risk.” People who save and invest their money are choosing to trade away today’s income in exchange for income tomorrow. Investments have to pay a premium to get people to park their money—and since the future is uncertain, that premium has to be pretty large.

"Of course," says Rogoff? Why?!? Seriously, Picketty expounds that showing the rate of return on investment is greater than the growth of the economy elicited shock amongst economists in general. For Ms. McArdle to casually toss off Rogoff's dismissal without elaboration is beyond excuse to those who have actually read that far in Capital.

Including the other guy Winship's explanation completely misses the point, but does reveal something. Winship goes into an economist's explanation. Let's remember the disdain Picketty holds for most of these explanations. *cough*scientificity*cough* Continuing with McArdle:

Whether he’s right depends on a number of things. For example, as the stock of capital gets larger, the return on each additional dollar invested into capital is likely to fall. If you’re the first person to open a fast-food restaurant in your town, the return on your investment is probably pretty high. If you’re the 80th, you should have more modest expectations.

(p. 3.)

Picketty addresses this logic, which McArdle so obviously got from an economist that it just hurts. She is paraphrasing the theory of marginal productivity here (if memory serves). And that example with the restaurants is pretty sound. Things get into the weeds on the next page.

If, as Summers and others argue, labor and capital aren’t very good substitutes—meaning additional dollars invested require new workers to make the investment profitable—then over time, as capital grows faster than the labor force, the return on new investment will fall pretty sharply, either because you can’t get workers to operate your machines or you have to pay them higher wages to get them to work for you. On the other hand, if it’s relatively easy to substitute capital for labor—imagine staffing your fast-food restaurants with hamburger-cooking machines and order-taking computers that never take a break and don’t demand raises or health insurance—then additional investments may be made at a high rate of return.

(p. 4.)

There's a missing element from this argument. It assumes that the marginal productivity theories of capital and labor are accurate, an assumption that Picketty scornfully dismisses:

According to the simplest economic models, assuming "pure and perfect" competition in both capital and labor markets, the rate of return on capital should be exactly equal to the "marginal productivity" of capital (that is, the additional output due to one additional unit of capital). In more complex models, which are also more realistic, the rate of return on capital also depends on the relative bargaining power of the various parties involved. Depending on the situation, it may be higher or lower than the marginal productivity of capital (especially since this quantity is not always precisely measurable).

(Picketty, ibid, p. 212, I emboldened.)

Relative bargaining power is difficult to model mathematically, though, so . . . economists usually ignore it. And if we apply an asymmetrical bargaining position to the Winship explanation of why r > g above—you know, the bit about "because you have to have some compensation for risk", investors get to charge a bunch—the fact that investors get to charge whatever they want thanks to their relative bargaining power makes this "parking of capital" just plain silly.

And what happens when this asymmetrical relative bargaining power is applied throughout the world? Why, we get the situation we have today. It's called Colonialism! There is a popular economic theory that investment all over the world will eventually mean we will all be rich one day. This is just another silly assumption, of course, assumed by the silly. It's one of the reasons, I think, McArdle trotted out the marginal productivity example in her piece; the logical outcome to capital investment in marginal productivity terms is Enrich the World! To which Picketty responds, after summing the theory:

Thus the wealthy countries—or at any rate the residents of wealthy countries with capital to spare—will obtain a better return on their investment by investing abroad, and the poor countries will increase their productivity and thus close the gap between them and the rich countries. According to classical economic theory, this mechanism, based on the free flow of capital should lead to convergence of rich and poor countries and an eventual reduction of inequalities through market forces and competition.

This optimistic theory has two major defects, however. First, from a strictly logical point of view, the equalization mechanism does not guarantee global convergence of per capita income. At best it can give rise to convergence of per capita output, provided we assume perfect capital mobility and, even more important, total equality of skill levels and human capital across countries—no small assumption. In any case, the possible convergence of output per head does not imply convergence of income per head. After the wealthy countries have invested in their poorer neighbors, they may continue to own them indefinitely, and indeed their share of ownership may grow to massive proportions, so that the per capita national income of the wealthy countries remains permanently greater than that of the poorer countries, which must continue to pay to foreigners a substantial share of what their citizens produce (as African countries have done for decades).

(Picketty, ibid, pp. 69-70, I substituted Italics for Bold.)

McArdle continues, sadly. And I say "sadly" not just because the force of her arguments wilts compared to the force of Picketty's, but also "sadly," like how one would describe a lone dancer swaying to the music alone on the prom dance floor while his or her date is banging a best friend in the rest room. Here's a bit:

Piketty’s work suggests that this era was an historical anomaly, and he predicts that capital will dominate the future as it did before the wars. But predicting the future can be hard work.

(p. 4.)

Umm, your point?

Imagine an ancestral Thomas Piketty sitting down in 1913 to write Capital in the Twentieth Century. Such a book would probably have shown a continuation of long-term trends, with a tiny European elite deriving most of their outsize income from investments or land. He would probably predict that capital income, which had recently been rising in Britain and France after a 30-year decline, would continue to soar. In other words, his major prediction would have likely been totally wrong.

(Still p. 4.)

So, if he were wrong, he would be wrong! Damn! Why didn't he think of that?!? Still, she continues. "By extension, any policy changes he suggested would also be wrong. This section of the book, and especially Piketty’s proposal of a global tax on wealth to prevent the accumulation of massive fortunes, is almost universally viewed as the weakest."

Wow. Taxes are not popular. Therefore the best thing to do would be to . . . I'll say something for Picketty: He actually proposed something. You, Ms. McArdle? You opted for deflection.

Even if we assume Piketty’s prediction is correct, that economic forces favoring capital will cause it to accumulate and concentrate in the hands of a hereditary superelite, and even if we assume his remedies would work, that leaves one big question to debate: Is this really the most important issue facing the world, “the defining challenge of our time?"

(p. 5.)

"Oooh, look at that poor boy over there with all that theoretical work! His conclusions are problematic, so I doubt there is much to his protestations of importance. So sad."

But Ms. McArdle is far from finished. She has many other errors of reading to commit, though a few of them might have been furnished by her editors. (I suspect the really bad cartoon of taxes heisting the richy-rich's car might be an editorial choice, for example.) Here's one: After noting that "the U.S., after all, is where income inequality is extreme," she attempts to deflect again. "But Piketty’s book is primarily about wealth inequality."

Yes, yes it is. And water is still wet. She does get the gist of Picketty in the next sentences, thankfully, though she dismisses the importance. "Income can create wealth, though if that happens, it will be far in the future." Will it?

Picketty himself notes that the scale of the income disparity in the US is completely unprecedented in all of recorded history:

Is it possible to imagine societies in which the concentration of income is much greater [than found in countries like the US today]? Probably not. If, for example, the top decile appropriates 20 percent of each year's output (and the top centile took 50 percent just for itself, as in the case of wealth), a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening.

(Picketty, ibid, p. 263.)

Picketty is quite specific on the enormous income question. It is mostly not the most cited suspects in the press, the professional athletes, musicians and movie stars in terms of raw numbers of people. Those people are simply statistical anomalies due to their fame, not really worth considering. The real money goes to the top of the CEO class.

The income started to shoot up to the supermanager class, according to Picketty, starting in 1970. And the most likely reason? Here, I have read the book, but not collected my notes, so I do not have a direct quote. If memory serves, the uneven bargaining power phenomenon rears its ugly head once again in a slow-motion feedback loop.

The top management of big corporations can negotiate their salary. They negotiate this with other managers. As managers pay themselves more, they pay themselves more. As their taxes fall—which they did, spectacularly—every additional bit of income increases the size of the pot, so getting a really big increase to your salary and holdings means the increase must be really big.

Again, this happened in a time of falling influence of labor, so the difference between the pay at the bottom and the pay at the top is exaggerated. And it is continuing. As Picketty says, "I want to insist on this point: the key issue is the justification of inequalities rather than their magnitude as such." (p. 264.)

I should also note that Picketty sees most of the increase in incomes at the top as a social phenomenon, that is, people of one subgroup of society—people with connections to other people with money, that is—get the good jobs despite their educational opportunities. The top income earners in the US are therefore very much like the ancient plutocrats of Britain and France, the characters of Balzac and Jane Austen Picketty quite entertainingly quotes throughout Capital.

A point McArdle completely fucking misses.

Instead, she says:

Instead of the interest-collecting gentry of Jane Austen novels, we have Horatio Alger’s entrepreneurs on the make—an elite of doctors, lawyers, CEOs, financiers, professional athletes, and movie stars who mostly did not inherit their wealth.

(p. 5.)

No, the top earners "did not inherit their wealth." And if you had read Picketty seriously, you would know that. It is beside the point and completely irrelevant and absolutely not worth discussing. Am I being redundant enough? As for the "entrepreneurs on the make" crack, refer to the explanation I gave above. Social connections are the main way to getting a high income job, according to Picketty. Therefore, Ms. McArdle, you are preaching to ~~your publisher, a billionaire~~ the choir in general.

Furthermore, Horatio Alger's books are a pain the ass to read. They are simple schmaltz for simpletons, completely devoid of reality. I've read Ragged Dick (he's the main character, not the motivation for an old porn book, you perverts). There is no way homelessness could be described with less sympathy, let alone less verisimilitude. By contrast, Austen's books are a joy of detail.

One last shot. I'm getting tired of her shit. After listing even more "complications" of Picketty's theory that reveal she has not really considered those theories properly, or has tried to clear them with the scientificity double-domes in the orthodox econ pulpits, she writes: "Judging from the reviews and the reaction and commentary, most readers are probably not looking to tease out these sorts of complications." (p. 7.) Well, if they are as poorly summarized as you put it, possibly. Picketty's summaries are far better, though.

Continuing: "They are interested in the book’s broad sweep, in Piketty’s evidence that they are right to feel something is wrong." Jumping Jesus on a pogo stick, McArdle! You just won't let this bating go until the liberal straw men have been slashed to death, will you?

Yes, Picketty is worried about inequality. Yes, others are as well. No, I don't suppose that is something you can consider while you publish at Bloomberg Businessweek, not with a couple billionaires poking heads into your office every now and again, billionaires who at the very least hire underlings to do the hard reading for them and alert them to signs of heterodoxy.

But seriously, maybe you should consult someone who has more carefully read the book and include them in the article. Maybe you should at least include a few voices that aren't complete lickspittle blatherskytes for the plutocracy, economic hit men and women—like yourself, obviously!—just hoping to score enough liberal bashing and swiping points to get invited to the next fashionable cocktail hour, one necessarily interspersed with regular trips to the loo just to powder the brown off the nose.