The Piketty debate in the business media

Thomas Piketty, the author of the much reviewed “Capital in the Twenty-First Century,” is likely glad this week is over. The Financial Times sparked a media debate after a story criticized his data.

The story by Chris Giles and Ferdinando Giugliano broke on May 24 and claimed that Piketty made mistakes in reaching his conclusions about the distribution of wealth:

The sense of diligence in Professor Piketty’s compilation of trends in wealth is bolstered by an online technical annex and spreadsheets containing the data, with sources.

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.

This article set off a huge debate about Piketty’s methods and what it means to be an economist these days. Megan McArdle had the cover of Bloomberg Businessweek, featuring a mock teen magazine cover, chronicling his rise to fame and his research:

Over the past decade, Piketty, along with Saez and others, has deepened and expanded his work on income inequality, which eventually blossomed into the World Top Incomes Database. This work has been especially popular with the left—Piketty’s become one of its standard bearers in France. He took a break from his academic career to advise Socialist Party candidate Ségolène Royale when she ran for the presidency, and though he has not been an official adviser to the current Socialist president, François Hollande, he did join 41 other economists in signing a public letter of support. (This is not as startling as it may sound to American ears; the Socialist Party is France’s major left-wing political faction, akin to Labour in Britain and the Democrats in the U.S.)

Piketty’s book is an expansion of his earlier work but also a significant departure: For the first time he is attacking the problem of wealth inequality, as well as income inequality. People frequently speak as if the two are interchangeable. They are in fact quite distinct—one does not imply the other—and part of what makes Capital in the Twenty-First Century so important is that it provides a comprehensive account of the coevolution of income and capital.

The first thing to understand about Capital is that it is not really one book. There’s a data book, an analysis book, a book of projections about the future, and a book of policy recommendations based on those projections. All four are packaged within its 700 pages and frequently interleaved. Each has different strengths and weaknesses, a different style of argument, and a different audience—and when you see commentators yelling at each other about the contents, it’s probably because they’re talking about different books.

Neil Irwin had Piketty’s response to the criticism in The New York Times:

In response to a request from The New York Times to further address the criticisms, which The Financial Times published on Friday, Mr. Piketty, a professor at the Paris School of Economics, wrote that his data were correct, and his conclusions stood: Wealth inequality in Europe and the United States was high in the years before World War I, fell for much of the 20th century, and has been rising sharply again in the past three decades.

He argued that many of the things that The Financial Times identified as sloppy or arbitrary were in fact considered choices, which he explained in footnotes. Reasonable people might disagree with some of his choices of how to handle the data, he says. But even where there’s room for debate, any reasonable changes to his methodology would be small and not alter the broad conclusions, he suggested.

The part of the newspaper’s critique that throws the most doubt on his overall conclusions is its argument that wealth inequality in Britain has risen much less than Mr. Piketty contends. For that, he has sharp words. He says the newspaper’s analysis rests on apples-to-oranges comparisons of past data from tax returns mixed with current data from surveys, which makes the conclusions they reach deeply flawed, and contrary to what a wide range of other studies have found.

Forbes contributor Scott Winship defended Piketty and called the FT’s analysis “blown out of proportion”:

My initial assessment from Friday is mostly unchanged. The Financial Times blew the data issues it identified out of proportion. Giles discovered a couple of clear errors and a number of adjustments that look questionable but have barely any impact on Piketty’s charts. Much of his critique could have been consigned to a footnote to the effect that he uncovered other mistakes and questionable choices that do not actually change Piketty’s results. Giles’s post is written in a way that makes you think the alleged problems with Piketty’s data are more legion than they are. And he’s made some errors himself along the way.

Only a couple of issues Giles highlighted, for the United Kingdom in 2010 and the United States in 1970 and 1980, appear to matter, but in the worst case for Piketty, they would make the originally unimpressive trends look less ambiguously benign. I find it hard to believe that Piketty intentionally massaged his data to get the results he wanted, based on my familiarity with his previous work, on the relatively small impacts Giles’s issues have on the results, and on the fact that Giles was able to discover the issues in question because Piketty put massive amounts of data online.

And that’s just a small sampling of the outlets and business journalists who have weighed in on the debate. What is certain is that the debate has sparked a broader conversation about the book, income inequality and the ways capital is managed around the globe. And discussion can only be good in the long run.