If a man is suspected of murder, arson and speeding, any prosecutor who focuses only on the last charge risks ridicule. That imagined situation has some bearing on recent criticism of Thomas Piketty, the best-selling French anti-inequality economist. The accusations are largely restricted to ways in which he has exceeded the limits of his data.
The Financial Times, the most prominent critic, has identified possible compilation mistakes and biased adjustments in Piketty’s statistics on the history of wealth distribution. This is potentially a bit sloppy, but beyond that it’s hard to get too excited. Revising the questionable numbers would not change the basic conclusion that wealth has become more concentrated in most countries over the last three decades.
More importantly, though, all Piketty’s wealth data suffers from a much more fundamental error: It cannot be telling us what he says it does. In his widely praised book, “Capital in the Twenty-First Century”, he concludes that elites are becoming wealthier and more powerful at the expense of the rest of the population. However, wealth information alone, based on the market value of financial holdings and other real assets, can’t validate that claim. Incomes and, importantly, social factors also need to be considered.
Piketty does look at income inequality, and fewer doubts have been expressed about that data. But the meaning is only slightly clearer. Yes, the top 1 percent and 0.1 percent have been pulling away from the masses, as measured in income declared on tax forms. However, that provides little insight into what is surely the central economic topic: the comparison of how well people can actually afford to live.
This yawning gap won’t be filled by wealth or income data, even if it is perfect. Another much-cited case of doubtful data in economics also obscured a larger analytical problem. In 2011, Harvard professors Carmen Reinhart and Kenneth Rogoff wrote a book about fiscal deficits through history. Like Piketty, their measurements were questioned. Like Piketty, the more serious issue was elsewhere: the failure to explain why the average experience of high-deficit governments – mostly in wartime, under a gold standard or after a commodity price shock – was relevant to the merely recession-struck governments of recent years.