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Economist Thomas Piketty is defending his book today, from charges that he got his math on rising inequality wrong.
Piketty’s nearly 600-page book, “Capital in the Twenty-First Century,” has been the most hotly debated book this spring over its key conclusion: “The central contradiction of capitalism” is that it leads to the concentration of wealth in the hands of those already rich.
Piketty arrived at this conclusion after analyzing troves of data, which he says show this basic truth about free markets: that they make the rich richer over time.
Piketty’s work set off a new round of debate over income inequality, and earned him praise from Nobel Prize-winning economists and invitations to the White House, the International Monetary Fund, and the United Nations.
But over weekend, the Financial Times published an analysis arguing that Piketty’s “estimates of wealth inequality are undercut by a series of problems and errors.”
Piketty has welcomed the open debate, saying that is why put all his data online, but is arguing that any mistakes with data do not change the fundamental conclusion of his work.
The Economist magazine agrees with Piketty, while critics like Harvard economist Martin Feldstein argue that Piketty’s estimate of increased income inequality in the U.S. is “based on a flawed interpretation of U.S. income data.”
Financial Times’ editor Chris Giles told Here & Now‘s Jeremy Hobson that he was not out looking for faults in Piketty’s work.
“There is a real need to look at this more carefully and try and find out what the truth is, because there are very important issues,” Giles said. “I’m absolutely not in any way saying that wealth inequality is not an important issue that shouldn’t be studied.”
JEREMY HOBSON, HOST:
It's HERE AND NOW. Economist Thomas Piketty is defending his book today from charges that he got his math wrong. Piketty's book "Capital In The Twenty-First Century" has been hotly debated all spring because of its basic conclusion - that free market capitalism leads to inequality over time. Piketty analyzed troves of data and recommended policies to counter that trend, adding to the ongoing debate over income and wealth inequality.
But over the weekend, the Financial Times raised questions about Piketty's data. Chris Giles, economics editor of the Financial Times, wrote that criticism. He's with us via Skype from London. Chris, welcome.
CHRIS GILES: Nice to be here. Thank you.
HOBSON: Well, we'll get to what you're saying about what Piketty has said. But first of all, why did you decide to do this - to look into his numbers, look into his analysis and see if what he was saying was right?
GILES: Well, it was one of those times where it was really just luck actually. It wasn't a deliberate attempt. We weren't out to find fault or error with Mr. Piketty's work. I was just reporting on wealth inequality in the U.K. There was official data out Thursday, a week ago, and I actually thought I'd like to do an international comparison. So I went to Mr. Piketty's book as a source of reference.
And then the trouble was that I found that the U.K. data was completely different - the official data that the Office for National Statistics had put out. And so I couldn't then refer to other countries.
And I wrote in the article, though, that this raised questions about both sources of data. I then decided the next day to go and look where these errors were. I thought it might be something technical. But the more I looked then the more I seemed to find - there seemed to be wrong with - with Professor Piketty's work.
HOBSON: Well, what exactly did you find? Tell us a few of the examples of what you found that was wrong, as you saw it, with his work.
GILES: Well, it's quite easy to find things about Piketty's work because it's all online. All the sources are online. They all come from academic papers that are published. And so you can go back to the original tables and just look. And so some of the things are really quite basic and small, just transcription errors.
In one table, which he says is his source - and it's quite clear it is his source - he's just copied the wrong number over. And sometimes you can see which number he has. It's just a fat-finger error. In other cases, there are problems where it appears that he didn't like the answer that his own sources would give him. And then in his spreadsheet, you can see he's just added two or taken off two to a number. This is particularly relevant in the U.S. data where it - and the effect of that really is to make his lines look more smoother. They don't really change the overall picture much. And again, it's not a huge problem, but it certainly doesn't make you feel comfortable about the data.
But then I think that there were two really big problems that we found. One is very relevant to the U.S. And that's where the data simply doesn't exist in the sources he gives. And you can see he's just essentially made it up. So you might have data on the wealth held by the top 1 percent, and he's also tried to have numbers of the top 10 percent. Now, this source data has nothing for the top 10 percent.
So he just gets the top 1 percent number from the source and adds 36 percentage points to it. And he does that over a period of over 50 years for the U.S. data. And it's all there in his spreadsheet. And you see that's exactly what he's done. And actually, the data doesn't exist. So you can't really say anything with any certainty.
HOBSON: Now, he has responded to this. And he says he welcomes open debate. That's why he put all the numbers online. But he also says there's a lot of other data out there that shows what he showed, which is that there is rising inequality in wealth around the world.
GILES: There is quite - there is some data out there which shows it. In fact, the data he used in his book doesn't show that for the U.S. And in his response, he cited other work, which isn't in his book, which does seem to show it. And it really depends what sort of data you use.
So for the U.S., if you use a - if you survey people, that doesn't show a massive increase in inequality in wealth. It does in income, but doesn't in wealth nor does data that comes from estate tax records. But he's now citing new data from income-tax records based on sort of dividends and other income like that, which does show wealth increases.
For the U.K. - now, one of the biggest problems is with the U.K. data. None of the sources really show an increase in wealth inequality. And that's really understandable in the U.K. context where the, by far, the biggest source of wealth is housing. And that's much more equally distributed than any other form of wealth, and it's gone up in price a lot. So that has meant that even though those people who don't have access to their own homes - and they are still doing very badly - is not concentrated in the top 1 percent or top 10 percent. That increase in wealth has been shared much more generally.
HOBSON: But does anything that you found change the overall picture? That is the question that people are asking, that economists are asking after reading what you've done. Does it change the overall story or the conclusion that Piketty came to, which is that there is rising inequality around the world?
GILES: It does. Once you change the British data and use the most accurate and up-to-date data, which all the providers of data - there's other people out there who say this is the right data to use - then the U.K., you don't see any rise in inequality in the U.K. And then once you take that out, then you don't get any rise in inequality in Europe.
And then - what that means, that even if you find some increase in inequality in the U.S., you can't say you've got a generalized theory for the whole world that capitalism - the central flaw of capitalism is you're going to have rising wealth inequality, if one of the largest economic regions in the whole world, Europe, doesn't show that.
HOBSON: So you do not believe that there's rising inequality in Europe right now?
GILES: There doesn't appear to be in the data. I'm just using the same sources he used. So I'm not - I'm not an expert in this area. But I have been back through very carefully all the sources he used, and you do not see rising wealth inequality in the European data.
HOBSON: Chris Giles, you may have just poked a hornets nest with this. And I wonder what your life has been like over the last few days. Are you getting a lot of criticism from people for even calling into question Mr. Piketty's research?
GILES: I'm getting both. I'm getting both plaudits and criticism. What I - because it certainly wasn't motivated by any attempt to find fault with Mr. Piketty's work. In fact, it was motivated by me wanting to use it as a reference work and then finding I couldn't. So I don't mind I'm getting all those people who like it and hate it.
What's difficult is where it comes from obviously politicized views where people who love it are on the right and people who hate it on the left. I think there's a real need to look at this more carefully and try and find out what the truth is 'cause it's a very important issue. And I'm absolutely not in any way saying that wealth inequality is not an important issue that should be studied.
HOBSON: Chris Giles, economics editor for the Financial Times. And we've got a link to his article looking at the data that Piketty had come up with at our website hereandnow.org. Chris, thanks so much for joining us.
GILES: That's a pleasure. Thank you very much.
HOBSON: Well, have you been following the debates raised by Piketty's book? Do you think that income inequality is an issue that deserves more study, or do you think the results are in? You can let us know at hereandnow.org. You can also send us a tweet @hereandnow. You're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.