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On Thomas Piketty and Capital

Here’s a letter to the Wall Street Journal:


Phillip Magness and my colleague Vincent Geloso nicely identify a critical error in Thomas Piketty’s work that is purported to show that income inequality in the U.S. was significantly reduced by the New Deal-era imposition of very high marginal income-tax rates (“Inequality and the Piketty Accounting Error,” April 12).

Piketty, whose recent book is titled Time for Socialism, often slices and dices data in ways that support his socialist agenda. An example of such motivated empirical work is the failure, in his 2014 Capital in the Twenty-First Century, to count in a nation’s capital stock its citizens’ human capital, which is the creativity, knowledge, and skills that reside between workers’ ears. Almost all of this capital is owned and controlled by the workers who possess it rather than by employers and financiers.

Piketty’s exclusion of human capital from what he does classify and measure as capital is egregious. Since the beginning of modernity ordinary people have increasingly raised their incomes by acquiring more human capital, largely through education and job training. And so by not counting as part of the capital stock this important source of income for most people, Piketty conveys the misleading impression that large numbers of ordinary men and women are bereft of capital when, in fact, they are not.

As noted by Deirdre McCloskey in her review of Piketty’s 2014 book,

The only reason in the book to exclude human capital from capital appears to be to force the conclusion Piketty wants to achieve. One of the headings in Chapter 7 declares that “capital [is] always more unequally distributed than labor.” No it isn’t. If human capital is included – the ordinary factory worker’s literacy, the nurse’s educated skill, the professional manager’s command of complex systems, the economist’s understanding of supply responses – the workers themselves, in the correct accounting, own most of the nation’s capital – and Piketty’s drama falls to the ground.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030