Rockstar French economist Thomas Piketty's Capital in the Twenty-First Century is the most influential book in the field this year — everyone is reading or pretending to read it. But the Financial Times' Chris Giles scoured the tome and alleges that it's built on errors and bad math. Economists and financial journalists have been debating that claim through the holiday weekend. Who's right?
First, let's look at Giles' criticisms of Piketty's data. Capital traces income and wealth inequality in the U.S. and Europe since the 18th century, and concludes that inequality is a function of capitalism that needs to be corrected by the state. Giles, the economics editor at the Financial Times, argues:
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."
So Giles is specifically attacking Piketty's claims about wealth inequality, not income inequality. His criticisms are being taken seriously by the financial community, but The New York Times' Neil Irwin argues that Piketty's errors aren't big enough to undermine the thesis of the book. "Some of the issues identified by Mr. Giles appear to be clear-cut errors, and others are more in the realm of judgment calls in analyzing data that may not be fully explained by Mr. Piketty but are not necessarily wrong," he writes. You can read his full explanation of the errors here.
For his part, Piketty welcomes debate but insists he collected and used the (vast, vast amount of) data accurately. He tells Giles:
As I make clear in the book, in the online appendix, and in the many technical papers I have written on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogeneous over time and across countries. I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything online).
He added in a "jovial" email to Irwin:
Every wealth ranking in the world shows that the top is rising faster than average wealth. If the FT comes with a wealth ranking showing a different conclusion, they should publish it!
Economists will continue to debate whether or not wealth inequality is growing, and those debates will no doubt become more political. Now that there is a question about Piketty's data, Kevin Hassett at the conservative American Enterprise Institute is ready to pounce. He said on CNBC this morning, "The book is really a big mess. The whole second half of the book where he talks about the demise of capitalism is just fundamentally flawed. And the FT is just the tip of the iceberg." Jared Bernstein, the former chief economist to Vice President Joe Biden, had more measured thoughts about the data errors, which he shared on CNBC and his blog.
The Guardian's Paul Mason points out one possible motivation for discrediting Piketty's work:
The gleeful response to Piketty's "errors" on the rightwing Twittersphere did not happen because some FT pointy-heads discovered a few fat-finger inputs. It happened because, if Giles is right, then all the gross designer bling advertised in the FT's How To Spend It can be morally justified: it is evidence of rising social wealth in general, not the excess of a few Rolex types.
To form your own opinion, you can do the math yourself. Piketty put all of his spreadsheets online.