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Tue May 27, 2014

'Financial Times' Picks Apart Picketty, Sparking An Argument

Originally published on Tue June 10, 2014 8:53 am

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The feeling among the super-rich that capitalism is under siege may be heightened by the release of the book "Capital In The Twenty-First Century." It's by the French economist, Thomas Piketty. The book, which deals with growing inequality, has been a publishing phenomenon. It currently tops many non-fiction best seller lists. But late last week, The Financial Times published a story citing errors in the book and suggesting that some of its conclusions are mistaken. NPR's John Ydstie reports.

JOHN YDSTIE, BYLINE: Piketty's book has been widely praised by economists for breaking new ground in the area of economic inequality. At the heart of the book is his assertion that inequality is not an accident, but inherent to capitalism. He says over the long-term, higher returns to capital than to labor are giving the richest people in the world a growing share of global wealth.

As evidence of this, Piketty points to rising concentrations of wealth in the U.S. and Europe since the 1970s. But the Financial Times discovered some flaws in Piketty's work. It found errors in the data he used, suggested he had cherry-picked the data to support his conclusions and even constructed some data out of thin air. Economist Tyler Cowen of George Mason University assesses the FT criticism this way.

TYLER COWEN: The FT found a number of small mistakes in what he did which don't matter so much, but perhaps are an embarrassment.

YDSTIE: But Cowen says the FT found one big thing.

COWEN: That when you use better numbers for the United Kingdom, it seems that measured wealth and equality for the United Kingdom has not been going up.

YDSTIE: And when the FT's different data for Britain is combined with the data for the rest of Europe, it shows overall, European wealth is not becoming more concentrated. Cowen acknowledges that the FT numbers may be flawed as well. For instance, the wealth data don't include offshore bank accounts. But he says...

COWEN: I don't think anyone has the right numbers. But I also don't think that necessarily saves Piketty. We have an impressionistic sense that a lot of kinds of inequality have gone up. But the Piketty book makes a lot of very specific claims about how, why and when. And it seems that, on a lot of those, we're probably better off saying we simply don't know.

YDSTIE: Piketty has defended himself saying the FT is being ridiculous. But he, too, has acknowledged that the available data on wealth are imperfect. However, Piketty told the French news agency AFP that, quote, "more recent studies only support my conclusions by using different sources." But Cowen thinks Piketty simply doesn't make a strong case that high returns on capital are a bad thing.

COWEN: If we're really in a world where capital just keeps on accumulating and earning 5 percent, I think, in the long run, that will turn into higher wages and a lot of innovation. And it actually will be a pretty sweet scenario. I worry about capital not earning enough.

YDSTIE: Economist Branko Milanovic has a different take on the FT's criticism of Piketty's work.

BRANKO MILANOVIC: He might have made a mistake. That's possible. But it was not going to affect the main conclusion.

YDSTIE: Milanovic is a professor at the City University of New York Graduate Center. He says Piketty's conclusion that higher returns to capital will produce a greater concentration of wealth are not in question.

MILANOVIC: That's not in the dispute in the Financial Times article - that the concentration of income from capital is greater than labor. What the Financial Times dispute is, that in the case of U.K., the increase in concentration of wealth has been overestimated.

YDSTIE: Milanovic credits Piketty for publishing all of his data on the Internet. It's actually been there for more than a year. Milanovic says that will lead to challenges but also deepen understanding of the issues of economic inequality. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.