Piketty

Thomas Piketty's best seller book "Capital in the Twenty First Century" was a subject which led us to contact a mutual laureate of Economics Nobel Prize in 1972 along with John Hicks. Stanford's emeritus professor, Kenneth Joseph Arrow, has lots of contributions in the fields such as Public Economics, General Equilibrium, etc. Now, Arrow is far close to celebrate his 93rd birthday in the next month (August 23, 1921), and in this age he is still doing his academic works actively, especially in the fields of Health Economics, and Moral Economics. Persian translation of the interview was first published in "Mehranameh" monthly magazine (Vol. 36). But the following is the original English version of questions and Professor Arrow's answers; both of them sent and replied by e-mail. There are two introductory remarks which Professor Arrow wrote before starting to answer the question.



Introductory Remarks:
I have not read Picketty's book, "Capital in the Twenty-first Century," but I have read an expository article by him and his collaborator, Emmanuel Saez, and seen a number of his tables and charts. I am therefore acquainted with the general outlines of the results of his data analysis and of the projections he has made as to long-run tendencies.
Long before the book and its attendant publicity, I was aware of Picketty's reputation as the most careful and thorough researcher in the field of income and wealth statistics. These data are not like astronomical or medical data, observed by a scholar according to his or hers own scientific needs. They are the by-products of governmental activity, principally tax collection, and do not necessarily correspond to economic meanings. This statement is true of any economist's analysis. The data therefore need some adjustments to make a better approximation, and different scholars may have different judgments about these adjustments. Hence, there are bound to be differing results and therefore disputes. That said, I have every reason to trust Piketty's numbers; he has spent more time and effort on them. In particular, income data, derived from income tax data, are bound to be much better than wealth data.

The first question is about the notion of capital. Are there any differences between the definition of Capital in different economic systems like communism, socialism and capitalism? And what does Piketty say about the notion of Capital in his book?
Piketty seems to use the terms, "wealth," and, "capital," interchangeably. In his usage, he is referring to a stock of goods (including securities and other kinds of property) which can be bought and sold on the market and which are durable over time. In conventional economic discourse, this would be referred to as, "wealth." "Capital" would be goods used in production. Of course, capital in this sense is also someone's wealth, but it is being looked at from a different point of view. The idea of capital as goods used in production would also correspond to Marx's view.
The differences among different economic systems are drawn very sharply on paper but do not appear nearly as strongly in the real world. I don't think one can find a truly socialist state today, although they existed from 1918 to 1991 (the Soviet Union and its dependencies, and China during Mao's regime). On the other hand, there are not many countries where less than 35% of the national income passes through the government's hands, so the term, "capitalism," has moved a long way from its traditional meaning. Along with the allocation of income, governments have a lot of property, used in enterprises deemed productive, such as roads, parks, police equipment, offices, and computers. This property could be and sometimes has been sold, so this capital is also a form of wealth. But it is rarely used for this purpose.
In socialist states, when they existed, the scope of government ownership was, of course, much broader and included capital goods used in production (including agricultural and other land). Of course, in those states, they didn't constitute wealth, because they couldn't be marketed.
"Communism," in the sense of an equal sharing of goods regardless of work or ability or wealth (a definition used by Marx), has only existed in very small communities, which existed in the United States in the nineteenth century and in the Israeli kibbutz. These have all disappeared, as individuals sought greater success in the surrounding economy.

Secondly, the same question arises about inequality. What is the status of inequality in the world? Is it getting dangerous (for society, economy and people)? And if the answer is yes, I want to know if it is the capitalism's fault.
There has been a remarkably large growth in inequality of both income and wealth, at least in a large part of the world. Certainly, it is true in the United States, the United Kingdom, China, India, southern Europe, and much of Latin America. I don't know the facts, but I beiieve it is less true of Germany and the Scandinavian countries. I don't know about the rest of the world.
I do believe there are great dangers in this trend. For one thing, in a democratic society, wealth and income yield political power, so democracy is threatened. For another, wealth concentration may reduce the incentives of the poorer part of the population to become rich and therefore depress economic growth.
The growth in inequality clearly uses capitalist techniques in a capitalist system. But inequality has also been a characteristic of socialist systems. Those in power did not have individual wealth, but they had access to public wealth and lived very well. Further, the distribution of political power was much more unequal than in the typical capitalist democracy.

Despite what Piketty said in his book, he has a grand theory of capital and inequality. As a general rule, wealth grows faster than economic output. He explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate). Do you agree with him? Do you confirm or deny this declaration and what are your reasons?
Piketty has, in my judgment, no very good theory of the growth of inequality. The proposition that wealth inequality grows when r > g assumes that wealth owners reinvest all of their income into accumulating more wealth while no one else saves at all. Since the wealthy certainly spend a good deal of their income on their consumption and people with good but not very top incomes save and therefore accumulate capital, there are considerable pressures to restrict the growth of wealth at the very top. Further, a good deal of wealth accumulation is the result of highly risky entrepreneurial activity (all the wealthy in the high technology industries), it is clear that there must be some turnover in the wealth group based, not on the average rate of return, r,, but on its variability.
In capitalism we say economic growth is "a rising tide lifts all boats". So if we have inequality, it will not disappear and in the best status it gets fixed. Now we should conclude that capitalism cannot solve the problem of inequality and just try to raise all people from their positions?
It is true that we have not seen equality in capitalism or in any other broad economic system. I do believe we can take significant steps to redistribute a significant amount of income through the tax and transfer systems. Indeed, we do that right now. Retirement pensions and health provision are equalizing, and in most advanced countries, the income tax system has distinctly egalitarian tendencies. These can be increased to some extent without reducing the incentives to economic progress (the "rising tide").

Let's go to policy recommended by Thomas Piketty: the global tax on wealth. Many critics believe its ideological and not an economic solution. What is your opinion on this recommendation? Is it right, and more important, is it possible?
A tax of wealth is indeed redistributive, but it has both theoretical and practical deficiencies. If an individual owns capital and does not withdraw it, goods are produced for others. Do we want a tax which will discourage this?
From a practical viewpoint, a wealth tax is very difficult, because wealth is hard to measure. Much wealth is in the form of land, buildings, or machines, whose market value can only be truly known when it is offered for sale. Further, as Piketty himself recognizes, if each country sets its own wealth tax, they will compete by lowering the tax to attract wealth. This can be avoided only by an agreement to set the same tax for all; this has not succeeded for any other taxes.

Why Capital in the twenty- first century is a bestseller? Why people are eager to buy and read a heavy book with around 700 pages? Is it useful or harmful?
I cannot tell you about the vagaries of the book market. To the extent that it is read, it will cause people to think about the issue of inequality, which is very important.

Should we consider Thomas Piketty a Modern Marx or not? And why?
He is not a Marx. Marx wrote a book, but he spent most of his time organizing and creating a revolutionary movement. Further, he based his analysis on the class struggle. Piketty is no agitator and no advocate of class conflict.