Notes on
Piketty’s Book – Introduction
The first chapter of Piketty’s book stresses
the importance of bringing inequality back to the heart of economics. Taking a
quick trip through the history of capitalism, inequality is shown to be a
central feature since its dawn. Economics was born at the same
time as capitalism (or from the same mother). In its early days, the Classical
Political Economy saga, distribution was one of the key questions. Malthus, in
1798, predicted there would be overpopulation; “it is impossible to understand
Malthus’s exaggeratedly somber predictions without recognizing the way fear
gripped much of the European elite in the 1790s”. Ricardo, in the early nineteenth
century, based on the idea that the scarcity of land would inevitably on the
long run cause landowners to increase steadily their share of output and
income, shared with Malthus the view of an apocalyptic future for capitalism. For
Marx, the third prophet of doom, not landowners, but industrial capitalists would accumulate steadily capital and capitalism eventually would succumb to
its illness.
One important lesson from these three examples is that regardless of the failure of their predictions, they were
asking the right questions. Economists are often worried about errors type I
and type II, but seem unaware of error type III, i.e., providing the correct
answer for the wrong question. Piketty is quite critical about the state of
affairs of economics, which “should never have sought to divorce itself from
the other social sciences and can advance only in conjunction with them”.
I shall
argue, the prevalence of method over substance inevitably leads to error type
III. When “how” comes first and “what” is secondary, we’re necessarily building an edifice of mathematics over a swamp.
“To put it bluntly, the discipline of economics
has yet to get over its childish passion for mathematics and for purely
theoretical and often highly ideological speculation, at the expense of
historical research and collaboration with the other social sciences”.
In other words, if you are making error type III it doesn't matter how elegant is your mathematical apparatus or how well data fits your model.
I end this first post on Piketty’s book with
two graphs that speak louder than words, if and only if you are convinced the
shit hasn’t even begun to hit the fan:
