This book is a set of essays and commentaries on issues raised by Thomas Piketty's runaway best seller, Capital in the Twenty-First Century, written largely from the left. One of the biggest complaints voiced in the introduction and elsewhere in the book under review is Piketty's dismissal of the Cambridge controversy, which concerned how the physical capital stock should—or could—be aggregated and measured. That controversy involved debates between economists in Cambridge, Massachusetts, and Cambridge, England. The latter group argued that the marginal productivity theory of distribution was incoherent (except in a one-commodity world) because one could not calculate the value of capital without first knowing the interest rate. But if this were true, the quantity of physical capital could not be used as an explicator of the return to capital: the interest rate could not be both the consequence of and a determinant of the size of the physical capital stock.
Cambridge, England, had a logical point. Yet this has had almost no impact on the workings of government statistical agencies or on the practice of empirical economics, including growth accounting, which decomposes the past (and future) growth of real output into increases in the labor force, the physical capital stock, and a residual (total factor productivity [TFP]). For example, the U.S. Bureau of Economic Analysis (BEA) makes available online a series on the evolution of physical capital in the United States from 1925 onward (Fixed Asset Tables). There is little evidence the BEA has paid any attention to the Cambridge controversy.
There are no perfect ways to aggregate quantities of heterogeneous capital and chart the movement of such aggregates over time. Comparable challenges bedevil gross domestic product (GDP) measurement. The index number problem is real, and the use of chained index methods brings with it other complications. With respect to the calculation of capital stocks, the perpetual inventory method for inferring stocks from investment and depreciation flows has its limitations. Economic historians and policymakers are open to and interested in better tools for or advice on how to move forward with empirical inquiry. The problem is that Cambridge, England, participants in the controversy provided little of either, aside from suggesting that politics matter, which Piketty and many others would readily acknowledge. They have instead often retreated into a hermetic purity, insisting that the whole empirical enterprise is a fool's errand.
Data for the private nonfarm economy in the United States, for example, suggest that the physical capital stock increased hardly at all between 1929 and 1941, yet grew at a rate of close to 4 percent a year between 1948 and 1973. Do these numbers mean nothing, or do they signify real differences in the processes of capital accumulation in the different periods? I am quite willing to state that capital grew more rapidly during the U.S. golden age than across the Depression years. Piketty as well was prepared to set the Cambridge controversy aside and move forward with estimates of wealth, a term he equated with marketable assets and used coextensively with capital.
His eliding of wealth and capital is appropriately a recurring topic in these essays and elsewhere. When macroeconomists speak of capital they generally mean produced means of production—physical capital. Piketty includes the market value of unimproved land, slaves, and housing in his measures of wealth, which is appropriate for measuring wealth inequality. But he then draws inferences by considering these as measures of capital in an aggregate production function, which is more questionable. On two issues, however, I differ with contributors to this collection. First is the claim that housing is not part of the (produced) means of production (pp. 177, 232). Of course it is, unless we also wish to exclude from GDP the rental services produced by the housing stock (both rental and owner occupied). On the expenditure side these services comprise a large portion of national income and an even larger portion of consumption.
Second, and this applies more generally to the economics profession, we should cease referring to an increase in the capital-to-output (K/Y) ratio as an instance of capital deepening (p. 264). Capital deepening should be reserved for increases in the capital-to-labor (K/L) ratio, the result of accumulation occurring at a faster rate than the growth of labor hours. A rise in K/Y simply reflects a decline in the average level of capital productivity (Y/K), induced by capital deepening (rises in K/L), a decline that might historically be compensated for by increases in TFP. The possibility that these two influences roughly balance each other provides a theoretical underpinning for Nicholas Kaldor's claim (if true) that a long-run constancy in K/Y was a stylized feature of capitalist economies.
One of the great merits of Piketty's book is that it focuses uncompromisingly on top income shares, moving attention away from the anodyne Gini coefficient. After Piketty and his collaborators, one could no longer suggest, as many had, that initiatives to shift more of the tax burden toward the top were quixotic, because in the aggregate there simply was not that much there to tax. It is true that in explaining growing wealth and income inequality, Piketty focused on returns to capital, which differentially accrue to the wealthy. The emphasis on “r > g,” which relates the difference between the return to capital and the growth rate of the economy to changes in capital's share in national income, has probably drawn attention away from a secondary and important theme, the impact of growing inequality of labor income. There is indeed much below the top 1 or 10 percent worthy of investigation.
To its credit, Piketty's book has a clarity of narrative purpose, emphasizing the unambiguous trends across the developed world toward greater wealth and income inequality. This collection perhaps inevitably lacks that clarity, and there is some danger that the admixture of encomiums and critical comments may serve to dull Piketty's message. Branko Milanovic, in Global Inequality: A New Approach for the Age of Globalization (2016), for example, has argued that globalization may well have reduced global income inequality. That would not mean, however, that concern with trends in individual developed countries is unwarranted, particularly given some of the manifest political consequences of that growing inequality.
For business and economic historians, the more valuable essays in the book will be found in part 2, which includes historical consideration of inequality data and trends in France, Germany, Sweden, the United States, and Britain, and part 3, which features essays on Japan, Africa (particularly interesting), and India. Still, while there is much of value in this collection, it is not a substitute for reading the six-hundred-plus pages of its subject, a task that should be completed first.
