Sumner demolishes Piketty

Just back from the UK and just finished Piketty’s new book.  I’ll have lots to say when I get caught up, but I thought I’d begin with a little puzzle.

Explain the title of this post.  Hint.




27 Responses to “Sumner demolishes Piketty”

  1. Gravatar of foosion foosion
    23. June 2014 at 03:42

    It’s an illustration of the well known principle that one swallow makes a summer.

  2. Gravatar of foosion foosion
    23. June 2014 at 03:45

    It’s also shows what happens if you google your own last name.

  3. Gravatar of Kevin Donoghue Kevin Donoghue
    23. June 2014 at 04:31

    “I spent a lot of money on booze, birds and fast cars. The rest I just squandered.” — George Best. Such cases are not uncommon, but I don’t think they affect Piketty’s analysis very much.

  4. Gravatar of J.V. Dubois J.V. Dubois
    23. June 2014 at 04:40

    I thought similarly. Coincidentally this whole inheritance thing reminded me passage that I read in Douglas North’s “Violence and Social Orders” –

    Anyways what surprised me was the “extinction” data among English nobility in 14th – 15th century. The extinction was when a member of parliament did not have any male heir. The “extinction rates” were in a range of 25% – 35% every generation (quarter of the century). And although it is understood that medieval times were very violent, those were also times where survival of the house (and maintaining wealth) was a top priority pursued over particular needs of occasional some unruly young heirs/heiresses.

  5. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. June 2014 at 04:54

    JV Dubois: Of course, marrying heiresses–by definition in a patrilineal system, from families who failed to produce sufficient surviving boys–probably did not do anything for upping the propensity to produce boys. But that is an old observation.

    The Son Also Rises suggests strong propensity for continuing family success. Though whether that is from capital in the Piketty sense is another matter entirely.

  6. Gravatar of SG SG
    23. June 2014 at 05:46


    I noticed that your earlier Piketty take-down was linked to in Greg Mankiw’s NYT column on inherited wealth.

    Excited for the full review.

  7. Gravatar of Sean Sean
    23. June 2014 at 08:49

    Stings’ real name is Gordon SUMNER no less – I think!

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. June 2014 at 09:10

    So Sting joins the ranks of the average NBA star…as well as Bill Gates. As Xavier Sala y Martin put it in his review of Piketty;

    ‘Furthermore, unlike what happened in ancient times, where all the wealth went to a single heir, now the property of the rich is divided between many children (often from different marriages) so that from a very rich grandfather You can have very poor grandchildren. It is well known; the saying that the grandfather created a fortune, his children extend the fortune, and the grandchildren squandered same.

    ‘The world could have “r> g” and, in turn, be filled with families whose grandparents create fortunes , the grown children and grandchildren destroy them. And contrary to what Piketty says, in that world there would not be more and more rich and powerful dynasties. However, it would be true that “r> g”!’

  9. Gravatar of ssumner ssumner
    23. June 2014 at 09:25

    Kevin, Great line.

    SG, thanks for the link. Check over at Econlog this afternoon. I’ll have several more posts later.

    Sean nails it, and perhaps foosion (I couldn’t quite tell from his/her cryptic answer.)

  10. Gravatar of Matt Waters Matt Waters
    23. June 2014 at 09:38

    Being about 1/5 of the way through, the strongest part of Piketty’s argument seems to be with inherited wealth in the 1800’s in Europe. It seems that most of that wealth consisted of land taken by force at some point and then wasn’t diluted over centuries due to patrilineal systems of inheritance. From both a utilitarian and fairness perspective, it’s hard to argue for rewarding those who happen to inherit wealth. It’s damn near impossible if the wealth came through some sort of non-voluntary confiscation at some point.

    The biggest issue is the whole r>g thing. It must be news to anyone in investment management that 3% risk-free, real interest rates are so easy to come by. It does appear such returns were available to land-owners in the 1800’s, but so far Piketty’s doesn’t say how such returns were available. The land-owners may have enjoyed some sort of monopoly is my only guess.

    Today, there is likely 3% or more real interest rates available to long-term investors, but they have to take risk. The risk-free real rates in both 50’s-70’s and since 2008 have been zero or negative. I would argue the positive real rates were due to various bubbles from 1980-2007. During 1980-2007, those with wealth likely averaged real returns less than 3%, since much wealth was invested in overvalued, negative-NPV assets.

    So, IMO, the real question is whether the rich have enjoyed some sort of market distortion in accumulating their wealth, either in straight income or in their returns on capital. It hasn’t addressed that question so far 1/5 through the book and I don’t think it will.

  11. Gravatar of Walter Wessels Walter Wessels
    23. June 2014 at 11:19

    To explain growing inequality, and in particular, the wealth of the top 1%, Piketty would have us believe it is mainly due to the rich saving more. But if you look at who is rich and why they are rich, it is mainly due to their creating and utilizing technical change. The whole r > g business sets back our understanding of inequality and why it grows and decline. Seriously, the main point of the Solow growth model is to show that technical change, and not capital accumulation, is responsible for growth in the modern world.

  12. Gravatar of W. Peden W. Peden
    23. June 2014 at 11:47

    Scott Sumner,

    I’ve just started watching your Adam Smith Institute lecture. One little pedantic note: Wittgenstein is usually pronounced (at least by philosophers) like “Vittgenstein”, as in the German.

  13. Gravatar of TravisV TravisV
    23. June 2014 at 12:56

    Here is the video of Prof. Sumner’s lecture at the Adam Smith Institute:

  14. Gravatar of W. Peden W. Peden
    23. June 2014 at 12:58

    Just finished watching it. I think that’s your best presentation of your ideas that I’ve seen, and it was also a very interesting Q&A.

    Also, if you’re going to convince an old monetarist, it would probably be Tim Congdon, because (a) he’s always been wary of things like the k-percent rule and keen on allowing for money demand effects due to financial deregulation etc., and (b) he agrees that the problem in recent years has been money being too tight. (You and he would disagree on the “What is money?” question, but then again that isn’t so important if you’re aiming at NGDP targeting.) I think his main objection to your talk was only that you hadn’t mentioned any broad money figures, and even if you thought that these were good things to look at, you’d be unable to fully satisfy him because his preferred indicator for the UK these days (M4 excluding financial business’s money) has no official corresponding aggregate and can’t be calculated using FRED data.

    Anyway, congrats!

  15. Gravatar of Edwin Alvarenga Edwin Alvarenga
    23. June 2014 at 14:30

    Using Sting as an example for anything is inherently unfair.

  16. Gravatar of Joel Aaron Freeman Joel Aaron Freeman
    23. June 2014 at 16:48

    Matt Waters,

    I didn’t read Picketty, but the fact that you mention land ownership is interesting. Owning land is an implicitly rent-seeking behavior, since labor and capital can accumulate in an economy, but the quantity of land is fixed. If an economy is growing, the value of land will increase regardless of the efforts of the land owners. They can sit on their butts all day and still get richer. The entire philosophy of Georgism is to apply a land-value tax to eliminate this form of rent-seeking behavior.

    The 1800’s were a time of intense population and productivity growth. Thus it’s not TOO surprising that risk-free returns were available. If my angle is correct, then Piketty’s argument holds when (A) land is most valuable form of capital and (B) population is constantly growing.

  17. Gravatar of TravisV TravisV
    23. June 2014 at 19:33

    The World’s Hottest Housing Markets Are All English-Speaking Former UK Colonies

  18. Gravatar of tesc tesc
    23. June 2014 at 21:21

    Totally out of topic.

    How viable would be for the FED to pay interest on SAVING ACCOUNTS to control inflation? Instead IOR.

    That would promote saving from general population and lending from banks.

    Just a thought.

  19. Gravatar of tesc tesc
    23. June 2014 at 21:23

    By the way, Piketty is an embarrassment for the economics profession.

  20. Gravatar of Edward Edward
    24. June 2014 at 00:04

    “Totally out of topic.

    How viable would be for the FED to pay interest on SAVING ACCOUNTS to control inflation? Instead IOR.

    That would promote saving from general population and lending from banks.

    Just a thought.”

    That would be functionally equivalent to raising IOR and or the federal funds rate, a good thing in inflationary times, bad in THESE times. If the government prints money and uses it to grant a return to savers, its contractionary

  21. Gravatar of tesc tesc
    24. June 2014 at 02:03


    I know is contractionary and I was not thinking about the FED using it now. I was thinking in the future as an extra contractionary tool for the FED.

    It came to my mind because some friend were concern about QE3 and I told him that inflation can be stop with IOR. It sounded too easy, but that is how powerful the FED is.

    So I thought, why not do it in savings and even checking accounts. That would reduce consumption, therefore the CPI and the PCE would fall. However, banks would still have capital to lend for investment, the monetary base does not have to be contracted, and output would not suffer much or not at all.

    Obviously I am assuming PCE semi-targeting, not NGDP targeting. Although I think it would also help to avoid an overshoot of NGDP without reducing the monetary base and investment spending.

  22. Gravatar of Nick Nick
    24. June 2014 at 03:13

    This seems equivalent to me to saying the reality of false paternity effects the argument. It’s not literally about stopping people’s kids from getting money they don’t ‘deserve’. It’s about trying to get many many MORE kids to benefit from undeserved inheritance!
    Picketty is saying r>g and the low marginal cost of managing an extra unit of wealth will combine to cause wealth to clump up more and more in our society. How does any of this alter that calculus? It would seem that stings decision not to break up his money in a six way partition to his kids might just as easily end in a bigger single clump being passed along.
    Doesn’t this modification to pickettys argument (private wealth being funneled to foundations over children) just imply that oil wealth funds and superstar foundations will come to inherit the world instead of individuals? And is it so different if stings kids have a variety of nepotism positions within the super rich foundation he creates? Plus, of course, some people aren’t going to give their wealth away…
    Recall that the children of the fuedal nobility often were quite restricted in what they could do with their inherited wealth since titles didn’t trade on a market. If sting’s greatgrandson ends up ‘the 4th chairman of the sting foundation’ will that be any different than making him ‘earl sting the 4th’?
    I’m looking for something more along the lines of ‘we can make G bigger’ in my picketty debunkings… This seems like cold comfort.

  23. Gravatar of ssumner ssumner
    24. June 2014 at 03:21

    Matt, You said;

    “The biggest issue is the whole r>g thing. It must be news to anyone in investment management that 3% risk-free, real interest rates are so easy to come by. It does appear such returns were available to land-owners in the 1800″²s, but so far Piketty’s doesn’t say how such returns were available. The land-owners may have enjoyed some sort of monopoly is my only guess.”

    The key word is “appear.” Were the returns to landowners risk-free? If so, why did some lose land in the French revolution? What about costs? Are those returns gross returns or the return net of the cost of managing the estate?

    I agree with your comment.

    W. Peden, Yes, I suppose I do know that is the German pronunciation, but I often forget these things during public speaking. That’s one reason I can’t watch myself on tape, it makes me cringe.

    And I agree that Tim Congdon puts more weight on the aggregates.

    Edwin, That’s amusing.

    tesc, I don’t think the Fed could afford to pay interest on savings accounts.

  24. Gravatar of anon\portly anon\portly
    25. June 2014 at 06:59

    I don’t believe Sumner’s take on Piketty will be understood until Bernard weighs in also.

  25. Gravatar of Nathanael Nathanael
    29. June 2014 at 09:28

    Matt Waters: you want the 3% risk-free rate? Be rich enough to own a bank.

    Borrow from the Fed at < 0.25% and collect interest on reserves at 0.25% — on the money you borrowed for nothing.

    Since you can do this with a miniscule amount of capital, your effective profit is actually huge. You have to generate a lot of paperwork to make your operation look like a real bank, but really, it ends up being free money if you run the scam correctly.

    For added points, don't actually own the bank or put any capital into it, just make yourself CEO and issue yourself both cash and stock in the bank as "compensation". This effectively gives you another layer of leverage, as well as a layer of indirection if the cops ever come after you.

  26. Gravatar of Nathanael Nathanael
    29. June 2014 at 09:32

    “Doesn’t this modification to pickettys argument (private wealth being funneled to foundations over children) just imply that oil wealth funds and superstar foundations will come to inherit the world instead of individuals? ”

    More accurately, the people who maneuver themselves into control positions over the foundations and funds.

    Very, very much like the early feudal period. Power is attained by getting into the “management position” over money.

    The early noblemen in the early Middle Ages were actually appointed Roman officials who managed to end up with independent total control over the assets which they were supposedly merely managing on behalf of others (such as the state).

    Remember, the Romans had an essentially capitalist system.
    It degenerated into feudalism. It’s worth looking back at the process to see exactly how it happened, because we’re going headlong into a very similar sequence of events.

  27. Gravatar of Heiko Gerhauser Heiko Gerhauser
    1. July 2014 at 02:23

    Some very interesting points on your blog.

    Funnily enough, while you choose Sting to illustrate wealth destruction before it can be passed on by inheritance, it also goes to show that he would be hit hard by consumption taxes.

    I found your blog because I googled consumption and Warren Buffett, as I personally find it rather intuitive that consumption is what matters, not income. Consumption is what the poor want more of, I figure, redistribution must therefore take consumption away from the likes of Sting (ten houses, 100 employees just working for him).

    Money creates the illusion of perfect convertibility. Gold for example can be sold to buy a flat screen TV for a poor person. But it cannot be converted directly, therefore any policy that results in forced gold or other asset sales while simultaneously raising the demand for real goods and services without raising the ability of the economy to supply these goods and services, would cause asset prices to crater, while simultaneously creating inflation.

    It sounds nice, we take pieces of paper they do not really need or use from the rich, and give real goods and services to the poor.

    So, I share your preference for measuring poverty based on consumption expenditures.

    Personally, I do rather worry more about neofeudalism and rent seeking. Given that you acknowledge that much of people’s individual success is due to luck and the effort of society at large, I suspect you are also perfectly happy with very high taxes on very rich life styles on the premise that it leaves incentives to work and succeed in place.

    Finally, I would make one additional point on your idea of subsidising low productivity work through lower or negative income taxes. In a sense we do not want that incentive at all, we want an incentive to be productive, not an incentive to stay in a subsidised job that creates little value.

    As a social safety net, I would combine a low guaranteed cash payment (400 US Dollars per month) with workfare, the workfare consisting of undesirable work (like toilet cleaning) at below current minimum wage levels, of more desirable work (teaching assistant in schools) subject to suitable qualifications and with high demand even lower wage levels, and for the long term unemployed a time limited wage subsidy to get back into a a more qualified job.

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