According to the FT Thomas Piketty's book 'Capital' has been 'undermined by errors'. Chris Giles, who works for the paper, says he has found spreadsheeting mistakes and some inconsistent use of data in Piketty's work. The claim Giles then makes as a consequnce is that when he reworks the data he can find no increase in wealth in recent years, contrary to Piketty's claim.
In response Piketty, who has clearly not been given enough time to provide a meaningful explanation by the FT, has dismissed the claim, saying that, first of all he has underestimated wealth differences because offshore has not been included and secondly that his research is part of a great body of work that shows increasing wealth concentration. The implication is very obvious: he is saying that even if there is any error that does not change the reality of what is happening.
I have not checked the data. I do know something about using data to prove hypotheses. I know a great deal about the reaction of those who do not like the conclusions to work that challenges the prevailing world view from what is considered a left wing perspective, so let me offer a view, and not technical analysis.
First, I would be astonished if the odd transcription error or even odd occasional formula mistake did not exist in Piketty's massive work. He is human after all. But Giles has found no apparent systematic fault of the type in Reinhart and Rogoff. The claimed spreadsheet errors really do look like occassional mistakes, at worst.
Second, and much more importantly, some of Giles' claims are simply about choices. Whether to weight data or not is always contentious. Do and you're damned (as I know) and don't and you're damned. This is not an error or getting anything wrong. That is the sort of decision social scientists face, and it's why social science is misnamed because there are no absolutely right or wrong answers.
Third, Giles makes the absurd assumption that Piketty's data sources are reliable. They're not. As I have noted very recently, current HMRC and ONS data on wealth in the UK differ by approximately £2 trillion and both will underestimate offshore welath, dramatically. So sometimes a researcher has to use their judgement on data and even correct for it (I had to decide what to do with straightforward data inconsistencies in data reporting from Companies House in my recent work).
And then there's Giles wish to say Piketty is wrong which is very clear above all else is what he writes. Whatever else Giles is he's not objective. He is pursuing a vendetta. And in the process he is ignoring, as Piketty has already pointed out, all to evidence to the contrary of Giles' opinion. After all, we thought inequality was rising before Piketty, and with good reason. And the evidence is all around us. The IMF and World Bank were of that view before 'Capital'. There is no reason to change that view now. If it's wrong and we are to take no action on it then it is going to take a lot more than a transcription error on a single line of 19th century data to suggest we need to change tack now.
In fact, without saying Giles has not found some issues that Piketty may wish to respond to in more detail ( which no doubt, he will), all that Giles has so far proved is that he has a rather childish determination to undermine an argument he finds offensive to his wealthy patrons, and that he is takng considerable delight in his pedantry whilst at the same time ignoring the broader evidence and displaying very little knowledge of the conundrums that dealing with data present.
I won't change my mind on the reality and dangers of inequality even if Piketty was proven wholly wrong (which appears to be very, very unlikely). But, more than that, I expect this attack to backfire. It appears insubstantial. It wreaks of desperation. And it will open a wider debate that will reveal the compelling evidence for action.
Giles may feel smug for a moment. But that, I suspect, is his whole problem.
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If you recall, Richard, exactly the same type of reaction by the advocates and defenders of inequality followed the publication of The Spirit Level in 2009-10. And if I remember correctly every argument and device that the cheerleaders of “planet privilege” could level at that work was duly deployed over quite an extended period, creating a situation where the credibility of the authors was gradually but systematically undermined. So, it’s no surprise at all the Pickety’s now getting the same treatment. And we can count on the legions of right wing journalists and their media masters to continue the attack until his reputation is similarly soiled.
Indeed!
It was inevitable
I’d be surprised if Giles’ contention that inequality hasn’t risen holds up any better than Piketty’s data does! That said, one issue which I raised before is clearly leading Piketty up a dead end and that is his insistence on equating wealth with capital. People’s houses [unless rented out] do not equate to capital. Herein lies one of the issues that Giles refers to; Inequality. It is actually reduced if one includes residential property in the scorecard when in reality it is only the minority of people who are able to utilise such wealth by downsizing or emigrating.
For most people housing ‘wealth’ is just not fungible. Whereas if one considers ‘financial’ wealth alone, the case for increased inequality is much plainer to see.
The difficulty is differentiating housing and housing for rent
But I did heck very on this point in his work and am inclined to agree with you
Mind you: owning a house is now a major social issue
(I don’t understand this and I’ve no idea how you’re defining capital, so apologies for wasting Richard’s time, but…)
Isn’t this just asset liquidity? Houses are non-liquid assets like plant machinery. (Sell the machinery and there’s no plant.) Yet capital was needed to buy (invest in) the machinery. Owning a house saves expenditure on paying rent, like machinery manufactures profits.
If capital is defined only as actively-invested wealth (renting out a house), then big company cash mountains aren’t capital.
Good point
More important, land is used as a store of wealth, even if occupied
If two people each buy a house and each lives in his own, you have no return on capital, but if they live in each others house they do? If that is the case, then I do not find the term return on capital useful. Whether you get the return in money or moneys worth should not influence the calculations of return on capital. It was about ten years ago Norway abolished taxation of capital income from living in your own house, making the tax system even more biased in favour of putting your capital into your own dwelling.
I think the main issue here is the conflation of capital and land, of which houses are a mixture if the two factors. But undoubtedly the biggest component of the biggest component of wealth, in the UK especially, is land value. Which is why the only remedy is fiscal.
“But undoubtedly the biggest component of the biggest component of wealth, in the UK especially, is land value.”
No, it isn’t actually. The largest share of wealth is pensions savings. As the recent ONS figures showed.
And what is pension wealth invested in Tim?
Are you really so unable to consider its incidence?
Oh dear, Tim Worstall has just trotted out something from the ONS which is clearly untrue.
The ONS say that total pension wealth (total assets held by pension funds) is £3.6 trillion, sounds a bit high but let us accept this figure.
The ONS say that net household “property” wealth (i.e. after deducting mortgages) is £3.53.
We know that the ONS gross figure for residential land and buildings is understated (because I once emailed them and they admitted it), they then deduct mortgages and ignore commercial land and buildings.
Truth is, total value UK land and buildings is £6 – £7 trillion gross.
Or we could look at annual income – the annual rental value of UK land and buildings is £400 billion and total private pensions in payment is about £60 billion.
“Pensions” is not even a real separate category of wealth, it’s just shares and bonds owned indirectly.
Your last line is spot on
Poor old Tim
See Krugman on this issue – http://alturl.com/8wofd
I think we agree
I must be missing something here. Housing capital is realised on death and left to children etc therby ensuring they acquire more wealth. This increases the gap between them and people who do not inherit any money. Isn’t that the point?
It does make you wonder whether social scientists should produce both data sets – weighted and otherwise, resulting from this type of research; it might prevent this type of ‘alternative analysis’ of work and allow the reader to decide for themselves precisely what they find more credible?
Social science is about judgement
My answer is no!
Not least because there are so many ways to weight data
I have just been reading Fred Schwed’s “Where are the customers’ yachts”, and found this wonderful quote.
“One can’t say that figures lie. But figures, as used in financial arguments, seem to have the bad habit of expressing a small part of the truth forcibly, and neglecting the other part, as do some people we know.”
Being somewhat older than Richard, I know from personal experience, that having some money, I have got steadily richer without much conscious effort, while the younger generation have got poorer. On a small scale, what Piketty describes is exactly my own experience. It would be sad if Piketty got reduced to a discussion of pin-dancing by angels.
I very much agree with that last comment
I don’t think that will happen: Chris Giles is already looking like a zealot, not a serious analyst
From The Economist “Based on the information Mr Giles has provided so far, however, the analysis does not seem to support many of the allegations made by the FT, or the conclusion that the book’s argument is wrong.”
http://www.economist.com/blogs/freeexchange/2014/05/inequality-0
Quite so
Chris Giles does point out some errors in the spreadsheets which Piketty has put together (although the errors look more random than intentional) but his attempted refutation of the entire book is crazy. Looking at the UK data for example, it’s quite clear that there are huge discontinuities in the wealth data for the top 10% and the top 1%. (see http://blogs.ft.com/money-supply/files/2014/05/Raw-UK-wealth-inequality-1810-to-2010.jpg) Giles constructs his own preferred series by simply joining these different sources of data together, without taking account of discontinuities, and that’s just a crazy thing to do, because trends are driven largely by measurement differences between the surveys rather than underlying changes in wealth. The end result – whether Chris Giles intended it or not – is that he ends up looking like a cheerleader for the 1%. Which is a shame, as when I worked with Chris at the IFS in the 1990s he was one of the sharpest people there. But 15 years in journalism seem to have taken their toll and he’s now more of a serial apologist for the ConDems than a serious commentator. Witness his continual defence of the ConDem austerity measures against Krugman, Jonathan Portes etc, in defiance of most of the available evidence. It’s just a shame as Chris has the potential to be so much better than this.
Thanks Howard
I confess I only see the cheerleader
Glad to know there is more – even if he is not inclined to use it
Richard, I feel you are being a touch too hard on Giles here. I think it’s pretty clear that the conclusions he reaches are pretty heavily oversold, but his work does point to an important (but more limited) conclusion. As you correctly point out, Piketty’s errors, though embarrassing, don’t fatally undermine his work [1]. What is more important is the effect of his choices.
Piketty’s decisions appear broadly reasonable (not weighing by pop or GDP appears a little odd, but as you say, damned if you do, damned if you don’t), and running the data through them produces a result consistent with his hypothesis[2]. Having said that, Giles’ decisions are *also* pretty reasonable, and are consistent with *his* hypothesis. So the data neither prove nor disprove Piketty (which is a bit of a pain, but reality can be annoying like that).
Hopefully Giles’ work will spur Piketty to fix the errors, and locate additional data to disprove Giles (and indeed his reply to the FT starts down this road), and we will be left at the end of the process with a more robust and reliable conclusion.
Credit is due to both Piketty, for sharing his files (and hopefully this will become standard practice for anyone who wants their analysis taken seriously), and to Giles for the tedious and unglamorous work of auditing the data (if not the rather sensationalist articles).
[1] Having said that, and with the usual caveat around extrapolating from a tiny sample (and biased) sample, Looking at the quality of spreadsheeting here and in R&R, the technical quality of spreadsheet work in economics appears worryingly poor.
[2] We’re talking here specifically about that part of his work which rests on this section of the data. As has been pointed out elsewhere, much of the book rests on other data which Giles has, to date, not raised any concerns about.
Piketty was given advance notice and this was his initial response: http://blogs.ft.com/money-supply/2014/05/23/piketty-response-to-ft-data-concerns/. No doubt he will be able to respond further in due course.
Update/reply by Giles at http://blogs.ft.com/money-supply/2014/05/28/follow-up-on-data-problems-in-capital-in-the-21st-century/