Tuesday, July 22, 2014

Inequality Studies Across Academic Discipilnes: The Piketty Effect

-- Posted by Neil H. Buchanan

Jotwell: The Journal of Things We Like (Lots), a playfully named but serious publication, is one of the few successful online writing ventures that relies upon a wide range of authors.  Usually, large-scale unpaid ventures are overwhelmed by free-rider problems, but Jotwell has managed to thrive on a model in which each author submits one post per year.  Divided into nineteen sections, from Administrative Law to Work Law, the journal asks its authors to write 1000-word essays describing the best article or book in a given field that the Jotwell author has read in the past year.  I published Dorf on Law companion posts to my previous "jots" in 2013, 2012, 2011, and 2010.

Last year's jot summarized an article in a major economics journal, written by Peter Diamond and Emmanuel Saez, which summarized a body of work on income inequality that they had published with a frequent co-author, a young French economist named Thomas Piketty.  Piketty was so unknown to the outside world at that point that I did not even bother to mention him in my column.  I did mention him in my companion Dorf on Law post, but I managed to misspell his name.  (I am not alone in this type of error.  There is a law review article, co-authored by Professor Dorf, that acknowledges the research assistance of a young law student named Barrack Obama.)

As we all know, the ensuing year has seen Piketty emerge as the global "rock star economist" who wrote the book that everyone is discussing (without having actually read even a single page), Capital in the Twenty-First Century.  With the English translation of his book hitting the top of the bestseller lists, and the initial flurry of red-baiting at least in remission, people are now starting to think seriously about the implications of Piketty's book.  On Jotwell, this led to an unplanned quasi-symposium, with four authors writing jots about the book from different perspectives.  In addition to my piece (Thomas Piketty's Book is Masterful and Important, But Ultimately a Sideshow), there is a piece on the Trusts & Estates sub-site by Kurt D. Schenkel (Trusts and Estates Law and the Question of Wealth Distribution), the Tax Law sub-site by Daniel N. Shaviro (The Return of Capital), and the Work Law sub-site by Michael J. Zimmer ((Re)Booting the Dismal Science).

The central argument of my piece, which I previewed in a Verdict column and DoL post last month, is that Piketty's book is among the least persuasive arguments out there, when it comes to arguing in favor of income and wealth distribution.  In his book, Piketty says that capitalism is arithmetically hard-wired to create ever more inequality, unless we intervene actively and repeatedly to break up concentrations of wealth.  This is true, but in my jot, I essentially say that that particular argument really should be a big snore, given that there are so many other, more immediate and more compelling reasons to worry about poverty and inequality.  I still believe that to be the case, and it also seems clear that there would be no reason to change any part of the progressive/liberal political agenda going forward, even if Piketty's prediction about the next few decades were to turn out to be completely wrong.

Again, however, that does not mean that Piketty's book is unimportant.  Far from it.  Piketty brings important historical and statistical insights to bear on the question of inequality, and he takes a much broader perspective, even for all of the detail that he provides, than is typical for an economist.  That is why the Jotwell quasi-symposium was so interesting.  Professor Zimmer's piece on the Work Law sub-site takes the most direct shot at economics as a field, arguing that the book will do three good things to improve the practice of economics by economists, making the field (1) take macroeconomics more seriously again (rather than treating macro merely as applied micro), (2) more of a data-based social science, like sociology, rather than a self-satisfied preserve of abstract theorists, and (3) increasingly international in scope.

For Professor Schenkel, by contrast, the interesting question is about how a Piketty-inflected policy environment would affect trusts and estates law.  Obviously, if politicians take seriously the problem of inherited inequality, T&E law will become not just a battleground, but also a source of ideas.  He notes, for example, that "[i]t is no secret that U.S. trust law enables far more dead hand control of wealth than that of England," and he asks whether "mechanisms such as spendthrift trusts and Claflin restrictions are ill-advised," or whether "we [can] afford to be sanguine about jurisdictions eliminating their Rules Against Perpetuities."  Given legitimate questions about whether it is even possible to tax wealth effectively, during life or at death (or after), it is clear that even if conservatives succeed in beating back Piketty's disciples, they will have to do so not just by nitpicking his data but by getting into the deep weeds of property law.

Professor Shaviro writes from the perspective of tax law, which is also my primary area of expertise.  Even so, my interest in his jot is not merely a matter of intramural commitments.  In its way, Shaviro's piece is a blistering attack on the state of the legal literature on taxation, as it has developed over the last generation.  Shaviro describes a "sizeable, but as yet little discussed, disjuncture between the frameworks used by Piketty on the one hand, and in much of the last three decades’ tax policy literature on the other hand."  Although he tries to be even-handed about it, saying that "the disjuncture is on both sides," I could not read the second half of the piece without thinking how deeply the critique cuts into the existing conventional wisdom among tax law scholars.

Shaviro writes: "'Capital,' to which Piketty assigns such a central role, has in a sense been banished from much recent tax policy literature," and he then notes that the passage of time is also all but absent from standard "optimal tax" analysis.  Without taking time into account, one cannot even conceive of the questions that Piketty asks, much less address them.  Finally, Shaviro notes that the standard model takes virtually no account of the "externalities" of wealth concentrations, such as inequality's "effects on the functioning of various social and political institutions."

Shaviro does not put it as starkly as he might, but I read his arguments as supporting a devastatingly negative view of the state of legal tax policy literature.  This is hardly surprising, because the legal tax policy literature to which Shaviro refers is (as I have argued many times) merely a faithful application of the standard "neoclassical" economic theory to questions of tax.  Although Piketty actually leaves much of the neoclassical framework intact, even the small amount of heresy that he commits exposes the incredibly narrow worldview of modern economics, as practiced within economics departments as well as in its wannabe precincts like tax law.

In any event, Piketty's book could ultimately change the entire academic approach to studying real-world policy problems.  Even if he were to turn out to be inaccurate in predicting the path of future inequality, therefore, it could help the world much more profoundly if he were to dislodge the unhelpful approaches that have dominated economics and its colonized fields for far too long.