Thomas Piketty vs FT: A Perpetual Battle Over Capital in the Twenty-First Century

It has been the most talked about economics book for a generation.

And the fire started by Thomas Piketty's Capital in the Twenty-First Century is far from being extinguished.

Fuel is being added to the flames in a fierce debate over the data he has used to come to his central conclusion.

The French economics professor predicts in his hefty book – 696 pages in all, including notes and references – that wealth inequality in developed capitalist economies is rising and will reach levels not seen since the 1800s in the current century.

This is because it is an inevitability of capitalism, argues Piketty based on his analysis of the data.

The returns on capital – which the wealthiest own most of – grow faster than the economy. So wages, which the vast majority of people rely on for their income by selling their labour, do not keep up with or exceed returns on capital, such as financial investments.

Put simply, the rich get richer more quickly than everyone else. And so inequality grows as a consequence of the logic of capitalism.

A narrowing of inequality in the middle of the twentieth century was a mere blip, claims Piketty, because the wealthiest took a big financial hit from the two world wars.

The heavy fiscal responses from governments after 1945, as they sought to rebuild nations from war's shattered ruins, then temporarily lifted the wealth and opportunities for society's poorest.

All of this came undone when former British Prime Minister Margaret Thatcher and US President Ronald Reagan unleashed the power of capitalism by liberalising financial markets, paving the way for the capitalist frenzy that led to the 2008 crisis.

But Chris Giles, economics editor of the Financial Times (FT), has tried to take a sledgehammer to the foundations of Piketty's book – the data he has used.

'Out of thin air'

Giles wrote that he went back over Piketty's sources after checking the claim that that top 10% of Britons own 71% of national wealth in the UK and that this portion is growing.

Piketty uses estate (inheritance) tax records from HMRC to make this claim, but Giles points to Office for National Statistics (ONS) research to show that the figure is 44%, not 71%.

And that the wealth of the top 10% has actually been falling for a large part of the twentieth century, rather than rising over the past 30 years as Piketty suggests.

The FT editor adds that HMRC specifically says not to use its tax records as a measure for wealth.

Giles also finds a number of "fat finger" errors – innocent mistakes in the inputting of data to spreadsheets.

Moreover, he quibbles with some of Piketty's decisions, such as using a simple average for calculating the combined wealth inequality of France, UK and Sweden, rather than weighting it for population.

Giles wrote:

I discovered that his estimates of wealth inequality – the centrepiece of Capital in the Twenty-First Century – are undercut by a series of problems and errors.

Some issues concern sourcing and definitional problems. Some numbers appear simply to be constructed out of thin air.

Egalitarian Britain?

Piketty soon gave an equally detailed response to the FT's fisking of his book. He acknowledged shortcomings of some of the data, but pointed out that he published all of his workings online to be scrutinised. He was not trying to hide anything or mislead people.

He defends his use of inheritance tax data over the ONS wealth and assets survey, favoured by Giles, as "more reliable".

Piketty wrote:

Let me make clear that although I think my estimate is more reliable and rests on better methodological choices, I also believe that this large gap reflects major uncertainties and limitations in our collective ability to measure recent evolution of wealth inequality in developed countries, particularly in Britain.

As I explain above, believe this is a major challenge for our statistical and democratic institutions.

What is troubling about the FT methodological choices is that they use the estimates based upon estate tax statistics for the older decades (until the 1980s), and then they shift to the survey based estimates for the more recent period.

This is problematic because we know that in every country wealth surveys tend to underestimate top wealth shares as compared to estimates based upon administrative fiscal data.

Therefore such a methodological choice is bound to bias the results in the direction of declining inequality.

Piketty also notes the poor response rate of the ONS survey and drily points out that the 44% figure "would mean that Britain is currently one the most egalitarian countries in history in terms of wealth distribution".

Others have also noted that the ONS itself describes the survey as "experimental", which presents its own methodological problems for the Giles analysis.

Ambushed

Aside from the arcane but vital debate about methodology and data, there is a spat between the FT and Piketty over the way the challenge to Capital in the Twenty-First Century was handled.

Piketty told Newsweek that he had been ambushed by Giles and not given enough time – fewer than 24 hours – to respond to all of the questions raised before the FT published.

But Giles pointed out that Piketty beat his deadline to respond by four hours.

Ultimately the debate appears to be boiling down to purely methodological arguments rather than any accusations of deliberate misrepresentation of data.

Many others have weighed in on either side of the debate. Piketty's solution to widening inequality of heavily taxing wealth all across the world has, naturally, made him a hero of left-leaners. As a result, many have leapt to defend him.

Channel 4's Economics Editor Paul Mason, not exactly known for having a romance with capitalism, jibed at the FT over the paper's How To Spend It supplement for its readership of wealthy consumers.

Mason wrote in the Guardian:

It is always right to trawl through data ... But the gleeful response to Piketty's 'errors' on the right-wing Twittersphere did not happen because some FT pointy-heads discovered a few fat-finger inputs.

It happened because, if Giles is right, then all the gross designer bling advertised in the FT's How To Spend It can be morally justified: it is evidence of rising social wealth in general, not the excess of a few Rolex types.

But the attack does not quite come off. For Sweden and France, the FT's conclusions barely diverge from Piketty's. For Britain and the US they do: the official figures capture the general curve of inequality downwards in the mid-20th century, but shatter into incoherence after 1970, failing to match Piketty's claim that wealth inequalities have increased.

Ongoing debate

The FT may have taken some of the shine off of Piketty's tome, but the book is largely unscathed. As ever, ideological dogmatism will cloud interpretations for many.

Some of the right sees it as yet another jealous leftist assault on wealth, while some of the left take the book as a Marxian gospel with which to beat opponents over the head.

So the debate will never really be over, about either the methodology or the politics.

Piketty has said he will update his work to iron out any accidental errors and improve the data as new, better statistics become available.

But be in no doubt, there will be another Giles somewhere to challenge him when he does, and hoards of let-wingers and right-wingers to do perpetual battle on Twitter.