Worth a read—generally quite positive and very insightful.
As have others, Larry raises objections to the prediction that r (the rate of return on wealth) will remain roughly constant as the amount of capital in the economy grows.
Larry’s on solid economic grounds, as per diminishing marginal returns theory: “As capital accumulates, the incremental return on an additional unit of capital declines.” The question is, does the return fall proportionately to the accumulation? TP says no, implying continuous wealth accumulation and higher inequality. LS says probably, especially if you factor in capital depreciation. [One thought here: computers depreciate relatively quickly (which have you replaced more: your laptop or your stove?)—as they become an increasing share of the capital stock, does it thus depreciate more quickly relative to past trends?]
Piketty’s best evidence, on the other hand—and as I read him, this evidence closes the deal for him re the above argument—is that r has, in fact, remained roughly stable, except when the capital stock was sharply diminished by war.
I agree with Larry that the most valuable attribute of the book comes from the data archeology by Piketty and others that made this work possible. As Summers puts it regarding rising inequality: “After Piketty and his colleagues’ work, there can never again be a question about the phenomenon or its pervasiveness.”
Interestingly, though he dismisses the common argument that higher inequality is all about the return to skills–“There can now be no doubt that the phenomenon of inequality is not dominantly about the inadequacy of the skills of lagging workers”–Larry’s considerably more willing than I to cite pay-for-performance rather than rents among those that Piketty labels the “supermanagers.” Summers arguments mirror those made by Mankiw the other night, so maybe it’s a Harvard thing.
–While TP argues that friendly corporate boards pay “rents” to their supermanagers, both Summers and Mankiw point to executives who are equally highly paid and who’ve been appointed by private equity firms who set their pay, presumably commensurate with their performance.
–Re finance, he cites investment managers who are compensated in part based on the returns they generate.
–He stresses the “winner take all” arguments that globalization and technology combine to provide today’s best entrepreneurs, athletes, and movie stars with global reach and thus huge returns relative to their historical counterparts.
I say “meh…” to all of the above, though I’d agree no one knows. I’d guess PE firms must match the distortionary norms set by the broader corporate sector. On finance, I’ve shown salaries moving inversely to regulation. Moreover, while investors may be paid for returns, many were demonstrably not “unpaid” for systemic risks that turned out to be extremely costly. If they’re getting pure upside, there must be rents at work (also, this part sounded a bit to me like he was defending the carried interesting loophole–yuk). The winner-take-all thing is interesting but as I stressed in my debate with Greg, the “Robert-Downey-got-$50m-for-playing-Iron-Man” is a small part of the inequality problem. Pay him like Clark Gable and not much would change.