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Donald Boudreaux on Thomas Piketty

16 May
George Mason U. econ prof Don Boudreaux sent the following letter to the Washington Post about the author of the overly-popular (but long and likely rarely-entirely-read) recent book Capital in the Twenty-First Century

Dear Editor:

Charles Lane correctly notes that Thomas Piketty overlooks the practical difficulties of raising taxes without also raising barriers to the entrepreneurship and effort that improve everyone’s living standards (“Thomas Piketty identifies and important ill of capitalism but not its cure,” May 15). But the problems with Piketty’s analyses run much deeper than this oversight. Piketty’s main thesis – that capital in free markets (absent calamities such as war) automatically grows at an average annual rate of at least 4 percent, so that those individuals with more wealth than others today will be those individuals with even more wealth than others tomorrow – is difficult to square with reality.

Consider, for example, that 21 of the still-living 100 richest Americans of only five years ago are no longer in that group today. That’s a greater than 20 percent turnover in a mere half-decade – and this turnover isn’t likely explained by the financial crisis.

As reported by Larry Summers (who is no libertarian): “When Forbes compared its list of the wealthiest Americans in 1982 and 2012, it found that less than one tenth of the 1982 list was still on the list in 2012, despite the fact that a significant majority of members of the 1982 list would have qualified for the 2012 list if they had accumulated wealth at a real rate of even 4 percent a year.”

Real-world market economies are far more dynamic and churning than Professor Piketty and his fans realize.