Are you believer in the free market fundamentalist school of economic theory? If you are, then 2014 must have been a crap year. The main reason was the publication in English on what has now turned to be one of the seminal works of economics of our generation: Thomas Piketty’s Capital in the Twenty-First Century. Let’s understand the magnitude of this. A French economist, yes French, wrote a 700-page monolith of a tome in one of the most mind-numbingly boring subjects known to humankind and turned it into a New York Times bestseller. Presumably many of the thousands of people who bought Piketty’s book probably have never bought, much less read, an economics book in their lifetime. Maybe they didn’t even read it from start to finish (this blogger must confess, he has neither bought it nor read it) but, hey, it’s the thought that counts.
L’enfant terrible of economics
I cannot emphasize enough the he’s French bit. If there’s any country whose economic intelligentsia has been vilified by the Ivy League-bred doges of the economics profession, it is France. Yes, there’s a handful of world-renowned French economists like former IMF chief economist Oliver Blanchard and this year’s Nobel Laureate Jean Tirole, but for the most part these have comfortably fit into the “system”, and only challenged it at the margins, if at all. Certainty none of them has launched the kind of broadside that Piketty did in Capital, a book which uncovers free market capitalism’s ugly face: that of a system which naturally gravitates towards the accumulation of wealth by the owners of capital. Rather than see the two most recent periods of massive rises in global inequality (the so-called “guilded ages” before the 1929 and 2008 crashes) as oddities, Piketty has painted them as the baseline: the social-democratic golden age in the post-WW2 decades is in fact, a one-off, in which the trauma of war forced Western governments to redistribute wealth to a degree that had never been done before or since.
The meteoric rise of Piketty’s magnum opus did not go unnoticed by policymakers. The result is that the subject of inequality is now taken with the seriousness it deserves. The IMF, for example, published an important paper in 2014 on the subject, and has put it at the forefront of its current agenda. Long have we come from those glory days in the 1990s and 2000s in which inequality was a subject exclusively reserved for left-wing radicals and, well, French economists. While the most hardcore right-wingers still ferociously hold to their old dogmas, the fetishistic quest for growth and profits at all costs is increasingly seen by both sides of the spectrum as counterproductive: inequality corrodes the social as well as the democratic order, compromises growth and destroys social mobility (neoliberals long believed the opposite).
The curious case of the Excel coding error
Of course, Piketty has not been the only recent ideological setback for the right. Two years ago in 2013 we witnessed the shaming a paper that served as a template for austerity policies in much of the Western world. This was Kenneth Rogoff and Carmen Reinhart’s “Growth in a Time of Debt” in the American Economic Review in 2010. The fact that it was published in a non-peer reviewed edition of the journal (one of the most prestigious in economics) should have been a warning that the numbers may have been a bit fuzzy but nevertheless, the conclusions of the paper – that economic growth became compromised when the debt-to-GDP ratio rose beyond 90% – became something of a dogma of faith for every advocate of austerity in the West. The Republicans (in particularly their “fiscal guru” and quasi-libertarian Paul Ryan) used it in their budget proposals. So has George Osborne in the UK who has used it to justify his quest to trim back the British state to Victorian-era levels. As Paul Krugman noted in an op-ed, the study’s now infamous conclusion was often quoted as being one that “economists believed” as opposed to simply what R&R had erroneously concluded.
Except it was all bull, as one lowly University of Massachusetts PhD student painfully discovered. What he saw was in fact, “coding errors, selective exclusion of available data, and unconventional weighting of summary statistics”. The result was that whereas the paper suggested that economies contracted by an average of -0.1% when their debt levels reached the 90% of GDP threshold, they in fact grew by 2.2%. Of course, using the term “coding error” suggests some overly complex estimation method that it was only human to fudge. Actually it was as simple as not selecting the correct range of cells in Excel; no actual coding needed. Ultimately, R&R gave a half-hearted apology not before claiming that “this regrettable slip [does not] affect in any significant way the central message of the paper”. Yeah. Right.
Why I’m still a pessimist
You’d think after this one-two punch smack in the face of free market fundamentalism, the message would be learned. Sadly that is not the case. The US and UK are growing again, but behind the encouraging GDP numbers is a rise of poorly paid or temporary jobs, stagnation of real wages for those who are already employed, and yet inexplicably, record stock market highs and corporate profits. Doesn’t take a genius to figure out that the status quo hasn’t really changed much. Because for all the copies of Capital in the Twenty-First Century sold, money still makes the world go round. And for every Piketty gaining “rock star economist” status, there’s still a legion of right-wing economic hacks like Tyler Cowen, Greg Mankiw, and Robert Lucas, as well as an endless number of right-wing and libertarian think-tanks thinking we should continue to deregulate, cut taxes, trim government, and party like its 1999.
Guess who governments are going to continue to listen to?