Piketty's primary contribution is to provide an impressive array of data on wealth and income, for several countries, beginning as early as the 1700s in some cases. Note that he does not examine consumption data. The book is an impressive feat and certainly deserves attention, as the facts Piketty provides are crucial to discussions of the evolution of capital and economic inequality in the rich countries. Many reviews have been very positive; there are a lot of positive things I could say about it, but I will leave that to others. The book suffers from some fundamental flaws; in short, while it is heavy on data it is light on serious economics. Readers will find themselves wading through hundreds of pages of opinion and ideological quips, not economic analysis, with interesting charts scattered throughout. The firehose of data can be overwhelming, which may explain why some reviewers internalized his arguments uncritically. Piketty's accomplishments with data collection are admirable. But a book of this size, with the title Capital, should include some economics.
Piketty's data on inheritance are the most interesting and persuasive to me. Inheritance still matters and plays a nontrivial role in the wealth and income distribution. Reducing wealth inequality over time, should we decide to do so, will require serious attention to the issue of inheritance, which more than any other issue lacks a tie to meritocracy (but that does not mean incentives stop mattering!). There may be other arguments, not based solely on inequality, for thinking about inheritance. That said, not all capital is created equal, and the book could have benefited from some focus on distinctions between capital types--particularly in the context of inheritance.
Most of the analysis in the book is more about accounting than economics. Piketty takes nearly everything as exogenous then divides things arithmetically. His ubiquitous r > g heuristic takes both sides of the inequality as given for almost the entire book. Lines like "the richest 10 percent appropriate three-quarters of the growth" (297) enable lazy readers to avoid thinking about what actually determines income. Language about "appropriation" suggests that we live in an endowment economy, as does the claim that post-World War I wealth inequality fell "so low that nearly half the population were able to acquire some measure of wealth" (350). Endogeneity, anyone? Taking income as exogenous leads to other large problems with inference, such as the claim that "meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither" (417). Piketty does not consider the possibility that this race results in more income than otherwise, nor does he consider the notion that an increase in the bargaining power of elite executives could actually come at the expense of capital owners rather than workers. I'm not making an argument for either here; I'm simply suggesting that Piketty's ideological quips don't deserve the certainty with which he delivers them. Models with endowment economies have their purposes, but a 600-page book should be able to relax such strict assumptions. His criticisms of mathematical economics (32, 574) are not surprising given that he relies so heavily on assumptions and mechanisms that would be highly vulnerable to criticism if they were forced into the transparency of a formal model.
This kind of fast-and-loose economic reasoning pervades the book. Piketty attributes the rise of the "patrimonial middle class"--the great home-owning middle class of developed countries--entirely to the rise of capital taxation (373). It's perfectly reasonable to argue that taxation played a role, but it's absurd to give taxation all the credit without further analysis. Piketty relies on this shaky causal claim for his central thesis; presumably unbounded capital accumulation wouldn't be a problem if everyone owned some. Denying that economic forces played any role in bringing wealth to the middle class helps Piketty claim that inequality will spiral out of control and leave us all in poverty unless serious tax reform is effected. This argument also requires him to assure readers that there are no tradeoffs associated with capital taxation: "It is important to note that the effect of the tax on capital income is not to reduce the total accumulation of wealth" (373). We also learn that there is "no doubt that the increase of inequality in the United States contributed to the nation's financial instability" (297). No identification problem here, folks; causal inference is easy! The book is littered with extremely strong claims like these, despite the existence of good reasons to at least be skeptical of some of them. Maybe Piketty is right about these things, but he has not shown it here; and even if his considerable collection of charts and tables is enough to dazzle most reviewers into fawning submission, the data are not sufficient for demonstrating his strong conclusions.
Piketty's data on the rise of middle-class capital ownership raise an important point. A key theme of the book is that poor people don't own productive assets, so they must rely entirely on labor for income. But is taxation and redistribution the only way to address this situation? This poses a difficult question for those who oppose some form of privatization of government retirement programs. One cannot simultaneously claim that owners of capital stand to gain absurd riches in coming decades and that privatization and choice for Social Security is a terrible idea.* This is not the only possible alternative to taxation, but it is a reminder that one way to treat the problem of poor people not owning stuff may be to help poor people, well, own more stuff. But Piketty simply asserts that "only a progressive tax on capital can effectively impede" increasing wealth concentration (439). More generally, Piketty decries the ability of those with large fortunes to access opportunities for higher rates of capital return than those with smaller starting funds, but he makes no mention of the fact that this is due in part to laws banning small investors from participating in alternative investments. By law, if I want to invest in a startup, I can only do it in undiversified ways (like starting my own firm or investing in a friend's). We don't need higher taxes to help lower classes invest better.
Another key weakness of the book is that, like much of the popular debate on inequality, it focuses almost entirely on higher moments of income and wealth distributions while making only minimal effort to provide context about absolute levels of income and wealth. Piketty compares inequality over the centuries, noting that it is returning to pre-World War I levels then claiming that "the poorer half of the population are as poor today as they were in the past" (261). This is only meaningful in relative terms; as Piketty briefly mentions a few times (but does not emphasize), the poor of 2014 are much better off than even average earners from previous centuries: "With 5-10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today" (415, see also 88), and even Piketty admits that this claim relies on dubious adjustments for inflation (how much did a car with air conditioning cost in 1800?). The truth is that most of today's developed-country poor are astronomically, unquantifiably better off than almost anyone from 1800, which raises the question of why Piketty sounds alarms about inequality reaching previous levels. He briefly acknowledges modern international context in chapter 12, but he examines only wealth inequality,** which is tricky, and makes no mention of global income inequality, which has been declining. In any case, Piketty has strong incentives to tell us that the only thing that matters is inequality within rich countries (432)--even if the poorest Americans are better off than most of the world.
This is the great failure of the inequality alarmists generally: a myopia centered around rich countries that have seen massive growth in purchasing power for everyone. For within-country inequality to become a public policy priority, those concerned about it need to make a much stronger case. This isn't just about whether society is totally meritocratic--obviously it's not, as Piketty argues in multiple places. The problem is that Piketty has not performed an analysis of optimal inequality, choosing to rely instead on a lot of straw man arguments and vague references to "democracy." He has provided a lot of data that demonstrate that inequality in countries that produce the top 20 percent of global output is on the rise, and he has suggested policy remedies (that he claims are basically costless), but he has not made a serious attempt to convince fence-sitters that this issue should top the policy agenda.
It is hard to believe that Piketty's predictions for the future--on which his policy prescriptions rely--are much more than undisciplined speculation. He does not have a model. He has shown us historical data from which he has drawn inference using accounting-based counterfactuals and a lot of hand waving. He has made forecasts for the future paths of income and returns to capital--both of which are basically exogenous processes in the text. On these forecasts he hangs his broader predictions. His predictions are worth noting because he is a capable scholar with a tremendous mastery of the data, but his hand-wavy approach to dismissing (or ignoring) weaknesses in his framework limits the ability of his speculations to convince those who don't already agree.
Economists who write books like this have an opportunity to educate the public in economic reasoning. Thinking about macroeconomics is hard. Piketty's methods and rhetoric suggest to readers that macroeconomics is easy. He can dismiss all objections with a wave of his hand. He can ignore policy tradeoffs and potential general equilibrium effects by simply asserting them away. Someone should count how often he uses the terms "no doubt" and "clearly" when drawing huge, highly debatable conclusions about almost everything (e.g., 511). By referencing only charts (if even that) for many of his claims, he is feeding the sloppy and destructive "this one chart proves...!" fad that has spread in the blogosphere; a chart is never sufficient to make causal claims or demonstrate optimal policy. In this sense, Piketty does his readers a disservice. He should have asked them to think harder instead of just gazing at graphs. He should have accompanied his facts and predictions with serious normative arguments instead of assuming his readers automatically share his deep concerns about how the world's top 20% are faring compared to the world's top 0.1%. He should have explained the reasons many economists prefer low taxes on productive capital other than land; even if he finds such arguments unpersuasive, he robs readers of the chance to consider them when he blatantly accuses those economists of intellectual dishonesty (514).*** He should have acknowledged the massive "causal density" problem in macroeconomics and shown readers how economists investigate causal relationships and, more importantly, identify the limits of their knowledge. Instead, he preaches to the converted and to those who are easily overwhelmed by a deluge of charts, knocking down straw men but avoiding the hard questions. The book is many things, including an excellent resource for stylized facts, but serious economic analysis it is not.
Capital is tremendously informative, and Piketty's use of literary anecdote is a nice touch; but ultimately this is a chart book, with plenty of economic data but very little economics.
*Piketty devotes a grand total of two paragraphs to this idea (488-9), making two weak, unimaginative arguments against the policy. He cannot imagine a way to transition from PAYGO to private investment accounts, and he believes that trusting retirement to the markets amounts to "a roll of the dice." We know enough about optimal retirement portfolio choices to do better than dice-rolling. For someone in my generation, watching a chunk of my paycheck go toward a program based on the silly assumptions underlying Social Security is the real gamble. In any case, if Piketty truly believes that giving everyone a chance to become an owner of capital is a dice roll, he must explain why he is so certain that capital income is sure to explode in coming decades.
**His discussion of wealth inequality even includes an awkward admission: "The average global fortune is barely 60,000 euros per adult, so that many people in the developed countries, including members of the 'patrimonial middle class,' seem quite wealthy in terms of the global wealth hierarchy" (438). But the middle class doesn't just "seem" wealthy. The developed world's middle class is wealthy by any objective standard, which emphasizes my point that inequalities within developed countries are much less disconcerting that true global poverty.
***Aside from this silly accusation, Piketty never mentions optimal taxation literature aside from a handful of his own papers. His central recommendation of a global wealth tax does not read like a result of optimal taxation analysis. He claims that "it is hard to think of an economic principle that would explain why some assets should be taxed at one-eighth the rate of others" (529), as if "elasticity" and other drivers of optimal tax models are not economic principles.