a16z Podcast - a16z Podcast: The Two Big Problems With Thomas Piketty’s “Capital in the Twenty-First Century”

Episode Date: May 15, 2014

“At a moment of great concern about inequality, now comes a learned tome proclaiming the gravity of the inequality problem,” says Larry Summers in a conversation with Andreessen Horowitz’s Balaji Srinivasan. “It’s a stunning thing, and it must reflect positively on the growing intellectualism of the society that a book like that could be a best-seller.” But that doesn’t mean Piketty got it right, adds the former Secretary of the Treasury and current a16z special advisor. Summers describes the two big problems he sees with Piketty’s argument, and how the forces of technology and globalization are better lenses through which to view and explain income inequality.

Okay, everyone. This is the A6 and Z podcast. I'm Bologi Serena Vossin, and I'm here with Larry Summers. Good to be with you, Bology. Maybe we can talk about Thomas Piquetti, which 696-page Doorstop is the number one bestseller on Amazon against all expectation, and he's been doing all the tours and so on. And we've kind of like had our criticism of him on Twitter, but I'm interested here your takes, criticisms, plotts, etc. it's a stunning thing and it must reflect positively on the growing intellectualism of the society that a book like that could be the best seller. It is a book that touches the zeitgeist at a moment of great concern about inequality now comes a learned tone proclaiming the gravity of the inequality problem.

The response reminds me a little bit of the book, The Rise and Fall of Great Powers by Paul Kennedy, that worried about military and military overstretch as a problem-facing nations right at the end of Ronald Reagan's administration. That book managed to miss the fact that the Berlin Wall was going to fall and the Soviet Union was going to collapse. And while Piquetti's diagnosis is, I think, a very powerful one, I think it is pretty clear that the share of wealth and income going to the top 1% has risen and there's at least good reason to believe that the trends will continue.

I don't find his theory of the contradictions implicit in capitalism and his theory of why wealth is rising at this rate to be a terribly convincing one. His basic argument is that rates of return are greater than growth rates, that capitalists just accumulate wealth, and that eventually all the capital is going to accumulate in fewer and fewer hands. And I think there are two large problematic aspects of the argument, and then there are other factors that are more important. The two problematic aspects are that as capital is accumulated, the rate of return on capital would be expected to go down, what economists refer to as the elasticity of substitution. And essentially all of the estimates, when you look at the proper concept of output, output

adjusted for the depreciation and obsolescence of capital, conclude that the elasticity of substitution is not that high, and therefore, as more and more capital is accumulated, the share of income going to capital should actually decline rather than increase, which means what we traditionally would have thought that the process of capital accumulation is on net good for workers who can use capital as a tool. Second problem is that in Piquetti's basic structure, The savings rate is assumed to be a constant, but people save differently if their wealth is 25% of their income, then they do if their wealth is 25 times their income. And so there's an additional self-correcting factor, the tendency of savings to decline

as wealth accumulates that also operates to contain the very serious cycle that he describes. His is a theory of accumulation by the fortunate, but what is striking, and you certainly see it out here in particularly dramatic form, is how dynamic the process of wealth accumulation is. Forbes looked at its 20, looked in 2012 at its 1982 Forbes 400 and found that less than 10% of those who were on the 1982 Forbes 400 were still part of the 2012 Forbes 400. Now, in part, 30 years is a long time and people die and their fortunes get split up. several ways. But there was all, you know, Mark Zuckerberg had not been born in 1982. So there are all kinds of fortunes being created. And I think a better way to think about the sources of large fortunes. And a better way to think about this is in terms of the economic processes, that that we were talking about earlier that take all the middlemen out

and therefore allow the creator, director, designer, to capture a larger part of the benefits. And that's what's behind entrepreneurial fortunes. In a different sense, with much better information systems, much greater capacity to execute the judgments that a CEO makes as to broad strategy and direction become a larger part of business success than they once were. And so entrepreneurial CEOs are rewarded heavily not just in new companies, but in traditional companies. And in a world of this kind of ferment, there's enormous gains to be had by being able

to judge the ways in which things are moving and judge who's doing the best job of taking advantage of the opportunities. And that contributes to the fortunes that are made in the financial sector. So I think it is much better to analyze inequality. in terms of the fundamental forces of technology and globalization, than it is in terms of any kind of inherent cultural contradiction of capitalism. That is not to deny that the phenomena are hugely important. It is a grave mistake to say that because an economic explanation can be given for wealth inequality, that means that it is socially all right.

to have so much wealth inequality and a book that has set off so much discussion and suggested so many lines of argument for consideration has to be regarded as a substantial contribution even if the ultimate hypothesis that it stresses does not strike me as being the primary phenomenon at work. So I will again defer to you on the sort of the macroscopic, but I want to come at this from a slightly different angle on Piquetti, some of the angles that we'd been talking about with Mark and so on. One of these actually you touched on, which is Mark remarked, you know, it'd be amazing if we could find this source that would compound wealth infinitely at scale, right? Because it's not easy, but it's possible to put in $1 million and make $10 million back. It's much harder to put

in a hundred million and make a billion, and it's very, very difficult to put in 10 billion and get 100 billion reproducibly. So the diminishing returns aspect here is something where the microeconomic analysis of exactly what's going on in Piquetti's cases, I think is very interesting because even just from a totally rational standpoint, people would want to be in those investments, right? So that's kind of one. But in terms of inequality, there's a few I think interesting takes on this one. So maybe in roughly increasing order of contentiousness or interestingness or mentionedness, what have you. So first is I'd say global inequality has decreased, right?

So in the sense of, you know, Hans Rosling's graphs and Gapminder and so on, from a number of different measures, you've seen that because of the rise of India, of China, the emergence of this global middle class, if you take a global perspective, there's a lot of people who were very poor, who are now no longer starving and who are getting wealthier, much more quickly. And so, you know, the fortunes that are being created are not just the individual ones, but, you know, China was in rags, you know, within our lifetime. In 82, it was just four years, five years out of communism, really.

And so that's kind of one. Global inequality, I think, is decreasing. Number two is, I think consumption inequality is decreasing. So, you know, that is to say, the hyper deflation of a lot of different costs, Sergey Brin is a billionaire, but he doesn't have an appreciably better Wikipedia experience than somebody who just has an iPhone, right? So if you set the cost of something to pennies, then, or lessen that to Microsoft, sense, so that's almost free or so cheap as to literally not be metered, and it's just bandwidth,

then you have more and more things that are accessible to more and more people. And I think that as software eats a world, we'll see more and more of these things. Right now, you could argue that technology has given us universal basic telecommunications and universal basic recreation in terms of infinite games and stuff on the internet. And it'll be a question as to whether it'll actually give us universal basic education. and so on, but things like Khan Academy are at least pretty good, even if one could argue they're not as good as an institutional approach. So I think the decline in consumption inequality is important here, because that's the other side of it. It's not just how much money

you're making is, what do you get for that money, how much do things cost? And then third, which is, I think, one the also important ones, perhaps least discussed of these three, is what I call the decline in power inequality, right? So, for example, there's on the order of a thousand billionaires listed in Wikipedia, and one things I've been tracking is a fraction of them that are non-Western, right? It's almost 500 of them are outside the U.S. and EU. And so that's a huge change, again, from like the middle of the 20th century, right? The extent to which the U.S. and EU, especially Western Europe, sort of dominated the world economy has just been, you know, declining and decline, declining

as a percentage. And that's simply because, you know, even though they're, you know, like, rising in absolute terms, it's not a zero-sum game, the, you know, you couldn't keep all these other countries back indefinitely. They eventually, you know, kind of got their economics together and China got its economy together in India to a lesser extent, and so they rose. And so I think that, you know, inequality is not just an economic thing. There's a few more dimensions to it, and from several different vantage points, things are actually going quite well. Finally, I'd say all these things tie together in, you know, you mentioned that you thought

his graphs are very good, and I agree. I think there's a lot of interesting data in that, but his prognosis may, you know, may not agree with as much. And I think that one aspect of his thing, which is, I think, really underconsidered is the proposal for a global wealth tax, you know, soon, actually already more than 50% of GDP by PPP is outside the U.S. and Western Europe, right? And so I don't think it's going to be very easy to tax all of China and India's, you know, new millionaires, you know, for a global wealth tax. I don't think you're going to get an accord on that. It's hard enough to come to an accord on climate change or something like that.

Something like this I don't believe is going to be feasible. And that's not an aspect that I've seen discussed all that much. It's almost as if there's still sort of a time warp to 1950. And so these are sort of the things that I've been thinking about with respect to Piquetti. I do think that you may be a little bit too serene. I agree with you that fantastic things are happening in the emerging markets and they're converging. but I think many of us in the United States are right to be concerned about what's happening within our country.

I hear you on consumption inequality, but if you look at what is probably the most fundamental measure of consumption, which is health, the data are very dramatic that the gaps in life expectancy between the top 10% of the population and the bottom 10% of the population have widened massively. It didn't used to be the case that people with higher incomes lived far longer than people with lower incomes. Today it is the case. The change in the relative life expectancy of a relatively fortunate person, say in

80th percentile in a relatively less fortunate person, say in the 20th percentile. So we're not talking about big extremes. The change in their relative life expectancy over the last long generation since the 1970s has been three or four years. To put that in some perspective, that is the equivalent of a doubling of cancer mortality. Is a three or four year difference. And so I don't know, there surely are aspects. We all have the same iPhones. We all watch the same Netflix. We all partake of Starbucks.

In that sense, perhaps consumption experiences are equalizing. But it would be a grave mistake not to recognize that what's more fundamental than all of that, which is health and life, is not converging and is within the United States very substantially diverge. I have minor kind of knit, which is I would group the iPhone and Netflix together, but I put Starbucks separately because that's a physical good, so it hasn't had that same decline, I don't think. Fair enough. So let's wrap it up. Thank you for being here, Lair. Good to be with you.