A devastating critique of Piketty

Last April I wrote a post about the problems with Piketty's book, Capital in the Twenty-First Century. Over the weekend I read Deirdre McCloskey's 55-page tour de force review of the book. It's far more than just a critique or a review of the book, it's an education in economics and a dazzling collection of references and observations on politics, society, and economic history. It's densely written, however, so it will require several hours of effort, but I think you'll find it worthwhile.

In one passage, McCloskey the professor gives Piketty a failing grade in basic economics:

Startling evidence of Piketty’s miseducation occurs as early as page 6. He begins by seeming to concede to his neoclassical opponents (he is I repeat a proud Classicist, Ricardo plus Marx). “To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process [in this case the process of rising prices of oil or urban land leading to a Ricardian Apocalypse]: the mechanism of supply and demand. If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which would lead to a decline in its price.” The (English) words I italicize clearly mix up movement along a demand curve with movement of the entire curve, a first-term error at university. The correct analysis (we tell our first-year, first-term students at about week four) is that if the price is “too high” it is not the whole demand curve that “restores equilibrium” (though the high price in the short run does give people a reason to conserve on oil or urban land with smaller cars and smaller apartments, moving as they in fact do up along their otherwise stationary demand curves), but an eventually outward-moving supply curve. The supply curve moves out because entry is induced by the smell of super-normal profits ...

Shocking.

Posted by Unknown

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