Piketty is an economic illiterate

I have finally put my hands on a copy of Thomas Piketty’s Capital in the Twenty-First Century. And what do I find, that this world famous book, this book that is going to set our economic world on its head, in its introductory chapter makes a fundamental error in basic economic theory I would fail any first year student for making. Forget about fraudulent data. He has confused a shift in demand (ie a movement of the demand curve) with a change in quantity demanded (the effect on the number of units bought caused by a change in the price). For an economist, you cannot be more wrong than that. Here is the passage in which, of all things, he is discussing Ricardian land rents in a section he titles, “Ricardo: the principle of scarcity”:

“To be sure, there exists in principle a quite simple economic mechanism that should restore equilibrium to the process: 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 should lead to a decline in its price.” (p.6 – my bolding)

He has here basically stated that insufficient supply (a shortage) will lead to a fall in price which you can see from the bits in bolding. An economist should immediately see the flaw, but for those not trained in the dark arts, let me explain.

1) The phrase, “if the supply of any good is insufficient” means, suppose there is more being demanded at the price than is being supplied. That is, suppose the price is below its equilibrium level so that there is upwards pressure on the price. He doesn’t say it quite that way, but only that “its price is too high” which, in theory terms, is a nonsense statement. But since he is talking about the pressure of demand on supply, he can only mean that the increase in demand is pushing the price up which is driving some people out of the market. As economists like to put it, the demand curve has moved to the right and prices have therefore gone up.

2) But because “its price is too high,” he writes, “then demand for that good should decrease.” Big, big mistake. He has shifted his meaning of “demand” from representing a movement of the entire demand curve to a movement along the demand curve. Higher prices, he is saying, cause the quantity demanded to fall. The demand curve stays put but with a higher price some people are leaving the market. That is why demand curves are downward sloping.

3) Then he writes that “demand for that good should decrease, which should lead to a decline in its price”. He has now mistaken a fall in quantity demanded, a movement along the curve, for a fall in demand, a movement of the entire curve to the left. He has confused a fall in the quantity demanded caused by a rising price with a fall in the level of demand, which is a shift of the entire curve.

This is one of the things I harangue my students about to stop them from making such elementary mistakes. Compare what Piketty wrote with the text of my Free Market Economics where I warn my students against making this absurd but common enough error, at least common enough amongst economic illiterates. From page 100:

Demand versus Quantity Demanded

People often do talk about demand as if it is a specific amount and it is therefore important to make sure that when someone is talking about “demand”, that one is aware of which meaning they have in mind.

Compare these two statements:

(1) if the price goes up demand goes down (and who would deny this is so?)

(2) if demand goes down the price goes down (and similarly, who would deny this?)

This becomes the following conclusion if the two statements are run together:

(3) if the price goes up [demand goes down; if demand goes down] the price goes down.

That is, if the price goes up the price goes down. A higher price is the cause of a lower price. Obvious nonsense, but it comes from using the word “demand” in its two different meanings.

In (1), this is using the word demand to mean a movement along the demand curve when the price happens to rise. In (2), this is using the word demand to mean a shift of the entire demand curve when one of the underlying factors has changed.

It is therefore essential to always make sure which meaning of demand is intended. You can usually tell from the context of what is being said, but the words here are slippery and can lead you into trouble.

This is trouble, all right. I find it absurd that Piketty cannot tell the difference between a shift of the demand curve and a movement along the demand curve.

To trust anyone’s economic judgment on serious economic matters who makes such a fundamental error would be ridiculous. He has 650 pages of stats and data but almost literally doesn’t know the first thing about economic theory?

This entry was posted in Classical Economics, Economics and economy. Bookmark the permalink.

43 Responses to Piketty is an economic illiterate

  1. .

    Turns out he doesn’t understand truncated demand or the various elasticities of demand etc.

    I have maintained that regardless of his data fudging, his theory is so absurd it is more out there than conspiracy theories. It is straight up conceptual nonsense. It is like building a high speed modern desktop/laptop PC solely out of plant fibre.

    He is an economic crank and his ideas are simply incorrect.

  2. JC

    But what if he’s actually right. I’m not saying he is but what if the wealthier are getting more so.? So what?

    I think there’s a pretty decent case to be made that capable people are potentially getting wealthier with globalisation. Just think Steve Jobs would not have become as wealthy if he wasn’t able to manufacture and then sell Apple products on a world wide scale. Instead of 300 million American consumers he was able to aim for and scale up to perhaps 2 billion potential customers.

    How is this a bad thing?

    Oh yea, we’re told by Marxist zombies that da inequality will lead to social unrest. Where’s the evidence that in a growing economy where living standards are rising there will be social unrest because some dude was capable in putting together a set of inputs more efficiently and more desirably than others.

    Thieves dickheads are peddling the idea that relative inequality and not absolute poverty ought to be our number one priority.

    They want a global envy tax.

    Here’s my idea: get rid government agencies such as the Climate authority where people like Clive Hamilton are glomming taxpayer funds for useless junk the government doesn’t want and supplementing his income with useless advice. That ought to help improve da inequality. All up Hamilton would be on perhaps 500k per year .

  3. Rafe

    That looks like a strong rejoinder but then economic illiteracy is not a bug for that mindset, it is a feature!

  4. but almost literally doesn’t know the first thing about economic theory?

    Quelle suprise.

  5. ar

    Leftism doesn’t work unless there is a basic fraud or misconception at its root. In this case, chapter one…

  6. Ant

    A communist’s head is full of mush and he writes horse shit.

    Quelle surprise.

  7. Tel

    He has here basically stated that insufficient supply (a shortage) will lead to a fall in price which you can see from the bits in bolding.

    That would go a long way to explaining why Cyclone Larry caused such a drop in banana prices.

  8. Diogenes

    Tried to post this comment on The Drum , (Piketty nitpicking: don’t rush to discard his case
    By John Quiggin) but for some reason not published

    Dear Professor,
    If I were a PHD student and this book was my thesis, and I had made the same errors, would I still receive my doctorate ? If so – why? If not why are you bothering to publish this article ?

    If the former that would explain the educated idiots we all deal with.
    Diogenes

    PS – Why is it that a journalist found these errors. and not an academic ?

  9. Tel

    (1) if the price goes up demand goes down (and who would deny this is so?)

    Velben goods, the “lipstick principle”. People perceive the good must be high quality because of the high price. This works in IT as well. Seems to work especially well on government buyers, errr, so I’ve heard.

    (2) if demand goes down the price goes down (and similarly, who would deny this?)

    Starbucks Coffee somewhat famously raised the price of their coffee in the face of falling demand in order to maintain their profits. It worked for them, but I grant you, can be risky.

    There’s other examples as well: old computer parts (especially minicomputers) can sell for higher prices now than they did when those computers were at peak popularity. The reason is unintuitive to an economist, business has invested in some heavy iron and the migration costs are prohibitive, but the manufacturer (and most of the market) has moved on; there isn’t sufficient demand to make it worth building more of those parts. Gradually the warehouse stock gets consumed, and service shops take to cannibalising old machines. Eventually the support costs get so high one business after another bites the bullet and makes the jump to modern equipment with a big capital cost once more (and the process repeats).

    (3) if the price goes up [demand goes down; if demand goes down] the price goes down.

    That is, if the price goes up the price goes down. A higher price is the cause of a lower price. Obvious nonsense, but it comes from using the word “demand” in its two different meanings.

    It isn’t obvious nonsense, it’s a very old concept known as “feedback”. There are books on it and everything, I’m not kidding!

    Consider a negative feedback audio amplifier: when the input voltage rises the output voltage rises by many times more which drives the negative feedback network forcing the input voltage to fall which causes the output voltage to fall by many times more and around it goes. Obvious nonsense? No, it’s a design at the heart of just about all audio equipment and has been for about 100 years. You can’t use simple cause and effect logic sequences to analyse that design, wrong tool for the job. Even more annoying, the design for a nice stable linear amplifier and the design for an unstable oscillator are very nearly the same… something that has annoyed generations of engineers.

  10. Henry2

    But Mr. Kates, Mr. Quiggan says theres nothing wrong with Mr. Piketty’s work.

  11. .

    Diogenes
    #1326669, posted on May 31, 2014 at 2:24 pm

    Brilliant stuff.

    Tel

    True Veblen goods are rare. Most Giffen goods exist because of micronumerosity, not a true reversal of the law of demand relationship.

  12. This is trouble, all right. I find it absurd that Piketty cannot tell the difference between a shift of the demand curve and a movement along the demand curve.

    Did you read it in the original French?
    [Slight edit. Sinc]

  13. .

    Did you numbers? Did you and Kweegggen read it in the original French? Are the translators all imbeciles like you? Do the laws of economics given to us from Basistat and Bapitste Say change when they are in French?

    Sacré bleu!

  14. Sinclair Davidson

    1735099 is making the point that this might be a translation problem. It is a fair point.

  15. .

    You’d note that I’m saying “numbers and kwigggen did better than professional translators? Yeah right..”

    Utter obfuscation and interference running for a nonsense theory supported by dishonestly manipulated and fudged data.

  16. 2dogs

    Possibly let me correct that, what he says in French is “qui permettra de calmer le jeu”.

    Perhaps he just means the market will be quiet? What is “le jeu” here?

  17. Sinclair Davidson

    2dogs – thanks for the link.

    Can French readers please have a read of the page at 2dogs link?

  18. Tom

    ‘Ce qui permettra de calmer le jeu’ literally means ‘which will allow things to settle down’—it’s basically a statement that the market will return to equilibrium. While French economists do distinguish between ‘la demande’ and ‘la quantité demandée’ in Micro, in my experience, most economists use the two interchangebly in everything but micro 1. Even in English economists use ‘demand’ sometimes as a shorthand for ‘quantity demanded’ – it’s a bit sloppy, true, but hardly a hanging offence.

  19. This, in Real World Economics Review, (issue 67), is balanced –

    The book has already had an enormous positive political impact. In my view, speaking truth about its limitations will not diminish that impact. Neoclassical economists have always talked of capital (K). The forbidden subject is capitalism. Piketty has whetted the public’s appetite with his talk of capital. Friendly criticism may get the public thinking about capitalism and what is needed to make capitalism deliver shared prosperity.

  20. Something weird is going on.
    What Kates wrote –

    If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which should lead to a decline in its price.” (p.6 – my bolding)

    Where does “which should lead to a decline in its price” come from?

    It’s not in the passage 2dogs posted which is page 23. Surely, Kates hasn’t mixed text from page 6 with text from page 23?

    My reading of the passage in question on page 23 is -

    If a good is in short supply and the price is too high, then the demand for this good will fall, and calm things down.

  21. 2dogs

    Surely, Kates hasn’t mixed text from page 6 with text from page 23?

    The passage is on page 6 in the English text and page 23 in the French text. The French text contains a lot of acknowledgements up front.

    Kates has correctly quoted the English text. “qui permettra de calmer le jeu” was translated as “which should lead to a decline in its price”. The French phrase is impenetrably vague, so I can understand why the translator got confused.

  22. The French phrase is impenetrably vague,

    Can’t agree with that.
    It is quite clear. My Uni French (better read than spoken) tells me it means what I posted above.
    Google translate interprets it much the same -

    “That will calm things down”

    To trust anyone’s economic judgment on serious economic matters who makes such a fundamental error would be ridiculous.

    Except the error is in the translation. It is ridiculous.

  23. 2dogs

    In context, it is vague.

    In particular, what is the egregious situation which is being calmed down?

    If you look earlier in the text, Piketty describes it as being a “prix est trop eleve”.

    So if that is the egregious situation which is being calmed down, the translator must have concluded that the price had fallen.

  24. the translator must have concluded that the price had fallen.

    The translator’s job is to interpret, not to conclude.

  25. 2dogs

    If that’s your approach to the art of translation, Numbers, your readers would find your works quite technically correct but insufferable to read.

    Every language has its own ways of turning phrases which if translated literally would make for an unreadable text. A good translator, by which I mean one which is good for the reader, must draw conclusions about the author really means.

    Here, what the author means is not clear in his original language (a bad thing for an academic work), and the translator has drawn the wrong conclusion. I imagine many French readers did likewise.

  26. JC

    I watched a little of Batman Rises earlier this evening. Piketty sounds like Bane. Almost word for word. If he’s unlucky Piketty won’t be just picked up data errors, he’ll also get caught out for lifting the dialogue from the character, Bane in Batman Rises.

  27. JC

    I’ve said it a couple of times now. The Right need to stop the Leftwing zombies raising the issue of da income inequality as it basically envy.

    The Right need to keep asking if there’s a consumption problem in the developed world and if there isn’t then the focus ought to be on absolute poverty, not relative.

    The real concern should be people around the world who don’t have enough to eat and their kids are eating dirt biscuits as they have in places like Haiti. Frankly no one lives in absolute poverty in Australia if they are of sound mind. No one.

  28. JC

    This is causes me deep concern and sorrow, not Australian relatively less well off who generally have an obesity problem.

    http://www.nbcnews.com/id/22902512/ns/world_news-americas/t/haitis-poor-resort-eating-mud-prices-rise/#.U4mycC9k1q0http://www.reefbikes.com.au/

  29. AP

    The error is in the first part of the sentence. The bit about things “calming down” is irrelevant. The demand curve does not shift because of lack of supply, as he described (although it could shift because of substitution, changing tastes, or technology). The “price is too high” BECAUSE of demand (and therefore not “too high”, but in equilibrium). The bloke is a moron.

  30. JC

    This weeks Barrons nails Picketty’s argument.

    It’s the shrinkage of what is available to the masses that’s important, not income disparities.

    THE U.S. IS THE bête noir of Piketty and other progressives obsessed with monetary inequality. But middle-class Americans take for granted their air-conditioned homes, cars, and workplaces—along with their smartphones, safe air travel, and pills for ailments ranging from hypertension to erectile dysfunction. At the end of World War II, when monetary income and wealth inequalities were narrower than they’ve been at any time in the past century, these goods and services were either available to no one or affordable only by the very rich. So regardless of how many more dollars today’s plutocrats have accumulated and stashed into their portfolios, the elite’s accumulation of riches has not prevented the living standards of ordinary people from rising spectacularly.

    Furthermore, these improvements in real living standards have been undeniably greater for ordinary folks than for rich ones. In 1950, Howard Hughes and Frank Sinatra could easily afford to pay for the likes of overnight package delivery, hour-long transcontinental telephone calls, and air-conditioned homes. For ordinary Americans, however, these things were out of reach. Yet, while today’s tycoons and celebrities still have access to such amenities, so, too, do middle-class and even poor Americans. This shrinking gap between the real economic fortunes of the rich and the rest of us should calm concerns about the political dangers of the expanding inequality of monetary fortunes.
    http://online.barrons.com/news/articles/SB50001424053111903301904579564170989136720?mod=BOL_hp_mag

  31. Alex

    If you look at what follows the quoted section it’s clear he’s talking about artificially lowered supply due to cartels.
    “In other words if the price of apartments or oil is increased, you can go and live in the country or use a bike… such an adjustment can take decades, during which the owners of real estate and oil can accumulate significant returns from the rest of the population.”
    (my translation, don’t have access to the English, check your copy to be sure I haven’t stuffed up)

    Consumers change their habits so the cartel loses it’s power and thus has to lower prices.

  32. Alex

    Sorry. having thought about it a bit more it’s not specifically about cartels, but any form of fixed supply. You say “He has here basically stated that insufficient supply (a shortage) will lead to a fall in price ” What he’s really saying is “insufficient supply (a shortage) over a long period will cause changes to consumer preferences, lowering demand and leading to a fall in price”

  33. Yohan

    What will happen once Piketty’s 80% wealth levelling taxes are introduced?

    The incentive for saving and investment has been lowered due to higher taxes, so there will be less savings and investment.

    Less investment, and the confiscation of capital will reduce capital accumulation. Total output of goods will fall that were only possible due to the longer chains of capital.

    There will then be a higher cost of production due to the scarcity of capital, thus there will be less production and less quantity of goods available, lower productivity and a lower standard of living.

    We end up literally with a Marxists/socialist basket case economy. But hey at least we have more equality.

    The idea shows up what is wrong with modern mathematical economists. Like all Keynesian and most neo-classical economists, Piketty he treats the production side of the economy as a given no matter what actions the government takes. Opportunity cost, time preference, incentives e.t.c cannot be graphed, so its convenient for Marxists economists like Piketty to pretend these issues don’t exist, and thus posit a completely unrealistic view of how the economy works.

  34. Token

    Fascinating to see the who the real Numbers is.

    When he takes the clown mask off, we can see an intelligence which could do much if he was not crippled with pride, envy & anger.

  35. brc

    Ultimately we are left with the realisation that this work is just like the photoshopped version of Abbot ogling a low cut top. Fake but true, but so exciting for the haters they must get behind it before any critical thought. Any economist that reinvents any type of Marxist thinking gets rushed out before anyone realises how full of incoherent contradictions it might be.

    The sad truth is that growing income inequality is a sign of healthy society, and decreasing income equality means that the true stars if that society are either in strike or have fled to somewhere that appreciates thei talent.

  36. .

    Very well said brc. What you said also gives support to the idea that a wealthier a society becomes, the less justified (as well as necessary) redistribution becomes.

  37. Pyrmonter

    What is so wrong with so much in the US: from Krug…

    By the way, I’m not accusing Mr. Giles of being a hired gun for the plutocracy, although there are some self-proclaimed experts who fit that description. And nobody’s work should be considered above criticism. But on politically charged issues, critics of the consensus need to be self-aware; they need to ask whether they’re really seeking intellectual honesty, or are effectively acting as concern trolls, professional debunkers of liberal pieties. (Strange to say, there are no trolls on the right debunking conservative pieties. Funny how that works.)

    (full text – http://www.nytimes.com/2014/06/02/opinion/krugman-on-inequality-denial.html?_r=0)

    A long way from Polanyi, still less Popper

  38. .

    (Strange to say, there are no trolls on the right debunking conservative pieties. Funny how that works.)

    Poor Kruggers, being towelled up on his own blog by honours and Ph D students.

  39. Token

    Krugman on Piketty “deniers”.

    LOL, all the beard has left as he counts the 30 pieces of silver he was provided is to call any who stands in his way “deniers”.

Comments are closed.