SINCE the publication of "Capital in the Twenty-First Century", Thomas Piketty has won many plaudits for his work on inequality. The book has so far sold more than 1.5m copies. Its arguments have been praised by Nobel-prize winners and politicians alike. Last year it won the Financial Times'
s business book of the year award, despite the newspaper's attempts to poke holes in the book's data and arguments. On March 25th Prospect
magazine put Mr Piketty atop its World Thinkers list
for 2015 (alongside Yanis Varoufakis, Greece's leather-jacket wearing finance minister, Naomi Klein and Russell Brand, it should be noted). But a new challenge to Mr Piketty's book has just appeared, and from an unexpected direction.
On March 20th Matthew Rognlie (pictured), a 26-year-old graduate student at the Massachusetts Institute of Technology, presented a new paper
at the Brookings Papers on Economic Activity. Although the paper began its life as a 459-word online blog post comment, several reputable economists regard it as the most serious and substantive critique that Mr Piketty's work has yet faced.
In his book, Mr Piketty argues that over the long run the rate on return of wealth exceeds economic growth: a dynamic summed up in the equation r>g. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labour (everyone else) falls. He also argues that the return on capital in recent history has been remarkably stable, even as economic growth has fallen, and that this trend will continue in the future.
Mr Rognlie mounts three main criticisms of these arguments. First, he argues that the rate of return from capital probably declines over the long run, rather than remaining high as Mr Piketty suggests, due to the law of diminishing marginal returns. Modern forms of capital, such as software, depreciate faster in value than equipment did in the past: a giant metal press might have a working life of decades while a new piece of database-management software will be obsolete in a few years at most. This means that although gross returns from wealth may well be rising, they may not necessarily be growing in net terms, since a large share of the gains that flow to owners of capital must be reinvested.
Second, Mr Rognlie’s research suggests that Mr Piketty has overestimated how high the returns on wealth are likely to be in the future. These should also decline over time, he reckons, unless it is very easy for the economy to substitute capital (like robots) for workers. Yet the historical evidence suggests that this is far harder than he suggests.
And third, Mr Rognlie finds that the growing share of national income deriving from capital income has not been distributed equally across all sectors. The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.
Mr Rognlie has critics of his own. He appears to underestimate the role changing technology plays in widening inequality (by increasing the substitutability of capital for labour, for instance, or by raising the demand to live in expensive cities). But his observation that it is homeowners in particular—rather than rentiers generally—who are grabbing a larger share of the pie is important for policy. Mr Piketty used the historical evidence in his book to argue that a global tax of up to 2% a year on individual wealth should be introduced in order to prevent capital concentrating in the hands of the few. But if housing wealth is the biggest source of rising wealth then a more focused approach is called for. Policy-makers should deal with the planning regulations and NIMBYism that inhibit housebuilding and which allow homeowners to capture super-normal returns on their investments.
Just how inconvenient Mr Rognlie's argument is for Mr Piketty's overarching narrative is a matter of perspective. The latter certainly did not make housing wealth the central theme of his bestselling book. But a story in which a privileged elite uses its political power (albeit through the planning system) to create economic rents for the few fits Mr Piketty's argument to a tee. Well-off homeowners may for the moment be more responsible for rising wealth inequality than top-hatted capitalists or famous hedge-fund managers. But their NIMBYism is a very Piketty-like phenomenon.