Palley: at this stage we’re talking doctrine


Michał Sutowski: To begin with, I’ d like to ask if an economist can become a celebrity? Of course, Mr Piketty is treated by some commentators, some of them do that positively, some of them not, as a sort of a rock star. He has lots of fans, is a big name on covers and so on. Can such a person be a good progressive economist?

Thomas Palley: Piketty is an outstanding empirical economist. There can be no doubt about that. His work will benchmark things for years to come. I think his work using tax records has given a whole new angle on income inequality, including particularly an insight into what’s been happening at the very top of the income distribution, which was not available or accessible in other data sources. Can he be a rock star? Well apparently so. People are voting with their feet in terms of attending his lectures, buying his book, television appearances and so on. And what’s the staying power of all this? I hope his work has a lasting impact, and I also hope that his success in getting people interested in the issue will rub off more deeply into getting people interested in the causes of inequality and getting people interested in the politics behind inequality.

MS: OK, so before we get to the details, there is one comparison on the right side. Milton Friedman was a guy who was a rock star, who was a comparable person on the right side… or was that different? Because he was also a very charismatic person, I think.

Friedman was selling religion about the economic system and he attracted buyers, he got people to join and sign up for his church which is part of the trouble now.

TP: Milton Friedman is a different kettle of fish. Friedman was a wonderful op-ed writer. Friedman’s book ‘Capitalism and Freedom’ sold millions of copies and was I suspect read in a way that Piketty’s ‘Capital’ will not be read. People will buy it, quote it and will get the basic message but they won’t read it in the same way that they read Friedman. And nor do I think, and this is part of the critique, that Piketty’s book carries the same ideologically powerful message that Friedman carried. Piketty’s book is essentially an empirical book and raises concerns about income inequality. Friedman was selling religion about the economic system and he attracted buyers, he got people to join and sign up for his church which is part of the trouble now.

MS: Many people still believe?

TP: Yes they still believe, absolutely. And the true believers turn their eyes away from evidence, including the evidence of history and we are still dealing with that problem. It infected two generations of economists. Larry Summers in The New York Times in 2006, shortly after Friedman’s death, wrote something like ‘If Democrats say we were once all Keynesians we now have to admit we are all now Friedmanites’. This is a remarkable statement. It is both nonsense and very revealing. Nonsense because we are not all Friedmanites. In fact Friedman’s economics and logic are very, very flawed. But Summers’ statement is also very valuable because it reveals Democratic Party elite thinking. I don’t think Piketty has had any influence remotely like Friedman. He has just made people aware of the issue of wealth and income inequality. His work is very topical, very timely and it’s also something a lot of other people have been writing about for more than twenty years.

MS: So why did Piketty succeed where others didn’t?

TP: Piketty is the breakthrough person. Why he was successful where others were not is a complicated question. It has something to do with timing – the Great Recession, stagnation, the public’s sudden awareness of the issue of income distribution. In fact, the economic role of income distribution in the crisis is quite complicated. A lot of people say that the deterioration of income distribution caused the financial crisis. I don’t think that is true. There was a very prolonged deterioration of income distribution but it’s effect was actually covered over by the financial boom. Once the financial boom and the credit bubble came to an end, then suddenly all the bad effects of income distribution on demand came to the front because finance and financial boom were no longer covering them over. That created an opening for Piketty’s work.

MS: You mentioned some people think that the crisis was just about financial markets and their behaviour – could you name some people with that?

TP: That was very much the position of the Obama administration in 2009 – people like Timothy Geithner, Larry Summers, and also Ben Bernanke. It is also the position of economists like Paul Krugman and Alan Blinder. Alan Blinder’s book on the crisis is just about finance, nothing more to it, no identification of income distribution as a fundamental macroeconomic problem.

MS: Could you say a little more about Paul Krugman?

TP: Krugman is a great policy advocate but he is also a Democratic party partisan. If you read his work income distribution is a non-issue. From his point of view it seems to be an issue purely for ethical and political reasons. It’s not an issue for reasons of macroeconomic efficiency. My own view is that it is the cause of the stagnation. We stabilized the financial system.

We engaged in massive fiscal and monetary stimulus and that still has not been enough to restore prosperity and it never will be enough because there is something wrong with the economic structure. And that something is income distribution.

That’s my point of view and it was totally denied by elite Democratic opinion – the Summers, the Krugmans the Blinders of the world — at the onset of the crisis. I don’t know where they stand on the issue now, but I think their view is changing. By the way, I think that is part of Piketty’s contribution: not only does he document income inequality, but he documents it as being so egregiously bad that these people are having to start to rethink. They are having to rethink because their program is failing and people like Piketty are providing compelling evidence about just how bad income distribution is.

MS: Ok, so did we just need a few years of inefficient crisis management policies in order to acknowledge something?

TP: Mainstream economists have been wrong before and after the crisis. First there was the failure of the economy to rebound, the failure to have a V-shaped recovery, the failure for green shoots to appear in 2009. Then there was constant over-prediction of growth by the IMF, constant over-prediction of growth by the World Bank – everybody being too optimistic, Now, Larry Summers has belatedly discovered the concept of secular stagnation, which is something progressive economists and people on the left have been talking about for a long while before him.

MS: Is it the same with Piketty’s work on inequality that some progressives were talking about that for a long time before?

TP: There is one group I particularly want to single out and salute is, which is the Economic Policy Institute in Washington DC and Larry Mishel, who has been the leader of that project for many years. Everything that Piketty finds, they had essentially found two decades before. However, they did not have data on the top one percent They were aware of the problem but not how extreme it was and how concentrated it was at the very top, but the essence of Piketty’s story had been told. Of course that gets to another thing – why were they not picked up and celebrated in the same way? A part of the answer is that the EPI group identified the problem while the credit bubble was still in place and people don’t rock the boat or change the system when there isn’t a crisis.

You can tell the public and policymakers ‘Look! you’re headed for the rocks!’ but people don’t believe you. Cassandras are not listened to.

MS: It’s night, the iceberg is not on the horizon, the orchestra plays…

TP: Yes! Even when the iceberg is on the horizon people will turn their eyes away from it; but remember always with the Casandra story, Casandra was eventually proved right. The EPI group with Larry Michel were documenting from the late nineteen-eighties that income distribution was deteriorating. However, they didn’t have a theoretical message, their work was purely empirical and the economy seemed to be humming along so people said ‘well, income inequality doesn’t matter for macroeconomic purposes’

MS: Could you give some more names?

TP: Well in that group there would be Larry Mishel and Jared Bernstein who was a co-author. Jamie Galbraith did some work on income inequality using different data sets but people have more questions about his findings than the EPI work. Branko Milanovic was doing work from a more global perspective. The EPI work was purely on the USA. Then the Great Recession and stagnation hit, making us aware of the iceberg, and Piketty comes up with his wonderful empirical work after we’ve hit the iceberg, which is a big reason why he gets the attention. I would also say that people like Larry Mishel people and James Galbraith are writing from outside the economics profession. They are critics of the profession. Larry Mishel is not an academic economist. Jamie Galbraith is in a public policy department and is a very well known critic of a new classical economics. Piketty is associated with the MIT school and is much more of an ‘insider’.

MS: What does it mean in the terms of theory?

TP: I’ll come back to that, but the important thing is – if you are an insider and you come up with these findings, it’s harder to deny them, it’s harder to turn a blind eye to them. What does it mean in terms of theory? Well, in my view this is one of the cracks in the book. Since Piketty comes from MIT he is very versed in the economics of Robert Solow. His laws are in fact derived from the Solow growth model, which gives them a very neo-classical flavor. For me, that was a big reservation about the book because I think not only do we need to document what’s happened empirically regarding wealth and income inequality, we also need to change the theoretical perspective that accounts for these things and explains the implications of such developments. Piketty’s Solowian growth framework is counter to that, and it shows up as an inconsistency in the book. The appendices and the laws are derived from the neoclassical growth model but the book is peppered with institutional references about the role of institutions in income distribution and hints of the role of power in income distribution I fear that since his argument is constructed in terms of a Solow neo-classical growth perspective it will be reincorporated into mainstream to leave theory unchanged, whereas I was hoping his findings would cause mainstream theory to be overthrown. That was a criticism in my review.

MS: Just a simple question – if Piketty’s conclusions are true then why is it wrong when he has whole different theory then you have; why bother actually?

The problem is that mainstream economists don’t teach other perspectives that in my view are actually more credible, more plausible, and identified the problem in advance.

TP: I think the theory you have matters very much for the type of policies you came up with. That shows up a little bit in Piketty’s conclusions at the end, where his big policy recommendations are a wealth tax and progressive income tax. I am for those policies too but such policies attempt to address the economic and distribution problem from an after-tax perspective whereas, if you have a Keynes-Kalecki macroeconomic approach, you need to get the pre-tax income structure right. You need the the right institutions to create good pre-tax outcomes, and if you don’t have them you’re going to be unsuccessful. So theory matters very much in terms of the policies you come up with both now and in the future. The world doesn’t stand still, we’re going to confront future difficulties, and the theory we hold will frame how we interpret and respond to those future difficulties. In my view, having the wrong theory is a problem. This connects to the debate about pluralism in economics. I’m fine with the type of economics embraced by Thomas Piketty and Robert Solow being taught. That is not the problem. The problem is that mainstream economists don’t teach other perspectives that in my view are actually more credible, more plausible, and identified the problem in advance. That should be to the critics’ credit. They saw these things coming in advance. The mainstream is always explaining things after the fact.

MS: Creating ad hoc theories?

TP: Not just ad hoc theories, but in addition having to twist itself into contortions after the fact to make existing theory account for these things. A good theory should help you navigate the world. I’m not saying it should predict the world, but it should provide a sense of future developments in advance of them happening. Neoclassical growth theory doesn’t do that.

MS: So what’s wrong with it?

For me the essential problem is that it’s built on the classical approach to macroeconomics, which assumes that economy operates at full employment and gets there automatically. Neo-classical growth theory is a full-employment theory of growth. It also rests on a theory of distribution called marginal productivity theory in which factors get paid what they deserve. Both of these features – the assumption of full employment and marginal productivity theory – are wrong.

MS: …Capital and labour?

TP: They get paid their contribution to production. Both of these things are wrong. We don’t automatically go to full employment and there is such a thing as exploitation. Income distribution is socially negotiated and influenced by the distribution of power.

MS: What sort of theory should we use to frame the empirical data, that Piketty gathered, in a proper way?

TP: I would say we need a bargaining – institutional – sociological theory of distribution that puts power and perception at its core. Obviously these features operate within the context of a particular productive condition – society can’t pay itself more than it produces. And on the other side of that at the level of macroeconomics you need a Keynes-Kalecki theory. Keynes is the theorist of aggregate demand and the failure of the economy to go to full employment, and Kalecki is the theorist who introduces income distribution considerations into the theory of aggregate demand.

MS: Can you put both of them in 3 sentences?


MS: Or 4 or 5?

TP: How would I describe Keynes? I think Keynes says a very large class of problems in capitalist economies can be understood through the concept of aggregate demand. Unemployment arises when there’s a shortage of aggregate demand and the market system lacks mechanisms to automatically increase aggregate demand to a level at which it will be sufficient to absorb all production at full employment. That means we usually end up with some unemployment. Kalecki has a theory of income distribution based on what is called mark-up pricing. Firms charge a mark-up over their normal unit costs and the mark-up in turn determines the distribution of income between capital and labour. Income distribution then impacts aggregate demand because of different propensities to consume across capitalists and workers – in fact capitalists tend to save more and workers tend to spend more of their income. Consequently, as you shift income distribution from workers to capitalist you reduce spending and cause Keynesian aggregate demand problems. That is our condition now, which is why income distribution matters so much for the current stagnation

MS: Someone may say ‘Ok, sounds good, but both these theories were formulated like… one of them was 80 years ago, the other 75 years ago’. Do they match contemporary conditions?

TP: They both deliver profound enduring insights, though we also certainly need to enhance and elaborate upon them. They’re very clear in their implications for closed national economies like we had in the 1940s, 1950s and even the 1960s. I think their insights endure at both the national and the international level. However, the situation is now more complicated and difficult to manage because of globalization and the mobility of capital, which mean national policy solutions are much more difficult. The problem is that national policies that worked before are much less effective in the current moment. Furthermore, the ability to implement such policies is further weakened by redistribution of the political power. Our tools have gotten weaker in this globalized economy, and so too has the willingness to employ those tools. In fact, those policy tools may be employed in reverse because the corporations and the plutocrats are in charge of the political system.

MS: You mentioned in your critical review of Piketty’s book that one of the core problems or the arguments against the ‘Capital in the 21st century’ is the notion of capital itself which Piketty seems to conflate with wealth. Piketty also forgets the question of the political power of finance. Capital as political power not just accumulated wealth.

TP: Well, there are multiple layers here. One critique, I think Jamie Galbraith has made this most saliently, is that Piketty is talking about total wealth. Yet from an economic point of view, in terms of Piketty’s own theory, he’s concerned about the quantity of productive capital which is supposed to determine distribution. That leads to a second more theoretical controversy regarding the concept of capital which provides another angle of critique on the neo-classical growth model. I already said that the neoclassical model is flawed because of its assumptions of full employment and its assumptions about distribution. However, there is this an even deeper critique regarding the coherence of its concept of capital, and some argue that provides another reason to throw the theory out because the concept of capital is at its very core. As for the issue of capital’s political power, I don’t really think it’s addressed by Piketty. Clearly there is a problem. If you want to change policy you need to have control over the political process. However, the power of capital, let us call it wealth, is an obstruction. For instance in the United States we know that the wealthy control the Republican Party and they also control substantially the Democratic Party, or at least the elite Democratic party.

I’m from Britain originally and I remember when I first came to the United States that I was always puzzled why Wall Street, Goldman Sachs, those sort of folks, split their political contributions between the Republicans and the Democratic Party.

MS: And when was it you came to the US?

TP: I came in 1980. Well, if you’re a City of London person you contribute to the Conservative party and you don’t contribute to Labour. In the US it’s different. The reason Wall Street backs both parties is they don’t really care who wins because they own both parties. They might prefer the Republicans to win a little bit, because Republicans will be a little bit more generous in their treatment of financial capital. But they don’t really cry if the Democrats win because they’ll get someone like Bill Clinton who’ll still treat them well by appointing someone like Robert Rubin as Treasury Secretary. It is quite amazing, the number of people from Citigroup, Goldman Sachs and McKinsey that have held senior policy making positions in Democratic administrations or have been appointed to the Federal Reserve. Some bright sociology graduate student should do a dissertation mapping that out. Anyway, that’s why Wall Street contributes to both sides. It controls both parties and that’s our political problem: how to break this lock, this obstruction to progressive politics is a very real problem. It is part of the explanation of why this crisis has not produced a progressive moment.

MS: What does it mean preventing progressive policies? You mean preventing some sort of regulation of financial markets or is it deeper?

TP: I think it’s deeper. It begins with the national economic conversation.

Voters are not economists, they’re not public policy experts. Voters don’t have time, their lives are tough enough making a living and so they’re not going to be able to study these things.

The role of politicians is to educate and to lead. By connecting with people’s lives and experiences, and then coming up with solutions to problems in their lives and experiences. The Democratic Party has chronically failed to do that for 30 years because it has been controlled by Goldman Sachs, Citigroup and McKinsey. And it’s still that way. Their solutions are education and infrastructure investments. Those are good things but they’re not addressing the two core problems: we want full employment so that people have jobs, and we want a system in which wages grow with productivity growth. For that you need unions and the full array of other labour market arrangements like minimum wages, employment protection, employee right, unemployment insurance, a full safety net to deliver that outcome. And by the way you see this same political problem in our health care reform which has been a huge money-maker for the health care industry complex. It was a deal struck with the insurance companies, drug companies, etc. The simple low-cost solution that would really drive down costs and give access to medicines at much lower price, was to have a single-payer option (i.e. make the medicare program open for all to enroll) and then let people vote with their feet by choosing who to buy insurance from. But they didn’t go that route because they felt it was too politically controversial and I’m sure lots of people within the Democratic Party, along with lots of lobbyists, were working to obstruct this. The reason is the health care industry complex owns a big piece of the Democratic Party too.

MS: With so much trouble with the institutional set-up and Piketty writing so little on that matter, are you in the same coalition?

TP: Absolutely. Two things about Piketty. First, he’s legitimizing everything that progressives have been saying for a long time. You cannot argue the facts anymore, which is something the Right has always tried to do.

MS: The Financial Times tried for a while.

TP: They did not get very far, so thank you Thomas Piketty. You have confirmed everything progressives have been saying about income and wealth inequality for two decades. I hope people will now become more open to the thinking and writing of progressive economists because it turns out Thomas Piketty has confirmed everything that we’ve been saying. And as for Thomas Piketty and his policies, his book still supports many progressive policies even if they’re not the main line of the argument. And the reason they’re not the main line, even though his intuition and his heart tells him that they ought to be, is the theory he’s saddled with. That theory buys him legitimacy but at the same time it limits his ability to make needed arguments.

MS: Can the success of his book inspire a discussion that would in terms of theoretical framework go beyond his premises and pave the way for more progressive thinking even in contradiction to what Piketty wrote?

TP: I guess that’s where I become pessimistic because I don’t think neoliberal economics is ready to fold on the basis of Piketty’s empirical findings. In fact far from it, it will fight back and try to incorporate Piketty’s findings in a way that is supportive of neoliberal economic logic. In part because of the theoretical model Piketty adopted, there’s no reason for the mainstream economic profession to feel compelled by Piketty’s empirical work to open up intellectually and accept other points of view. You have to realize we have what I call a neoclassical monopoly. It is enforced very strictly. As I always say, my issue is not that the neoclassical economics is taught. My issue is that it’s the only economics that’s taught and I don’t know how to break that monopoly. The professoriat at the elite universities is uncooperative in this. At this stage we’re talking doctrine. They have their doctrine and even when they say “Well, I’m open to other perspectives”, they’re not open enough to find teaching positions in their departments. They’re not open to making classes available in their departments in which other perspectives are taught. Talk is cheap. I don’t know what the solution is, how to force the universities to open up their economic curriculum to ideas that should be taught. The only tests for ideas should be do they pass the test of logical coherence? Do they pass tests of plausibility? And are they at all consistent with the empirical data? In economics, it turns out, quite a few theories can pass those tests and therefore quite a few theories should be taught. But the neoclassical monopoly does not allow that. They say: “We have the truth, you are in error and we cannot teach error”. That produces closed minds and closed society.

Thomas Palley

Thomas-Palley Senior Economic Policy Adviser to the AFL-CIO and a Research Associate of the Economic Policy Institute in Washington. D.C. He was formerly Chief Economist with the US – China Economic and Security Review Commission. Prior to joining the Commission he was Director of the Open Society Institute’s Globalization Reform Project, and before that he was Assistant Director of Public Policy at the AFL-CIO. Dr. Palley’s recent books are From Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics (Cambridge University Press); Financialization: The Economics of Finance Capital Domination (Palgrave Macmillan); and The Economic Crisis: Notes from the Underground (CreateSpace). He is also the author of Plenty of Nothing: The Downsizing of the American Dream and the Case for Structural Keynesianism (Princeton University Press) and Post Keynesian Economics (Macmillan Press). He also recently co-edited with Gustav Horn Restoring Shared Prosperity: A Policy Agenda from Leading Keynesian Economists (CreateSpace). He holds a B.A. degree from Oxford University and a M.A. degree in International Relations and Ph.D. in Economics, both from Yale University. His writings on economic theory and policy are available at


Michał Sutowski
Political scientist, columnist, editor. Coordinator of the Institute for Advanced Studies. Translator from English and German. Editor of the political writings of Jacek Kuroń and Stanisław Brzozowski. In 2012, he studied at the Yale University as part of the Political Critique scholarship.