Capital in the 21st Century by Thomas Piketty (Book Review)

In 1994 I was a student in Thomas Piketty’s first theory class at MIT. He was a young hotshot professor and I was a not so young student (in fact about 4 years older than Piketty). I still vividly remember the horror that was the first exam in this class. Piketty had vastly overestimated how well we understood the material and the English in his questions was ever so slightly off. There was groaning all around the room, myself included, and I was pretty sure I had failed the test (I didn’t — but not one of my finer hours).

Piketty didn’t stay in the US for long and once he returned to France he started to turn away from highly mathematical economic theory towards gathering and analyzing data about income and wealth distribution around the world. Together with other researchers he has compiled more data on this subject than anyone before, including the fascinating World Top Incomes Database.

In the introduction to Capital in the 21st Century, Piketty talks about why he has been committed to this project

Intellectual and political debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact.

No matter what one’s own  beliefs on the subject one should want a debate based on facts and Capital in the 21st Century and the data available online delivers a strong start to just that.

It is difficult to really appreciate the cumulative effect of all the data without actually reading the book. Piketty is superbly systematic in tracing the history of wealth and income from as far back as the 1700s to today across different continental European countries, Great Britain and the US. Even if you have methodological quibbles with any one particular piece of data, the combined picture is very compelling.

What is inescapable from the data is a robust pattern as follows: a high ratio of wealth to national income combined with large inequalities existed at the beginning of the 20th century; this was disrupted by two world wars which opened an opportunity for the emergence of a middle class; but since the 1980s we are re-approaching and in some cases beginning to exceed the earlier wealth accumulation and inequalities.

Along the way Piketty not only points out the similarities but also the differences between the various national experiences. In doing so he draws extensively on the politics and history of the respective societies as well as the economic research of the time and even expressions of wealth found in literature. These connections make what might otherwise have been a dry exercise in data presentation come alive.

Piketty carefully connects the historical evidence to a relatively simple analytical framework that relates wealth to national income. The central finding is that in periods when r (the return on capital) exceeds g (the rate of growth of the economy) wealth tends to accumulate and inequality rises. Again people may bring up methodological complaints but the totality of the evidence presented makes this very compelling (including a fascinating analysis of the returns on university endowments and one on the relationship between tax rates and managerial compensation).

Capital in the 21st Century is a hugely important book for compiling and analyzing this data alone. But beyond that Piketty also dares to openly ask a question that has to be a legitimate subject for discourse: what is the social value of large and potentially self proliferating fortunes? He gives the example of Liliane Bettencourt, heiress to the L’Oreal fortune, whose wealth has grown from 2.5 billion to over 30 billion dollars. He also points out that the US historically was suspect of such fortunes and had tax policies that reduced the likelihood of their accumulation and inheritance.

Where the book is weakest is in extrapolating the present trends to the future and making policy recommendations. First, despite the observed disruption in the past caused by the world wars, Piketty does not talk at all about the potential for disruptions going forward based on technological changes (for instance the word “automation” doesn’t appear at all). That is of course the area that I have been spending a lot of my time thinking and writing about.

Second, Piketty does not sufficiently separate the ideas of redistribution from the role of government. In particular, he suggests taxing wealth as a way to curtail its accumulation. He seems to lean towards having government use those funds to pay down debt and increase services, whereas personally I am more intrigued by reducing the size of government and empowering individual action through a guaranteed basic income.

Nonetheless, Piketty has done a huge service to society with his work and I hope this effort continues. In that regard I agree entirely with one of Piketty’s recommendations: governments (and the people) need much better realtime and detailed data on wealth and income. We now have the technological capabilities to collect it and we should avail ourselves of those.

Beyond more data we also need an active debate about what is likely to happen in the future and what (if any) corrections to that path we should want as society. If you want a strong grounding for that debate and/or have any level of interest in politics, history or economics I highly recommend reading Capital in the 21st Century.

Posted: 5th May 2014Comments
Tags:  wealth capital inequality piketty book review

Antifragile by Nassim Taleb (Book Review)

Ok, so this isn’t so much a review as an exhortation to read Antifragile by Nassim Taleb which I consider one of the most important non-fiction books I have read. Let me start with some disclaimers:

1. I don’t read a lot of non-fiction books, not because I don’t start them but because I don’t finish them. Most aren’t good or important enough and you are often better off reading the blog post or HBR article on which they are based. So you may want to take my claim of “one of the best” with a grain of salt but I don’t say it lightly either.

2. Taleb’s writing can be annoying as it is sometimes comes off as arrogant or grandiose. Don’t let that stop you from reading Antifragile. He has something extremely important to say and it is well worth getting past style and ego. My advice: simply treat occurrences of “I am smarter, better read, more buff (just short of and have better sex) than you the reader” as entertaining. I should add: all of the aforementioned are potentially even true which might make them more rather than less annoying.

3. At varying points, Taleb overstates the strength of certain claims. Again, I suggest you don’t let that stop you. I can’t quite tell whether he does it because he genuinely believes it or because his interpretations are so counter to the received notions on these points that he feels he has to take an absolute position to make it stick (see footnote [1]). It doesn’t matter because throughly exposing yourself to his views will give you a much better understanding of the world.

4. Most importantly, please ignore anyone who claims that Antifragile is based on faulty math. The heart of the book is not based on complicated math but instead on a powerful logical argument. Formulas would be a distraction from the power of this argument instead of strengthening it. For those who really care about math there is a separate mathematical document freely accessible on the web (I am still working through it and don’t expect to finish that until the summer). Rest assured though you can safely ignore it and should be very skeptical of anyone claiming to use math to counter Antifragile.

So with that out of the way let me try to summarize the essential line of argument from Antifragile.

1. Some things are fragile, which means they break under stress. If you pick a glass vase off the floor and drop it, it will break, i.e. be worse off. Other things are robust. If you pick up a rubber ball off the floor and drop it, it will bounce instead of break and so will be unchanged. But there is yet another category and it is things or systems that are anti fragile. If you yourself jump off the floor and land again your legs are becoming stronger. Stress (within certain limits) is in fact good for the body. The body is thus more than robust, it is antifragile.

2. The world is full of non-linearity. There is a height from which you can drop the glass vase and it won’t break. But just above that it will break and the two outcomes are entirely different. The damage to the vase is not proportional to the height of the drop. The same can be true for upside. One example are successful investments in network effects businesses such as Tumblr. The value of the network rises far faster than its size. When things are non-linear relatively small changes can have a large impact on the outcome. Importantly what matters to you is the outcome, not the variable.

3. The past is a fundamentally flawed predictor of the future. I really mean fundamental here. There is no amount of mathematical sophistication that will fix this problem. Why? Extreme events are underrepresented in the past. They have to be. Axiomatically so. To see this consider the real extremes. Events in which the earth is destroyed are underrepresented because otherwise you wouldn’t be reading this. Similarly, events in which we have figured out how to feed information directly into the brain of every human haven’t occurred yet because again you wouldn’t be staring at a screen or printout right now. I made this argument at the level of the whole planet / all of humanity where it is easiest to see but it applies equally at smaller scales such as the economy or even a single company or individual human being (or specific glass vase). It also applies to less extreme outcomes than the ones I chose. For instance, the largest previously recorded flood is an upper bound on the floods for which we have past data (by definition) and even larger floods are completely absent from the data (but that does not make them impossible) [2]

Now all you have to do is put these three arguments together and you get to the heart of Antifragile, which is as follows:

A. Because of #2 and #3 proper predictions about the future are hard (thanks Yogi Berra) and therefore you are better off working on #1, i.e. being antifragile than investing in complicated mathematical models (that don’t work)


B. There is a specific way to be antifragile: avoid situations with limited upside and very large non-linear downside which are “sucker’s bets" and instead seek situations which have limited downside and very large non-linear (ideally uncapped) upside. [3]

This applies to how we live our lives as individuals, it applies to companies, it applies to governments and even the human species at large. Much of Antifragile examines different areas of life such as education, medicine and government and analyzes them in this framework. This turns out to be powerful as it shows that much of what ails us can be comprehended and potentially fixed by moving from fragility to antifragility (and by detecting where someone has made themselves antifragile at the cost of others). I won’t attempt to summarize or review those applications. Each one of them is well worth the time reading.

Bottomline: finish whatever book you are currently reading (assuming you like it) and then read Antifragile next.

[1] It is in some of the applications where Taleb overstates his case. For instance he takes an extreme position on the relation of theory and practice arguing that practice informs theory and not the other way round. While I agree entirely that the theory to practice direction is vastly overstated, “in practice” the two inform each other and trying to pin down causality strictly in one direction seems futile. Looking at computer science, a domain that I know something about, he is entirely right that many and possibly most important contributions have come from practitioners. But there have also been huge theoretical breakthroughs in information theory and cryptography that have provided the basis for practical work at a completely new level. Write theory and practice on two sides of a strip of paper and then fold and glue into a Mobius strip and you have a better model of the interaction of theory and practice. Addendum based on a tweet by Taleb: here is a piece in which he states the argument less strongly as “Theory is born from (convex) practice more often than the reverse (the nonteleological property)” (emphasis mine). That I agree with and I will reread the chapter in the book and potentially replace with a different example.

[2] So you might ask: I buy the argument for the really extreme outcomes but can’t we make use of the data on the somewhat less extreme outcomes? The first answer is: it’s the really extreme outcomes that matter the most, so this question is less important than you think. The second answer is: this is where you should consult the mathematical part if you really care as it shows how for combinations of non linear effects with naturally occurring fat tail distributions you can get (arbitrarily) large prediction errors (on the outcome, which — keeping #2 above in mind is the thing that matters)

[3] The non-linearity of the payoff function for the “sucker’s bet” is concave whereas the one with the dramatic upside is convex. So you can restate the rule as: avoid concave non-linearity (which is fragile) and seek convex non-linearity (which is antifragile). Footnote added per Taleb’s tweet.

Posted: 22nd May 2013Comments
Tags:  book review antifragile taleb

Moonwalking With Einstein by Joshua Foer (Book Review)

While Moonwalking with Einstein isn’t a new book — it was published in 2011 — I only just got around to reading it. The book’s subtitle is “The Art and Science of Remembering Everything” and it uses modern day memory competitions as the hook for examining the history, cultural significance and to some degree science of memory. I highly recommend reading it if you haven’t done so already!

There is lots to like here. First, Joshua doesn’t just cover memory competitions from a bystander’s perspective — he throws himself headlong into participating which makes for a very engaging story. Second, the book has many terrific character portraits in it, including the wonderful Ed Cooke whom I have come to know quite well as the founder of Memrise (a London-based education startup) and who is an occasional commenter here on Continuations. Third, Moonwalking provides and excellent perspective on the importance of memory at a time when many are further rejecting it in an age where information is just a search query away. I keep telling my children that the reason I find it easy to remember new things is because I already know a lot of old things.

There are two areas in which I wish the book had a gone a bit deeper. The first is using memory techniques to remember modern bodies of knowledge (the memory contests themselves are largely about remembering numbers, decks of cards and somewhat more usefully names and other info about people). There is a tantalizing substory about a teacher in the Bronx who uses memory techniques to help his students do well on the Regents exams (and the students also compete) but it is not clear if those students continue to have an advantage. The second area in which I would have loved to see more is a bit more modern neuro science on memory. I don’t know much about this myself and am just learning about neural networks (which are models) but it seems that memory is related to "recurrent" networks (ones that loop back onto themselves).

Knowing Ed (and through Ed having met Joshua at a dinner in London) made reading the book even more fun for me.  And it reminded me that I had previously met a memory champion when a friend of mine was dating Tatiana Cooley who won the US Memory Championships two or three years in a row in the late 90s. Even without that context though the book is so engagingly written that my thirteen year old son who just picked it up immediately plowed through the first couple of chapters.

Now please excuse me as I go off and use Memrise to learn some memory techniques so I can finally remember more of the names of the team members at USV portfolio companies!

Posted: 27th March 2013Comments
Tags:  memory book review memrise joshua foer ed cooke

Public Parts by Jeff Jarvis (Book Review)

In Public Parts, Jeff Jarvis tackles the incredibly challenging and important topic of the impact of the internet on privacy and publicness. Jeff calls himself a “publicness advocate” in contrast with the often nameless “privacy advocates” who are cited whenever there is a discussion about a change in how Facebook works or the WSJ goes on an anti-cookie bender.  As you can tell, I fall squarely in Jeff’s camp that publicness is largely a good thing (and like Jeff, I blog and tweet and check-in albeit in significantly lower volume than Jeff).

Public Parts starts off with a wonderful historical and cross cultural survey on privacy and publicness.  Jeff pulls together information from a broad set of sources and this is a must read for everyone thinking about the topic.  It is amazing to see the degree to which these two concepts are socially determined and how much they have changed across time and space.  Jeff mentions the contrast between German co-ed saunas and the blurring of houses on Google Streetview as great examples of cultural differences.

Based on this background Jeff looks into what a definition of privacy would look like.  He provides powerful challenges to many of the existing attempts at definition.  And in the strongest accomplishment of the book goes on to provide an “ethic" of privacy and one of publicness.  Instead of abstract definitions, these are concrete behavioral rules.  The "ethic of privacy" applies to the recipient of private information, whereas the "ethic of publicness" applies to the potential originator.  They could be loosely termed "caring" and "sharing." If you have received private information you need to take great "care" in what you do with it.  Conversely if you have information that might serve the public you need to consider "sharing" it.

Following this are some uneven chapters about privacy and publicness for corporations and government.  They are uneven because these are big topics and it is difficult (impossible?) to do them justice in the space Jeff alots to each.  As a result there are some relatively mundane parts, e.g. about Best Buy’s use of Twitter for customer service while some important questions aren’t pushed hard enough.  For instance, can a company be transparent and yet still have a “strategy”?  For much of history, the notion of being “strategic” was intimately tied to information asymmetry.  I would have also liked to see more of a discussion of how the copyright and patent systems impact publicness.

These are minor issues though compared to the powerful conception of privacy and publicness as ethics.  Anyone thinking about privacy and publicness and how the Internet is changing them should make sure to read Public Parts and also to engage with Jeff in the ongoing discussion he hosts over at his blog buzzmachine.

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Posted: 21st December 2011Comments
Tags:  jeff jarvis public parts book review