This is a brief review of Capital in the Twenty-First Century by Thomas Piketty with some longer observations on the problem solving process in the book, from a lean management perspective .
It is surprisingly readable for a 570 page economics textbook / tax policy pamphlet. The 470-page preamble to a 100 page conclusion was full of sobering insights into the reality of the wealth gap today, its history, and future trends in the same direction. As a remedy to the dangerously widening wealth gap, Piketty calls for a progressive tax on capital, and worldwide transparency of capital including exposing hidden tax shelters and bank accounts. For a fan of history and/or economics, it is a good read.
From a lean management perspective, the book also provides an unintentional but delightful case in point on how not to do problem solving. Solution-jumping, a special form of the jumping to conclusions bias, is the premature selection of a solution to a problem, such that it is rendered ineffective, or effective only by chance, including the chance that the person proposing to the solution is brilliant. A solution-jump suggests that intermediate steps of thinking, from observation to inference, have been skipped over. When one jumps to a conclusion, one does so without laying out the logical arguments from the original premise. Solution-jumping is extremely common, but has no part in a widely learnable and duplicable practical problem solving process, which is what we need to have a world full of problem solvers in a world full of problems. This condition is arguably one of the main goals of lean management. From a practical problem solving point of view, Piketty’s proposed progressive tax on capital and related remedies to the wealth gap appear to be an example of solution-jumping.
Let’s review the practical problem solving steps, with a focus on the problem analysis and solution development steps 1 – 5, omitting the action steps 6 – 8 which are the execution, verification and standardization steps. These five steps contain important actions to guide us away from our cognitive biases and closer to objective reality based on an understanding of facts and context. Moreover, the lean practical problem solving process includes consensus-building throughout the planning phase (steps 1 – 5) which is essential in having the proposed solution be anything more than a bold but Utopian dream.
Step 1: Clarify the problem
The first step is to clarify the problem and write down a concise problem statement that is free of implied causes or solutions. The problem statement should articulate a gap between the current situation and the ideal or desired situation. What is the problem Piketty is trying to solve? Is the problem that inequality exists? Or is the problem one of degree? Or is it the speed of increase in this wealth gap? Or, is the problem that meritocratic values can be undermined, destabilizing societies, governments, economies?
There is plenty of data in the book which could have been used to craft a good problem statement. At best they are used as background statements to frame the problem. These include
- Half of people in all societies where we have data own basically no wealth
- The rate of return on capital (r) is greater than the rate of overall economic growth (g)
- Return on capital (r) has historically been 4% – 5% per year
- The economic growth rate (g) which supports wealth growth of everyone is at 1% – 2%
- This leads to increase in the wealth gap
- The expected low growth rates of the 21st century will only accelerate this trend
Piketty’s following statement could be taken as a problem statement of sorts “…capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” However, it fails on many accounts, including containing a solution, containing a cause and lacking a defined gap between current and ideal condition. The lack of a clear problem statement makes effective problem solving much more difficult because we cannot agree on what problem we are trying to solve.
Step 2: Break down the problem
The second step of practical problem solving is to start with the problem statement from step 1 and further break down the large problem into smaller, more manageable ones. Then, a few of the smaller concrete problems are selected for further study based on prioritization criteria such as greatest urgency, importance and chance of success. Finally, the second step of practical problem solving includes getting out of one’s building, office or ivory tower and verifying the actual processes that create the output (the problem) by looking and listening on-site, where these processes happen. This part is neglected woefully often. While Piketty presents historical data, providing breakdown by where and when, and to some degree who / what in the question of inherited wealth versus not, the breakdown is too shallow limited to guide prioritization. Some apparently arbitrary prioritization has been done, such as with the notion that inequality based on merit and effort is acceptable while inequality based on inheritance is less so. As there was no problem breakdown and prioritization of the smaller problems to solve, there was no third part of “go see” to verify the assumptions and processes behind these smaller problems. To be fair, the book was intended not as a practical problem solving exercise but as an academic text relying heavily on historical data, documented descriptions of historical conditions and current data. Nonetheless, I believe even a small amount of field work and on-site verification would have greatly aided Piketty in developing workable solutions to the accelerating wealth gap problem.
Step 3: Set a target to achieve
The third step in practical problem solving is to set a target to be achieved. This is a commitment to following through and finding a way to close the gaps in the small, concrete, more manageable problems identified in step 2. This is not where we solve world hunger, but rather aim to “put X more calories into the bodies of Y people in region Z by date 20VW.” No such concrete target is evident in Piketty’s book, because his problem statement is vague, the problem is large and not broken down and thus any solution must be too large for a clear commitment to achieving.
Step 4: Find the root causes
The fourth step of practical problem solving is where most fail when it comes to solution-jumping. We may fall prey to confirmation bias, subconsciously selecting only the data that fits our prejudices, conclusions or preferred solution. We may explore avenues of causation half-heartedly, just long enough to find a dead end and give up, eager to return to the cause that “we already know” to be the reason for the problem. Root cause analysis is greatly aided and enabled by effective scoping and framing of the problem in steps 1 and 2. Even lacking this, like many practical problem solvers, Piketty puts his able mind to work in asking, why does this wealth gap exist? What are the mechanisms? Is it the tax structure? Is it the nature of business ownership? Is this gap a flaw in the capitalist system that should be fixed, or a feature of the capitalist system?
Unfortunately, rather than asking a series of logically connected “why?” questions, to drill deeper with each question, the avenues of exploration read more like a series of professor’s lectures designed to help the student understand and dismiss each as the true cause of the problem, in favor of the root cause supporting the preferred solution. It is exposition more than exploration. The easy mobility of capital worldwide today to whatever location and opportunity offers the best return, compared to the relative immobility of labor is touched on, but never explored carefully as a potential root causes. The absurdly high levels of executive compensation and the non-transparent and corrupt ways that boards set CEO salaries is another feint and stab, rather than an attempt to analyze the problem in order to get closer to a root cause of inequality.
A particularly interesting observation involved the economies of scale enjoyed by the wealthy in employing wealth management expertise of consultants to improve their return on capital. For example $10,000 per year in consulting fees to an investment expert would be 10% of the modest $100,000 savings of a middle class person while it would only be 1% of the $1,000,000 of assets of a wealthier person. It would be a foolish act for the person to spend 10% of their capital per year for investment advice, while for a wealthy person a 1% investment that yielded an extra 2% or 3% return may be a wise one. From a lean management point of view this is a “false economy of scale” problem. Such problems are often addressed by lean methods and new technologies alike. For a lean example, the false economy of batch production is corrected through reducing set up and changeover times or simply by improving the transaction costs of the process, allowing small scale production to be done as effectively as large scale production. In the case of technology, expert knowledge is increasingly available today in a wide variety of topics at low cost or free of charge online, and soon algorithm-based “robot financial advisors” may bring down the cost of good financial advice drastically. While robot advisors cannot help people without any capital to invest, they may help address one root cause and decelerate the growth of the wealth gap for a certain segment of people. While touching on the potential root cause for the smaller problem of economies of scale in hiring investment advisors several times in the book, Piketty does not propose a countermeasure such as, “Let’s make it just as easy for the person with $100k in savings to invest as well as the person with $1 million” through better education, better financial literacy, better advice about managing finances.
Step 5: Develop countermeasures
The fifth step of practical problem solving, and the last in the “planning” part of it, involves identifying various countermeasures to the root causes. The term “countermeasure” is used in order to avoid the finality of the word “solution”, since practical problem solvers have learned that there is always another piece of the problem to solve, always more improvement possible, and that no solution is permanent in a dynamic, changing world. The beauty of the practical problem solving approach is its insistence on practice over theory, forcing us to find small, workable solutions to experiment with rather than large, sweeping political or economic theories. Therefore, we must develop multiple countermeasures addressing ideally all but at least many, of the root causes of the broken down problems.
Piketty’s proposed countermeasure is a progressive tax on capital, meaning the wealthiest pay more. The first issue, from a practical problem solving point of view, is that there is no clear causal link between countermeasure and root cause, much less back to the problem statement. Progressive taxation of capital may slow down the increase in inequality but how does it address the root cause? He is advocating redistribution of wealth, which would address the symptom of inequality but is not root cause correction. When applying solutions that do not address the root cause, typically we create unintended consequences by further tweaking a bad system. Piketty considers alternate solutions, but almost as straw men to be cut down in favor of a tax on capital. What would make the de-selection of these alternative countermeasures and the selection of the tax on capital more credible is a logical chain of causation from countermeasure to root cause to problem statement.
The second issue is that if not done mindfully, countermeasure selection by itself can be polarizing, sapping any momentum for change that may have been built up to this point, even generating resistance to change. This is why multiple countermeasures must be explored in parallel, with only the ones with the most consensus and impact implemented first in order to build early wins and more momentum for change. Unfortunately, Piketty’s countermeasure asks the minority super rich pay via tax on capital, and this minority super rich happen to be the people most influential today in putting in office the politicians who would set such tax policy. This is exceedingly unlikely to happen. Piketty admits as much. His proposed solutions will probably not work because of the lack of political will. By any logic, and particularly that of lean problem solving, unworkable solutions must be rejected and we must return to the earlier problem solving steps to check our assumptions, reframe and redefine the problem, break it down into manageable sub-problems, set a target that one is committed to achieve, perform root cause analysis and only then identify workable countermeasures and build consensus around them.
Some may argue that “fix global wealth inequality,” like “solve world hunger” is not a candidate for practical problem solving in the first place, because the topic is too large to be tackled through this process, and my observations above are unreasonable. To this I heartily disagree. The alternatives to practical problem solving are only undesirable ones: impractical problem solving, inaction, or revolution. Only practical problem solving helps us to take a large problem and break it down into smaller ones, taking concrete actions based on consensus, creating belief in our ability to make meaningful change through small wins, learning from successes and failures, and returning back to the original problem in cyclical fashion until it the problem has been cut down to size. Piketty has helped us to recognize and frame an important problem very broadly, underpinned it with facts and data. From there he jumped to a solution. Practical problem solving offers a better approach.
I have not followed Piketty’s career, nor have I read his other essays. It is quite possible that he began his investigation largely free of prejudice and followed the facts and data to his conclusion that a progressive tax on capital was the best solution to the problem of growing global wealth inequality. I am not a trained economist, nor a Professor in the subject. However, I have spent the past 20 years developing expertise in the area of continuous improvement. Practical problem solving is an area where I consider myself to have significant expertise. I am open to the possibility that my conclusions about Piketty’s book are biased, due to the fact that my eyes are trained to find the types of faults in the problem solving process as I found in Piketty’s book Capital in the Twenty-first Century, namely a lack of a clear problem statement, a lack of thorough problem breakdown, no clear target, at best tenuous links between root cause analysis and proposed solutions, and a lack of consensus-building effort around the preferred countermeasure. To be fair, Piketty never intended this book to be a practical problem solving primer. The topic he is addressing, of building a more fair and stable society through greater wealth for a larger number of people, is vitally important for our future. It deserves the best minds and the best approaches to problem solving. However, I am grateful both for the information and ideas presented in the book and for its problem solving flaws, as these flaws serve as a teaching tool for lean learners on how not to do practical problem solving.
You can learn more about practical problem solving through our online course.