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In a video discussion, economists Thomas Piketty and James Heckman explain how collecting data is fundamental to their research on economic inequality and the development of policies to reduce it. Heckman argues that data is essential for testing and differentiating between competing economic theories, a capability that earlier economists like Adam Smith lacked despite their profound ideas. Piketty reinforces this by cautioning against developing overly sophisticated theories that are not grounded in empirical facts, advocating for a more systematic collection of data, especially historical data, to enable proper comparisons and inform public debate. Both economists agree that this data-driven approach is critical for understanding complex issues like economic inequality and for designing effective policies. Piketty also suggests that while data is not a cure-all for social conflict, it is a prerequisite for a more rational and informed public discourse.

Piketty and Heckman on Why Data is Fundamental for Inequality Research and Policy

Figure 1.2 depicts the distribution of income both between and within countries. Countries are organized based on GDP per capita, with the least affluent country (Liberia) on the left side of the diagram and the most affluent country (Singapore) on the right. The population size of each country is represented by the width of its bars.

Each country is divided into ten bars, each representing a decile of income. The height of each bar indicates the average income of 10% of the population, starting with the lowest-earning 10% at the front of the diagram and progressing to the highest-earning 10% at the back. The income is measured in 2005 US dollars. It's important to clarify that "the richest 10% of people" refers to the wealthiest 10% of the entire population, not just income earners. It is assumed that each member of a household, including children, receives an equal portion of the household's income.

Visualizing Income Distribution: A Comparison of Countries by GDP Per Capita and Income Deciles

[https://ourworldindata.org/](https://ourworldindata.org/)

Thanks to the work of thousands of researchers around the world who dedicate their lives to it, we often have a good understanding of how it is possible to make progress against the large problems we are facing. The world has the resources to do much better and reduce the suffering in the world.

We believe that a key reason why we fail to achieve the progress we are capable of is that we do not make enough use of this existing research and data: the important knowledge is often stored in inaccessible databases, locked away behind paywalls and buried under jargon in academic papers. 

The goal of our work is to make the knowledge on the big problems accessible and understandable. As we say on our homepage, Our World in Data’s mission is to publish the “research and data to make progress against the world’s largest problems”.

Our World in Data

A policy-making approach where strategies to lessen economic inequality are designed, implemented, and evaluated based on the collection and analysis of empirical data. Economists like Thomas Piketty and James Heckman champion this method, using data to identify the causes of inequality and to create more effective interventions.

Data-Driven Policies to Reduce Inequality

A central challenge in economic analysis is to move beyond observing correlations to understanding the underlying causal mechanisms. According to James Heckman, the process begins with observing a fact and first determining if it is a consistent, 'repeated finding' or simply an 'anomaly'. Once a stable pattern is established, the crucial next step is to ask, 'What are the mechanisms that give rise to that repeated finding?' This deeper inquiry involves using multiple data sources, such as cross-sectional and longitudinal data, in conjunction with economic theory to build and test models that explain *why* a phenomenon occurs. Identifying these mechanisms is essential for creating effective policies, as it allows interventions to target the root causes of an issue.

Identifying Causal Mechanisms in Economics

Tax systems function not only as a means for governments to raise revenue but also as an invaluable source of data for social scientists. Economist Thomas Piketty highlights that the administration of taxes naturally produces large, systematic datasets. This process creates formal legal and statistical categories, such as income levels and forms of wealth, which can be analyzed to track long-term economic trends. This administrative data is particularly crucial for studying the historical evolution of income and wealth distribution.

Taxation as a Source of Economic and Social Data

According to economist Thomas Piketty, the collection and dissemination of economic data serves a vital social function beyond academic research. While better data alone will not resolve social and political conflicts, it can elevate the quality of public debate. By grounding discussions in established facts, data allows for a more informed and rational public discourse on critical issues like economic inequality.

The Social Role of Economic Data

As explained by economist Thomas Piketty, the study of long-term economic trends, such as the history of income and wealth, is inherently interdisciplinary. It cannot be understood as a purely economic story. To gain a full picture, it must be analyzed as a political and social history as well, recognizing that political forces, institutions, and social structures are deeply intertwined with economic outcomes.

The Interdisciplinary Nature of Economic History

A key difference between modern economics and its earlier forms is the availability of large-scale data. As James Heckman points out, even foundational economists like Adam Smith developed profound ideas for 'The Wealth of Nations' without having access to a systematic body of data to test them. This contrasts with modern economists, who can leverage vast datasets to 'discriminate among alternative explanations' and empirically ground their theories.

Data Availability: A Contrast Between Historical and Modern Economists

In economics, there is a crucial interplay between empirical data and theory. Data serves the primary function of validating or refuting economic models, allowing researchers to, in the words of James Heckman, "discriminate among alternative explanations." This empirical grounding prevents theory from becoming disconnected from reality. As Thomas Piketty cautions, economists can sometimes focus too much on sophisticated theory without understanding the basic facts they are trying to explain. At the same time, economic theory is essential for providing structure to research. Heckman notes that theory is necessary to help organize one's thinking and to form hypotheses that can then be tested against the data.

The Interplay of Data and Theory in Economics

While extreme poverty has seen a global decline, income inequality *within* countries has not only persisted but has markedly increased in recent decades. This trend is visible in income distribution visualizations, such as those from 2014, which reveal a substantial gap between the top 10% of earners and the rest of the population in many affluent and middle-income nations. This disparity can be quantified using the rich/poor ratio, which compares the average income of the wealthiest 10% to the poorest 10%. For instance, this ratio has been shown to be relatively low in egalitarian countries like Norway (5.4) while being much higher in places like the United States (16) and Botswana (145).

Rising Within-Country Income Inequality in Recent Decades

An economist develops a highly sophisticated mathematical model to explain the causes of wealth inequality. However, they have not yet consulted any historical data, such as tax records or national accounts, to see if the model's assumptions align with observed facts. Based on the arguments about the fundamental role of data in modern economic research, what is the primary weakness of this economist's initial approach?

Based on the principles discussed by economists regarding the role of data in economic research, what would be the most critical next step to differentiate between the two competing explanations presented in the case study below? Explain your reasoning.

Resolving a Debate on Economic Inequality

Based on the discussion about the fundamental role of data in economic research, match each economist's specific argument or shared principle to the statement that best describes it.

Two prominent economists argue that empirical data is fundamental to the study of economic inequality. Beyond its scientific role in testing competing theories, they suggest data also serves a crucial social function. Analyze this dual role of data. In your response, explain how data helps differentiate between economic theories and how it contributes to a more rational public debate on complex social issues.

The Dual Function of Data in Economic Inquiry

An 18th-century economist like Adam Smith developed profound economic theories without access to large, systematic datasets. In contrast, modern economists argue that empirical data is fundamental. Explain the primary reason why this shift to a data-centric approach is considered a critical advancement for the field of economics, particularly for testing competing ideas.

The Shift in Economic Methodology

Based on the principles of data-driven economic inquiry, the systematic collection and public presentation of empirical facts about inequality is considered a sufficient condition to resolve the social and political conflicts that arise from wealth disparities.

Drawing on the principle that empirical data is essential for testing and differentiating between competing economic theories, describe at least two distinct types of data you would need to collect to evaluate the claims of Economist A and Economist B. For each type of data, explain how it would help you determine which theory is more likely to be correct.

Investigating the Rise of Income Inequality

Imagine two economists propose different explanations for rising income inequality in a country. Economist A argues it is primarily due to technological changes that favor high-skilled workers. Economist B claims it is caused by changes in tax policy that benefit the wealthy. Based on the principles of modern empirical economics, explain why collecting systematic data is the essential next step for determining which explanation is more credible.

Evaluating Competing Economic Explanations

An economist is investigating the recent rise in wealth disparity in a specific country. Based on the principles of data-driven economic inquiry, arrange the following research steps into the most logical and effective sequence.

Two groups are debating a new policy to address economic inequality. Group 1 presents a highly complex economic theory predicting negative outcomes but offers no historical data to support its claims. Group 2 presents extensive historical data from other countries suggesting the policy would be effective but does not offer a detailed theory to explain the mechanisms. Based on the principles of modern, data-driven economic inquiry, which group's position offers a more constructive starting point for a rational policy discussion?

The World Inequality Database (WID) is an open-access database that provides extensive historical and comparative data on the distribution of income and wealth, both within and between countries. Maintained by a network of international researchers, it aims to democratize access to economic data and inform public debate on inequality.

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