Dan Kervick — How Hassett Gets Piketty Wrong

So according to Hassett, Piketty has argued that eventually capital is going to “have everything” and “get all of income.” And the reason for this is that our economy can indefinitely substitute capital equipment for labor, so that all returns will eventually accrue to the owners of that capital. 

But Piketty makes no such argument.

Piketty says first that the capital/income ratio β – the ratio of total accumulated wealth to annual national income – tends toward s/g over the long run, where s is the nation’s savings rate and g is its growth rate. And the total capital share of national income is always rβ, where r is the rate of return on capital. So if the total accumulated wealth of some nation is 5 times its annual national income, and the annual rate of return on capital is 5%, then the total capital share of income will be 25%. Suppose also the savings rate is 9% and the growth rate is 1.5%, and that these rates are stable over an extended period of time. Then s/g is 6, and that initial 25% capital share will move in the direction of 30%, and stabilize there....

Rugged Egalitarianism
How Hassett Gets Piketty Wrong
Dan Kervick

See also, Nothing Magical about Piketty’s Mathematics

George Cooper worries that Thomas Piketty has advanced some “magical mathematics” in Capital in the Twenty-First Century: mathematics which lead to absurd results. And Cooper argues that when one repairs these absurdities in the most logical way, Piketty’s main policy prescription – a 2% global wealth tax – is seen as a recipe for economically disastrous effects. But the mathematical fix Cooper proposes is not at all plausible given the historical trends Piketty’s research has revealed. More importantly, I think Cooper has simply misconstrued Piketty’s mathematics, and that it doesn’t require any fix at all. When we interpret the mathematical formulae in the way Piketty has indicated, and impose economically natural conditions on their range of application, Cooper’s problem disappears, and Piketty’s historical analysis and projections emerge unscathed.