James Hamilton — Criticisms of Piketty

James Hamilton looks at Piketty's treatment of depreciation and finds it wanting.

A more telling criticism of Piketty’s thesis relates to his treatment of depreciation, an issue raised by Larry Summers and Matt Rognlie. The need to keep up with what would otherwise be a growing cost of depreciation over time is a key factor that pins down the stable growth path in most economic models and is one reason I am puzzled by Piketty’s claims of an inherent instability in capitalist economies....

A more plausible and standard assumption (though one that can still easily be improved on further if one thinks of the saving decision as the outcome of some kind of rational calculation) would be that the grosssaving rate s* is constant. Under this alternative specification, the relevant characterization of the steady state would be β = s*/(g + d) where d is the depreciation rate. For example, when g = 0, with GDP of $100 and s* and d both 10%, the economy would be in a steady state with a capital stock of $100. Depreciation is $10 annually, and gross investment is just sufficient to cover depreciation each year with no growth in the economy and no reason for any variables to change over time. But the good news is that $90 would be left over for people to consume on a sustained basis every year. That’s a rather boring but much more plausible notion of what an economy with no growth could look like.

But a sensible characterization of the implications of depreciation for the dynamics of wealth accumulation would not have caught the attention of as many commentators as Piketty’s book seems to have done.

Econbrowser
Criticisms of Piketty
James Hamilton | Professor of Economics, UCSD