IT IS the economics book taking the world by storm. "Capital in the Twenty-First Century", written by the French economist Thomas Piketty, was published in French last year and in English in March of this year. The English version quickly became an unlikely bestseller, and it has prompted a broad and energetic debate on the book’s subject: the outlook for global inequality. Some reckon it heralds or may itself cause a pronounced shift in the focus of economic policy, toward distributional questions. This newspaper has hailed Mr Piketty as "the modern Marx" (Karl, that is). But what’s it all about?The Economist | The Economist explains
Thomas Piketty’s “Capital”, summarised in four paragraphs
R.A. (Ryan Avent is The Economist's economics correspondent.)
(h/t John Carney at CNBC NetNet)
3 comments:
And today’s super-rich mostly come by their wealth through work, rather than via inheritance.
Ha! I guess that's according to the CEO as "franchise player" analogy.
I believe Avent makes a mistake. He says:
"From this history, Mr Piketty derives a grand theory of capital and inequality. As a general rule wealth grows faster than economic output, he explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate)."
I don't believe Piketty argues that as a general rule wealth grows faster than economic output. Nor is that essential to his argument. What he argues is that, for a given savings rate s and national income growth rate g, the wealth-to-income ratio will tend to stabilize around the ratio s/g. If the wealth-to-income ratio is less than s/g, then wealth will grow more rapidly than national income. But if the wealth-to-income ratio is greater than s/g, then wealth will grow more slowly than national income.
So assume a savings rate of 10% and a growth rate of 2%. Only if the wealth-to-income ratio were less than 5 would wealth be growing faster than income. But that's neither here nor there, since it will stabilize near 5 in any case, and the capital share will stabilize at rs/g. Whether or not wealth is growing faster than income is not what drives growing inequality. What drives increasing inequality of capital ownership, as I understand Piketty's argument, is that some individuals save at a higher rate than the national savings rate, and other save at a lower rate; and the savings rate for individuals is higher in proportion to the amount of previously accumulated wealth they already possess. As a result, even in an economy with a stable wealth-to-income ratio and stable capital share, the rate of change in the proportion of the capital share flowing to a given possessor of wealth will vary directly with their wealth. The rich don't just get richer; they get richer at an increasing rate depending on how rich they are.
This is inherent in the construction of capitalism, the objective of which is capital formation. In the view, investment is the outcome of saving, so both capital goods including land (natural resources) and savings (financial capital) are considered capital.
So it is not surprising that distribution is skewed institutionally toward capital share over labor. Given the diminishing consumption rate with increase in income, compound interest, and rate of return on non-interest bearing capital, as well as asset appreciation, it's no mystery why the rich get richer. Anyone that's played Monopoly™ knows how this works.
I don't think that anyone seriously argues that this is not the general case. The argument is rather than trickle down makes everyone better off, and even Marx agreed with that. This is the pretty much undisputed advantage of capitalism, which is backed up empirically. Global poverty is declining even with increasing inequality, although it can be argued that the (qualitative) misery index isn't the same as the (quantitative) poverty index.
The argument is whether capitalism in the sense of neoliberalism as a political theory based on a market state is the only alternative (Thatcher) or whether this is the optimal alternative, as many economists argue based on efficiency of capital and labor based on marginalism, where government "intrusion" in markets is an imperfection: The more perfect the market, the more likely it is for everyone to receive their "just deserts" based on merit, individuals being both rational and sovereign in choice, hence, fully responsible endogenously for personal outcomes irrespective of exogenous influence.
Heterodoxies question this view to varying degrees. Some hold that capitalism is compatible with distributed prosperity through institutional reform, whereas other think that capitalism is inherently flawed and political economy needs to be redesigned so as to put people (workers, "labor") over money and machines (capital). Capital resists both alternatives.
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