Per Krusell and Tony Smith — Piketty’s ‘Second Law of Capitalism’ vs. standard macro theory

Thomas Piketty’s new book has been widely praised for its empirical contribution, but his prediction of rising inequality rests on economic theory. This column argues that Piketty’s pessimistic forecast is based on an extreme – and unrealistic – assumption about households’ saving behaviour. According to standard theory, the wealth–income ratio would increase only modestly as growth falls, so declining growth would not be a powerful force for generating high inequality.

Saving causes investment. Morons. And they take Piketty's definition of capital to be captial goods rather than total wealth. I guess they either read the book superficially or just read negative reviews. They suggest, for example, that Giles points up data problems, when that has been thoroughly debunked for the red herring it is.

Their conclusion: Piketty's model conflicts with standard textbook models like the Solow growth model, so how could it be correct.

Concluding remarks

We are not sure why Piketty has chosen such an extreme assumption on saving. We have looked in the source materials underlying the book for a test of his assumption, and a comparison with the obvious alternative, and standard, theories, but did not find a clear test or comparison. What is clear, however, is that what lies behind his extreme predictions is his extreme – and, we think, unrealistic – assumption about saving.

Our view, instead, is that wealth dispersion in the Western world – which is very large and most definitely a compelling target of theoretical and empirical study – has primary determinants much different than those emphasised in Capital in the Twenty-First Century. These include, to mention but a few, educational institutions, skill-biased technical change, globalisation, and changes in the structure of capital markets. It is to these forces that those who care about inequality should be devoting their attention, and to which policy reforms ought to be targeted.

 The concluding remarks show that they understand that the problem is with institutional arrangements to some degree, but the few they mention aren't the fundamental problem. It's the asymmetric power that enable extraction of economic rents that go chiefly to the top tier — who use a portion of these rents to control the neoliberal system through plutonomy in a complex system involving reliance on cronyism and privileges that wealth bestows, like a double standard of justice.

And once there is a large amount of inherited wealth held by a relatively small cohort, all that that has to happen for inequality to grow boundlessly is for this wealth be to be saved at compound interest while  other cohorts are not able to save or must dissave owing to flat or declining growth.

VOX
Piketty’s ‘Second Law of Capitalism’ vs. standard macro theory
Per Krusell, Savings Banks Foundations and Swedbank Chair in Macroeconomics, IIES, Stockholm University, and a CEPR Research Fellow, and Tony Smith, Professor of Economics, Yale University