Picketty: Capitalism and Income Inequality

By John BristowNo Comments

More on Thomas Picketty’s historical research into capitalism and income inequality in Europe and the US since the 18th century:

Thomas Picketty

Thomas Picketty

As stated, the book’s central thesis is that when the rate of return on capital is greater than the rate of economic growth over the long term, the result is concentration of wealth. He defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not. The rate of return includes profits,  dividends,  interestrents and other income from capital,      and growth is measured in income  or output.

He shows us that the return on capital has exceeded growth over the last 1000 years apart from the last century. He sees the 20th century to be an exception.

For the after tax rate of return on capital mapped against growth for the world see the graph:

Despite the periods when the wealth of the elite is diminished by world war, depression or debt-fuelled recession, Picketty argues that his data show that over long periods of time average return on investment outpaces productivity-based income by a wide margin. He dismisses the idea that bursts of productivity resulting from technological advances can be relied on to return sustained economic growth. Also a return on investment can increase when technology can be substituted for people. Piketty believes the growth rate will always return to being below the rate of return.

Income inequality as measured by the income of the top 1% in several countries tended to drop in the middle of the last century but has increased in the past several decades. Here is the graph:

He sees the trend being towards higher inequality. This was reversed between 1930 and 1975 due to unique circumstances: two world wars, the Great Depression and a debt-fuelled recession destroyed much wealth, particularly that owned by the elite. These events prompted governments to undertake steps towards redistributing income, especially in the post-World War II period. The fast, worldwide economic growth of that time began to reduce the importance of inherited wealth in the global economy.

The book argues that the world today is returning towards “patrimonial capitalism“, in which much of the economy is dominated by inherited wealth: the power of this economic class is increasing, threatening to create an oligarchy.

Some of the Criticism of Thomas Picketty’s historical research into capitalism and income inequality in Europe and the US since the 18th century

On the causes of income inequality:                                                                                      Most other economists explain the rise of top 1% incomes by globalization and technological change. The top 1% incomes are now mostly salaries, not capital incomes.  Daron Acemoğlu  and James A. Robinson point out that he seems to ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society”.                                                                                                                                                                                                   Others point out that a large part of the increase in wealth has been through the value of land not capital goods.

Others have problems with definition of capital Piketty uses:                                                David Harvey sees him having a “mistaken definition of capital“, which describes as: […] a process, not a thing […] a process of circulation in which money is used to make more money often, but not exclusively through the exploitation of labor power. Picketty defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market no matter whether these assets are being used or not.

And where the rate of return comes from:                                                                                 James K. Galbraith criticizes Piketty for using “an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says”.

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