Piketty’s r > g

I won’t hide the fact that Thomas Piketty’s “Capital in the 21st Century” is one of my best reads after a long time (last time I enjoyed a book this much was “A Brief History of Time” by Stephen Hawking more than a decade and half ago!).

I had no takes on the conclusions and arguments presented in the book, though disagreeing with Piketty’s central conclusion in the book is pretty mainstream among US academics (currently the leading light of economic thought). A word of warning from the article itself, the sample is biased as heterodox schools of economic thought are not in the sample.

As I read on, the book itself and what others had to say about the book, the stiff opposition to Piketty’s argument made me curious. Recap: Piketty argued that the rate of return on capital exceeding the growth rate will lead to worsening wealth inequality.

Does anyone support him? I have not come across nor read any in support.

From all the articles that do not support the “r > g leads to greater wealth inequality” thesis, this article on Forbes is a good summary. It concisely collects many arguments against the theory from different sources. It could convince almost anyone as to why r > g is not a very good theory. I’ll tackle the points one by one.

  • Economic theory and empirics suggest that returns to capital will decrease over time contrary to the r>g hypothesis
    The scenario would play out this way only if capital productivity were not changing over time, i.e. there were no technological improvements. That’s not how reality is progressing.
    The value of the capital-labor elasticity being less than 1 is deflecting from the core issue of capital enjoying a higher rate of return than labor. Reading the introduction of this paper could make it clearer.1
  • Bill Gates suggests adopting consumption taxes in the U.S. and moving away from high income taxes rather than a tax on capital
    A rather difficult one to analyze as multiple changes will occur at the same time. Concentrating just on Bill Gates’ words, a policy that focuses on a regressive tax to solve inequality sounds like an untenable proposition. Modifying the tax to target “luxury” items will probably push the cost of the item so high not enough people will bother with buying it and keep tax revenue low (and the program in deficit). The idea does not seem feasible.
  • Income Inequality Is Falling Globally When Including Data From Developing Countries
    I argued previously why wealth and not income inequality matters more. In short, it is wealth inequality that allows market access discrimination, thereby discriminating who gets access to the basic rights of life (food, shelter, clothing, even employment) and luxuries.
    Discarding that, income inequality falling globally is actually not the best of signs (bear with me please). If the claim is made that those in the low-income group is achieving socioeconomic parity with, say, the Scandinavian countries (where a strong social support system is in place and a high standard of living is maintained) then that could be a good thing. Countries like the US are in the group of developed nations where inequality is arguably the hottest issue, particularly in the coming presidential election. Mixing countries that are highly unequal with countries having lower income inequality simply confuses results.
    The only scenario I can dream of where income inequality is falling globally but rising within a country, as stated within the article, is when the average income (GDP per capita) is used to measure income inequality among countries with different socioeconomic classes within a country. That would be incorrect measurement and in no way refuting Piketty’s r > g statement.

While I went through the arguments made against Piketty, I realize I have not made any arguments in support of the r > g hypothesis.

I’ll share that after completing it.

I’ve seen this video from Khan Academy explaining why Piketty’s r > g is wrong. The explanation is wrong and I will show why when I present my case for supporting the r > g theory.


Footnotes
1As I thought over this, a framework for analytically showing the split between the returns to capital and labor that negates this argument could be made. The issue of how and why the split between the returns are a certain way can then be explained as well as the evolution of the split.

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