The Dim-Post

April 10, 2014

Vox summary of Pikkety’s Capital

Filed under: economics — danylmc @ 9:10 am

I’ve asked my university library to order in a copy. It’s not here yet but the basic argument seems very simple. Matthew Yglesias writes:

The main concepts Piketty introduces are the wealth-to-income ratio and the comparison of the rate of return on capital (“r” in his book) to the rate of nominal economic growth (“g”). A country’s wealth:income ratio is simply the value of all the financial assets owned by its citizens against the country’s gross domestic product. Piketty’s big empirical achievement is constructing time series data about wealth:income ratios for different countries over the long term.

R is a more abstract idea. If you invest $100 in some enterprise and it returns you $7 a year in income then your rate of return is 7%. Piketty’s “r” is the rate of return on all outstanding investments. A key contention of the book is that r is about 5 percent on average at all times. The growth rate (“g”) that matters is the overall rate of economic growth. That means that if g is less than 5 percent, the wealth of the already-wealthy will grow faster than the economy as a whole. G has, in fact, been below 5 percent in recent decades and Piketty expects that trend to continue. Because r > g, the rich will get richer.

Let’s assume that Piketty is correct and he’s discovered something deep and important about the nature of capitalism. That’s a really big deal, and Pikkety’s work looks like it’ll be a landmark in its field.

Now, obviously I’m not an economist, but from a layman’s point of view this doesn’t seem like this is a very difficult or opaque idea. Pikkety looked at the historic data and noticed a trend. It’s not like, say, Heisenberg’s work on quantum theory – which was so counter-intuitive and nonsensical even subsequent Nobel Prize winners are baffled as to how and why he developed his ideas, but which happened to be correct and revolutionised physics. It’s a little disturbing that after two hundred years of capitalism we’re only now discovering critically important but fairly simple insights into how it works.

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17 Comments »

  1. If it was that simple and no one noticed it in 200 years it is an extremely safe assumption to say this theory probably falls down horribly somewhere.

    Comment by King Kong — April 10, 2014 @ 9:19 am

  2. From the link:

    If it’s that simple, how come nobody noticed before?

    Piketty makes two claims about this. One is that in Victorian and Edwardian times, people certainly did notice. His many references to 19th century novels (in Jane Austen books a man’s “income” is the rent received by the estate he inherited, not his salary) are designed to establish that something like his account of the central importance of inherited wealth was conventional wisdom in pre-war Europe, and not just among radicals. And of course there was a lot of political radicalism in pre-war Europe.

    His second point is is to concede that the life experience of the non-Millenials alive today contradicted this narrative. World War I directly destroyed some wealth, and also led to very high levels of taxation and inflation as wartime finance measures. Then came the Great Depression in which many fortunes were wiped out. Then came World War II which directly destroyed even more wealth (as in cities were literally burned to the ground) and was associated with even more extreme wartime finance measures. Then came a fast period of postwar growth associated with European reconstruction and the unleashing of long-suppressed consumption impulses. It’s only over the past 20 or 30 years that the underlying dynamic has reasserted itself.

    Comment by danylmc — April 10, 2014 @ 9:25 am

  3. Because r > g, the rich will get richer.

    Those who are rich, and remain rich, by design rather than accident/birth are almost certainly well aware of this (or some equivalent articulation of the same idea). It’s the whole point of the privatisation of assets, reduction of high-income tax brackets, etc.

    Comment by RJL — April 10, 2014 @ 10:05 am

  4. Thank goodness, a site with no comments section.

    Comment by George — April 10, 2014 @ 10:57 am

  5. It has seemed strange that in recent years the rich have become richer (20%?) while the poor have become poorer. Two jobs per family needed unless you are the Duchess of Cambridge.

    Comment by xianmac — April 10, 2014 @ 11:20 am

  6. No, xianmac. It’s not strange at all.

    Over the past (roughly) 20 years we’ve gone through a structural change in the production process. Technology has become such critical part of how a business operates and competes that the relative composition of inputs has shifted. Relatively more ‘capital’ inputs are being used compared to labour inputs, so it’s inevitable that the absolute return on investment is going to move in a similar way.

    Comment by Phil — April 10, 2014 @ 12:49 pm

  7. Once again, an economist finds a way to state the obvious in mathematics and gets showered in praise. What an effing joke. The essence of this argument has been known for years. All he has done is measure it in a way that the economics establishment might consider valid.
    What a dismal science.

    Comment by trev — April 10, 2014 @ 1:02 pm

  8. Over the past (roughly) 20 years we’ve gone through a structural change in the production process

    Availability of labour has also massively increased since the addition of bazillions of women-folk since the ’60s, which I assume* has resulted in wage sustained suppression while “g” has been trending up.
    I guess that’s where a lot of the “r” is claimed from.

    *Too lazy to investigate. I’m sure one of you has the appropriate citation at fingertip.

    Comment by Gregor W — April 10, 2014 @ 1:32 pm

  9. “which I assume* has resulted in wage sustained suppression ”
    I thought you lefties had agreed that it was unfettered international trade and “the race to the bottom” what has done for workers wages?

    Did the wars really destroy the wealth of the elites? The land remained, even if the buildings were destroyed. I thought high rates of estate duty did for the estates, hence the number that were gifted unto the state to avoid those duties. Are the wealthy becoming more wealthy? Perhaps they are at the moment, but, like the current warming hiatus, normal service will resume eventually and we will see a return to the social mobility of recent years.

    I smell confirmation bias here…

    “In the United States, for example, 5 percent of households own a majority of the wealth while the bottom 40 percent have negative wealth due to debts.”
    Um, aren’t all new home buyers going to be at the bottom, if wealth EQUALS assets MINUS debt…? Aren’t those with a student loan but fantastic jobs, going to be at the bottom…? At least until they repay their debts and accumulate assets. And I thought numerous studies indicate that mobility is more important than snap shots: our wealthiness changes over our lifetimes, sofollowing the strands (longitudinal studies requuired?) are actually more informative than comparing two snap shots of all the population. Victorian and Edwardian times were less meritocratic than recent times, so perhaps a comparison to those times is not as valid as first seems.

    I like how the solution is the same as for global warming: we need more tax…
    In fact, the takeaway should to be: we need more growth.

    Comment by Clunking Fist — April 10, 2014 @ 2:46 pm

  10. Once again, an economist finds a way to state the obvious in mathematics and gets showered in praise.

    We live in a world where phrases like ‘stating the obvious’, ‘common sense’, ‘everyone knows’ and the like are thrown around frequently.
    More often than not, they turn out to be neither obvious, common, or applicable to everyone once the cold light of data collection is turned upon them.

    I agree with Yglesias’ comment “Piketty’s big empirical achievement is constructing time series data about wealth:income ratios for different countries over the long term.”

    Comment by Phil — April 10, 2014 @ 3:01 pm

  11. I thought you lefties had agreed that it was unfettered international trade and “the race to the bottom” what has done for workers wages?

    That was those other lefties.

    However, given that unfettered international trade didn’t exist pre-NAFTA (and even then it’s not really unfettered), that leaves about 30 years of something else happening in the western economies.
    I’m merely positing that labour supply increases are a likely factor in r>g, along with things like asset privatisation, trade liberalisation, off-shoring, unfettered capital movement, fiat currency, massive spikes in the credit cycle etc.

    but, like the current warming hiatus…

    Jesus.You’re like a broken record.

    Comment by Gregor W — April 10, 2014 @ 3:58 pm

  12. Non-economists are always somehow attracted to the idea that economists as a group don’t know what they’re doing, and are on the lookout for any theory that turns the established discipline on its head. Pikkety seems to be tapping into that market.

    Comment by kalvarnsen — April 10, 2014 @ 4:18 pm

  13. ” It’s a little disturbing that after two hundred years of capitalism we’re only now discovering critically important but fairly simple insights into how it works.”

    Disturbing? It sounds like you have fallen into the conceit of thinkings humans just about know it all. Either that or economist bashing. Lefty economist bashing has many similarities to AGW science bashing dontcha think?

    Comment by Swan — April 10, 2014 @ 6:54 pm

  14. In fact, the takeaway should to be: we need more growth.

    That’s one thing Yglesias suggests:

    What are some other possible solutions to the problem Piketty diagnoses?

    The politically easiest way to avert Piketty’s prophesy of doom would be to increase the economic growth rate. “

    Comment by steve — April 10, 2014 @ 7:53 pm

  15. “World War I directly destroyed some wealth, and also led to very high levels of taxation and inflation as wartime finance measures. Then came the Great Depression in which many fortunes were wiped out. Then came World War II which directly destroyed even more wealth ”

    ” A key contention of the book is that r is about 5 percent on average at all times. ”

    So at all times, except a good chunk of the 20th C. Hmm

    Comment by Swan — April 10, 2014 @ 8:21 pm

  16. More on this from the Guardian:

    http://www.theguardian.com/commentisfree/2014/apr/12/capitalism-isnt-working-thomas-piketty?CMP=twt_gu

    Brilliant response in the comments… “Move to North Korea then.”

    So there!

    Comment by steve — April 13, 2014 @ 2:40 pm

  17. all the important things in economics were figured out 150 years ago by a certain bearded German but for some strange reason no one seems to pay any attention, wonder why that might be. oh yes that’s right: ‘the ruling ideas are in every epoch the ideas of the ruling class’

    Comment by auferstanden aus ruinen — May 2, 2014 @ 9:22 am


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