April 19, 2014


REVIEW : of 'Capital in the Twenty-First Century', by Thomas Piketty (Martin Wolf, 4/15/14, Financial Times)

More interesting is Piketty's theory of capitalist accumulation. He argues that the ratio of capital to income will rise without limit so long as the rate of return is significantly higher than the economy's rate of growth. This, he holds, has normally been the case. The only exceptions from the past few centuries are when a sizeable part of the return on wealth is expropriated or destroyed, or when an economy has opportunities for exceptionally fast growth, as in postwar Europe or the emerging economies today.

This theory is built on two pieces of evidence. One is that the rate of return is only modestly affected by the ratio of capital to income. In the language of economists, the "elasticity of substitution" between capital and labour is far greater than one. In the long run, this seems plausible. Indeed, an age of robotics might further raise the elasticity.

The other is that, at least in normal times, capitalists save a sufficiently large share of their returns to ensure that their capital will grow at least as fast as the economy.  [...]

[The book] does not deal with why soaring inequality - while more than adequately demonstrated - matters. Essentially, Piketty simply assumes that it does.

One argument for inequality is that it is a spur to (or product of) innovation. The contrary evidence is clear: contemporary inequality and, above all, inherited wealth are unnecessary for this purpose. Another argument is that the product of just processes must be just. Yet even if the processes driving inequality were themselves just (which is doubtful), this is not the only principle of distributive justice. Another - to me more plausible - argument against Piketty's is that inequality is less important in an economy that is now 20 times as productive as those of two centuries ago: even the poor enjoy goods and services unavailable to the richest a few decades ago.

For me the most convincing argument against the ongoing rise in economic inequality is that it is incompatible with true equality as citizens. If, as the ancient Athenians believed, participation in public life is a fundamental aspect of human self-realisation, huge inequalities cannot but destroy it. In a society dominated by wealth, money will buy power. Inequality cannot be eliminated. It is inevitable and to a degree even desirable. But, as the Greeks argued, there needs to be moderation in all things. We are not seeing moderate rises in inequality. We should take notice.

We all already recognize the obvious solution, which is to make capitalism universal even as income from labour becomes ever more marginal.  That's why O'Neill accounts, SS reform, health care mandates and the like are premised on forced savings accounts.

Posted by at April 19, 2014 7:01 PM

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