A Reflection on Piketty’s “Rentiers Always Win” or r > g

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Yves here. This post addresses a pet peeve of mine, namely, the reverential treatment of the Piketty postulate that r (the rate of return on wealth, which Piketty defines very inclusively) exceeds g, overall economic growth. This is usually written as r > g. A number of people have debunked Piketty’s self-proclaimed “fundamental law of capitalism” from a range of perspectives. One particularly early and effective critique came from Lance Taylor, who demonstrates that r varies, and even though it might often exceed g, it does not always work out that way. Moreover, he also demonstrates that Piketty’s model also relies on some extreme assumptions. Despite this and other debunkings, r > g is still treated reverentially by people who clearly know better (see this article in Jacobin, hat tip Mark Ames, which does a great job of explaining US Serious Economist “fair weather” politics relative to Piketty. Yet it discusses the Cambridge capital controversy as being fatal to their position when it is ALSO fatal to r > g).

This post is shorter and more accessible than the Taylor paper, so I hope you find it to be informative.

By Philip Arestis, Professor of Economics at the University of the Basque Country, Spain, and Malcolm Sawyer, Professor of Economics, University of Leeds. Cross posted from Triple Crisis

The recent book Capital in the 21st Century by Thomas Piketty (2014) has attracted an enviable amount of attention with its detailed history of income and wealth inequality. A central idea in this book comes from (r > g); that is, the idea that the rate of return on wealth (r) exceeds by a considerable margin the rate of economic growth (g) so far as Western industrialised countries are concerned. This, Piketty argues, has implications for rising inequality especially of wealth and of rentier income.

The basic mechanism is that when the rate of return is greater than the income growth rate, then savings made out of the return on wealth received in the form of dividends, rents, interest and capital gains adds to wealth, which then rises at a rate determined by these savings (and equal to savings propensity out of wealth (s), multiplied by the rate of return (r), (i.e., s∙r), and then the stock of wealth rises faster than income. The wealth to income ratio then rises, and the gains from wealth rise faster than other incomes. Wealth inequality also rises on the basis that rich wealth owners can achieve higher returns on their wealth than the poorer wealth owners. This is a substantial, though not complete, part of the general rises in inequality over the past three or more decades (and a large part of his book is concerned with documenting those rises in inequality).

It is interesting to compare Piketty’s analysis with others who have considered the relationship between the rate of return on wealth and the rate of growth (which are largely ignored by Piketty). Before undertaking this comparison it is worth noting, as King (2014) suggests, that the relationship in question is an accounting identity and the question is should one treat it as a “fundamental law of capitalism”? A notable example of another view of the relationship between rate of return and rate of growth comes from what was called the Cambridge equation based on the equality between savings and investment (applied to a closed economy without a government). Savings are largely based on profits, and investment is closely linked with the growth of output with investment enabling the capital stock to grow in line with output. Then savings equal to investment yields the equality s∙r = g. In contrast, Piketty’s approach would argue that s∙r > g. In other words, Piketty is indicating that the tendency to save exceeds the tendency to invest (on the basis that investment will be undertaken to keep the capital stock growing in line with output).

There are two problems with Piketty’s approach. The first is that his focus is on savings without paying any regard to the other side of the equation, namely investment. He views wealth to income ratio to be rising; but that also means the capital to income ratio rising. What is the consequence of that? From a neo-classical perspective, the marginal product of capital, and thereby the rate of profit would decline (there are well-known objections to that view from the work of Sraffa and others). From a heterodox perspective, if savings intentions exceed investment intentions, deflation results with high levels of unemployment. If the capital-output ratio rises, the rate of profit will decline unless there is an increase in the share of profits, and as the capital-output ratio continues to rise, increasing share of profits emerges.

The second is that the intention to save out of wealth exceeds investment intentions: savings to take place has to be matched by investment. The excess of savings over investment provides a deflationary situation, which can be met by the government running a budget deficit or which results in high levels of unemployment.

Thus there must be doubts as to whether the scenario portrayed by Piketty could continue with r > g. Something would have to give. It may be “rioting on the streets” as unemployment rockets; or it may be that the rate of profit declines, though budget deficits could play a role of limiting those effects. Consequently, the conclusions of the book need a great deal more work to be substantiated. A further example, as King (2014) comments, is that the current problems most economies are faced with are different. Namely, that the problem is not r > g but that the rate of interest is below the growth rate, and this is particularly so with regard to the rate of interest on government bonds. This does not necessarily lead to the same conclusions in terms of distribution as Piketty suggests. Another issue which has been pointed to is the use by Piketty of a single average rate of return, whereas there are important differences between, for example, the rate of return on government bonds and the rate of return on equity with regard to their level, their implications for distribution along with the risks and uncertainties involved.

There would be many reasons to think that growth rates in industrialised countries will continue to slow as they have tended to do in the past few decades (as Piketty, 2014, p. 97) suggests) since the end of the “Golden Age”. The causes of this slower growth can be variously ascribed to the end of technological catch-up (by industrialised countries with the United States), the impacts of financialisation on investment, the failures of neo-liberalism to maintain growth through increasing inequality; to these Piketty adds slower population growth (and sometimes decline). The ecological limits on growth, though strangely absent from his discussion, reinforce the view that growth will be lower than during the “golden age” of capitalism. But whatever the causal factors behind slowing growth, it would seem likely that future growth rates in industrialised countries may well be of the order suggested by Piketty or slower.

It is then imperative to consider the macro-economic and distributional consequences of that slower growth. Piketty’s preferred solution is that of a global wealth tax, which would need to be substantial—in effect sufficient to reduce savings out of rentier income to around 1 to 1 ½ per cent of wealth. To boost the level of demand such a wealth tax would need to be spent, and public expenditure increased or other taxes decreased. There is much to be said for such a wealth tax, which is in no way to underestimate the practical and political difficulties of securing such a tax. However, we would argue that the implications of the r > g assumption are more widespread and serious than Piketty envisages, and that there can be other ways of addressing the issues. Taxation on corporate profits can be raised; the power of workers enhanced to shift the distribution of income from profits to wages.

Piketty’s book has documented the widening inequality, which scars industrialised economies, and generally draws the implication that rising inequality has not been justified by enhanced economic performance. He has identified the relationship between the rate of return on wealth and the rate of growth as a major issue. In our view, an excess of savings out of return on wealth and the rate of growth is unsustainable. It may lead, following Piketty, to rising wealth inequality. But we have argued that the difference would be deflationary and cause high levels of unemployment. There is a need to reduce the effective rate of profit—and this can be attempted through enhanced worker power or a corporation tax (on a co-ordinated basis to reduce tax competition).
– See more at: http://triplecrisis.com/a-reflection-on-capital-in-the-21st-century/#sthash.E3GTblyv.dpuf

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  1. Dylan

    So your argument is, he is sort of right but not always, so it’s not a fundamental law. I think that was clear to everyone anyway

    1. Yves Smith Post author

      Go read the Jacobin piece I linked to. They stress that it IS a fundamental law and that is precisely the claim Piketty makes. David Graeber has an article up now at the Guardian that makes the same argument based on PIketty. There are lots of article that say the same thing. I suggest you familiarize yourself with the commentary on this issue and not assume that your views are what is being bandied among economists and in the media. The fact that so many economists are having to rouse themselves to debunk Piketty’s r > g is an indirect proof of how many writers are parroting it as gospel.

      1. Jerry

        You say, “The fact that so many economists are having to rouse themselves to debunk Piketty’s r > g is an indirect proof of how many writers are parroting it as gospel.”

        Piketty says in his introduction, “Economists have for too long neglected wealth distribution partly because of Kuznets and partly because of the profession’s undue enthusiasm for simplistic mathematical models.” And then he goes on to say, “To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.”

        Wouldn’t it be more of a surprise if there was no rush to ‘debunk’ his thesis?

        1. Ben Johannson

          The surprise is that the”debunking” is coming from both the mainstream and the heterodox. That two groups coming from different (sometimes very different) intellectual pedigrees find problems should at least make us look at the hypothesis in a more cautious fashion.

          1. PopeRatzo

            They come from different intellectual pedigrees, but they both serve the powerful. Of course, they’re going to attack Piketty. He’s just pointed out to the world that they’ve got a pox growing on their well-fed butts.

            1. lambert strether

              On serving the powerful… I seem to remember that Piketty comes from the Hollande faction of the French Socialist Party. Can somebody confirm or disconfirm?

        2. Dan Kervick

          Nobody has “debunked” r > g. The historical persistance of that inequality seems to be the least controversial aspect of the book. Indeed, that Taylor paper argues that not only is r > g true, but it is an obvious and trivial truth that follows from accounting identities.

            1. albrt

              The Quartz article seems to be setting up a couple of straw men: (1) that r > g means that specific assets will generally increase in value at a greater rate than GDP, and (2) that the elites really intend to give the investing public an “r” rate of return on their captive retirement accounts.

              As to number 1, I would certainly agree with those who suggest that r > g is more of a political/institutional tendency than a “law.” Liquid capital has certain strategic advantages over other factors of production. Unless institutions exist to level the playing field, capital will often obtain outsized returns compared to other less nimble factors. In our system we have not only failed to level the playing field, we have done everything we can to tilt it further, financializing all other factors of production as much as possible and even giving liquid capital free reign to buy elections. But the advantage of liquid capital is based on its power as a universal solvent, not on a naive view that the prices of individual assets will always go up.

              As to number 2, I agree that we should watch our wallets around anyone who suggests that average people can jump on the “r” bandwagon and all become capitalists. But that in no way undercuts the point that real capitalists have a substantial advantage in our system and most systems, unless there is the political will and the wisdom to create institutions capable of moving the returns in another direction.

              1. Yves Smith Post author

                No, Bhide is not misrepresenting Piketty. You are trying to salvage Piketty by saying something he did not say.

                Piketty stated that r > g is a fundamental law of capitalism and that returns to r, which is wealth defined very inclusively, exceed those of the economy as a whole. He further claims that it’s generally a hefty margin, on the order of 4% (that isn’t part of the “law” part, which is based on his theoretical argument, which has been refuted by Taylor and others).

                1. Dan Kervick

                  Piketty never says that the returns to wealth exceed those to the economy as a whole. That would be utterly impossible unless labor had negative aggregate income. Where are you getting this stuff?

            2. Dan Kervick

              You misunderstood my reply. A mathematical equation of the form x > y is usually called an “inequality”. In this case, Piketty has argued that r has been persitently greater than g through most of economic history. That’s what I meant by ” the persistance of that inequality seems to be the least controversial aspect of the book.” Almost all reviewers seem to be convinced that r has been greater than g throughout most of economic history.

              You have cited the Lance Taylor article very favorably. On the second page of that article, Taylor says that r > g is a “commonplace observation” and that “his inequality is basically a theorem of national income and flows of funds accounting.” I don’t agree with him on the second point. But since you apparently think Taylor’s argument is the bee’s knees, why are you so opposed to the Piketty’s historical conclusions about r and g?

              Piketty does not argue that wealth always grows faster than income. Wealth will grow faster than income when the wealth to income ratio is less than s/g, and it will grow slower than income when the capital-to-income ratio is greater than s/g. Both scenarios are possible. But it is also possible for inequality to continue to grow even when wealth is growing more slowly than income. He grants that wealth is extremely difficult to measure. But for people who disagree with his conclusions, they need to come up with better measures. The FT tried in th case of wealth in the UK, but seems to have launched a dud.

            3. EmilianoZ

              Amar Bidet has obviously not read Piketty. In his example of Mr. Darcy, Bidet counts the rent you extract from a property as income. Piketty counts that same rent as return on patrimony (return on wealth if you want). Piketty is not even comparing asset price and income (which is what Bidet is doing). Piketty is comparing return on patrimony and GDP growth. That Bidet article is totally irrelevant.

              1. Yves Smith Post author

                Piketty defines wealth very inclusively. His r > g claim is that returns (which he calls “profit”) from wealth exceed overall economic growth.

                I’ve read Piketty’s Darcy example and find it to be bizarre, since Piketty is talking about a “fundamental law of capitalism” when income from agricultural holdings is a pre-industrial-revolution model. The industrial revolutionary merchants and industrialists displaced the landed aristocracy. One of Piketty’s important data sets is French estate data, which would be great at capturing the value of landed wealth (steady income) and lousy at capturing the value of business wealth (if nothing else because the techniques for the valuation of enterprises had yet to be developed).

                If your effort to save Piketty is to assert that he meant only income received as r, his formula is even more absurd. There is no way that actual cash income received on wealth exceeds the overall rate of economic growth universally, on a persistent basis. Lots of wealth is held in the form of non-income or low-income producing assets, or even cash-flow-negative assets. This was established long ago, in the Cambridge capital controversy in the 1950s.

                1. Dan Kervick

                  I take it that for Piketty, “capitalism” refers to any system based largely on the private ownership of capital and market exchange. In any such system, there will be a private return to capital.

                  1. Yves Smith Post author

                    Funny how you opine confidently on what Piketty means in other contexts but not here.

                    And tell me how Japan fits into his construct. Japan has long had and continues to have very low income and wealth disparity, yet if we use your even more expansive notion of capitalism, which would go back to before Tokugawa era, Japan would never have exhibited rising wealth inequality for more than short periods of time before reversing itself.

                2. JTFaraday

                  “The industrial revolutionary merchants and industrialists displaced the landed aristocracy.”

                  This is something that would be interesting to investigate very carefully. My reading of English historians on the civil war and revolutionary period(s) suggests that it’s not so much that an entire “aristocratic” class was displaced so much as a way of life was displaced.

                  Sure, there are some holdouts who are slow to branch out, and these become Europe’s somewhat embattled political “conservatives,” but there is a lot more overlap between so-called “merchants and industrialists” and “land owning aristocrats” than the historical generalization about “displacement” suggests.

                  This is why we find Adam Smith grousing about English “aristocrats” and those aristocrats are political republicans and economic capitalists. What’s not to like?

                  Perhaps Piketty’s r>g is more like that kind of historical shorthand, and perhaps one that obscures as much as it reveals, than some sort of “economic law.”

                  1. JTFaraday

                    From that perspective, the Jacobin article the original post references is interesting, as Seth Ackerman proposes that what we’re seeing today in the US is a trustafarian class of inherited wealth that is quite taken with the “work ethic” and which works from position of privilege to nab all the best jobs. This means return on labor will go to those who already receive a return on wealth.

                    So we have people who like to call Matt Yglesias “the trust fund asshole,” while he attempts to influence public policy as just another bloke with a youth following.

                    Piketty can start to look pretty convincing. There’s no need to turn it into an “economic law.” That’s a red herring.

                3. EmilianoZ

                  Piketty being inclusive as you say, he probably included rents and asset price appreciation in his return on wealth. I suppose the distinction he made was between money received in exchange for work and money received just because you own something (be it property or stock or money or whatever).

                  Darcy is 19th century England. If that aint capitalist I dont know what is. According to Karl Polanyi (“The great tansformation”) that was when the purest form of market economy was practiced (1830-1870). I had always thought that capitalism started with the age of mercantilism (trade in spices, slaves, etc.). It was then supplanted by the age of industrialism and may end with the age of finance.

                  Anyways the landed aristocracy rented out the land. How is that different from private equity buying up apartment buildings and renting them?

            4. lambert strether

              The adversary in me finds the point that mathematical “inequality” isn’t the same as a societal “inequality” very appealing. Thinking in a purely tactical manner, any discussion of “that inequality” should produce much conflation, useful or harmful, depending on your outlook.

              1. Dan Kervick

                Right, I could have used “statement”. But I think in the context of the comment whatr “that inequality” referred to.

    2. Ben Johannson

      Piketty’s theoretical explanation for the empirical evidence he has gathered is in question and that matters because it’s the theory upon which any policy change would be based. No one is questioning that inequality is problematic and getting worse, they question why.

      1. Yves Smith Post author

        Piketty basically admits his theory doesn’t come from his evidence, they run on two separate tracks. And as someone who has spent my entire career dealing with lousy data (that’s when consultants are most likely to get hired), he makes awfully strong claims from disparate data sets which measure different types of wealth and he’s piled them all in a heap. Plus…..drumroll….Cambridge capital controversy!

        What I’m bothered by is that the fauxgressives are flogging Piketty, when I don’t see his argument as helpful to the left. If you believe r > g, then large and rising wealth disparity is a state of nature. You’ve handed the argument over conservatives, who will contend that you have to interfere in a very basic way in the operations of capitalism to undo that.

        1. Dan Kervick

          Piketty doesn’t argue that r > g is a state of nature. He argues that its is a contingent historical reality that has been true during most periods throughout history.

          He distingusihes between the pre-tax and post-tax rate of return r. The post-tax rate of return has in many cases gone below g, and is clearly something we can do something about through policy. When we had higher taxes on wealth and large incomes, we had a more equal society. He argues also for greater “democratic control of capital” which can certainly influence both the rate of return to private capital by directly regulating it, directing more of its return to the financing of public benefits, and by converting some private capital to public capital.

          What is more useful to the left: a belief that captalism contains self-corrective measures that will reduce inequality in the long run, and maybe even “euthanize the rentiers” all by itself? Or a view that says that capitalism contains deep mechanisms that tend to produce inequality, and therefore must be challenged politically? It has aways been the left that has argued that social justice and democracy required interference with the basic mechanisms of capitalism. That’s not a fight the left has traditionally been afraid of – at least not since the timid neoliberal era rolled around.

          If there is anything faux-gressive around, it is the illusory idea that we can achieve a decent society just by printing up all the money we need and letting the rich keep everything they have; or the idea that the solde source of inequality is the absence of full-employment. That’s a pipe dream. There is a deeply unjust and oppressive class structure in society based on concentrated private ownership and control. There is no way of challenging this injustice and opression without challenging concentrated private wealth directly and the unrestrained free enterprise systems that allow it to do its work of exploitation, control and domination. Also, feudal societies had massive inequality even though there was alwasy full employment. It was usually the case that there were chronic labor shortages. That didn’t turn vassals into nobles.

          1. Yves Smith Post author

            Piketty has called r > g a “fundamental law of capitalism”. You are telling me I am not supposed to take him at his own word?

            1. Dan Kervick

              The phrases “contingent historical proposition true in some periods and political contexts and not in others” and “historical reality dependent on a variety of mechanisms and not an absolute logical necessity” are taken directly from Piketty, pp. 358 and 361. Evidently it is compatible with Piketty’s understanding to the phrase “fundamental law” that r > g is both a fundamental law of capitalism and yet is historically contingent. We’re talking about economics, not physics.

              You really have to read the book to understand Piketty’s claims and arguments.

          2. Calgacus

            What is more useful to the left: a belief that captalism contains self-corrective measures that will reduce inequality in the long run, and maybe even “euthanize the rentiers” all by itself?
            What is most useful to the left and the right – is beliefs that are true. It is a gross mischaracterization of Keynes to suggest that the “euthanasia of the rentiers” would occur by self-corrective measures of the sort that he argued that did not exist.

            Or a view that says that capitalism contains deep mechanisms that tend to produce inequality, and therefore must be challenged politically?
            It would be useful to define capitalism. If it embraces the Keynesian / MMT /postwar era full employment mixed economy, then evidence for Pikettyesque theses is not there.

            It has aways been the left that has argued that social justice and democracy required interference with the basic mechanisms of capitalism. That’s not a fight the left has traditionally been afraid of – at least not since the timid neoliberal era rolled around.
            Again, a definitional problem. Seeing “capitalism” as an underlying mechanism which requires “interference” is a basic problem, a misleading viewpoint.

            If there is anything faux-gressive around, it is the illusory idea that we can achieve a decent society just by printing up all the money we need and letting the rich keep everything they have; or the idea that the sole source of inequality is the absence of full-employment.
            Perhaps not “sole” – but primary source of inequality, dwarfing all others put together – is the absence of full employment at living wages in line with the productive capacity of the society. That we can achieve a far more decent society by “printing money” for such full employment, while “letting the rich keep everything they have” is quite true. Thinking that it is “fauxgressive” or “illusory” comes in turn from mistaking what the rich are doing. The damage that the rich constantly do is not taking too much of a fixed pie, so that the 99.9% must wrest it back from them – but in the systematic sabotage of the economic capacities and potential of the society and the criminal blighting of individual lives by the plutocrats’ beloved unemployment.

            There is no way of challenging this injustice and oppression without challenging concentrated private wealth directly and the unrestrained free enterprise systems that allow it to do its work of exploitation, control and domination.
            Yes, but a Job Guarantee or similar program is a more logical, direct and historically effective challenge to this than a high tax regime alone. The only thing we must take from the rich is their “being the arbiters of who shall have economic security and social inclusion and who shall not.” (Victor Quirk). Everything else is comparatively meaningless.

            I wrote a much longer reply in the last MMT Wray thread, btw.

            1. Dan Kervick

              Keynes in the General Theory: “I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.”

              Keynes was predicting that so long as full employment was maintained, the growth of wealth and accumulation of capital would lead to a decreasing price for capital, and returns to it would ultimately only cover its replacement cost. So capitalism itself would kill off it’s own rent-generating systems.

              1. Calgacus

                But he did not think that “capitalism” – “the free market” as usually understood, and as I understand you to be using the word above, would or could maintain “full employment”. So there were no “self-corrective measures” on this understanding. Governments had to provide jobs – of course. And where is the evidence that Keynes was wrong on either score?

          3. MRW

            If there is anything faux-gressive around, it is the illusory idea that we can achieve a decent society just by printing up all the money we need and letting the rich keep everything they have; or the idea that the solde source of inequality is the absence of full-employment. That’s a pipe dream. There is a deeply unjust and oppressive class structure in society based on concentrated private ownership and control. There is no way of challenging this injustice and opression without challenging concentrated private wealth directly and the unrestrained free enterprise systems that allow it to do its work of exploitation, control and domination. Also, feudal societies had massive inequality even though there was alwasy full employment. It was usually the case that there were chronic labor shortages. That didn’t turn vassals into nobles.

            That’s not an argument. The serfs didn’t have a US government. They didn’t have a constitution guaranteeing their rights, a social compact. They didn’t function in a universe with a social compact between the common people and those who ruled them. A social compact where those who rule for us only do so with our consent.

            Making that kind of argument is like claiming that 13th C Persians should have brought Ghengis Khan up on war crimes charges. Or like those people who constantly bring up pre-Legal Tender Law (1870s) quotes about why our legitimate currency can only be gold and silver (as if Benjamin Franklin never wrote A Modest Enquiry into the Nature and Necessity of a Paper Currency in 1729. As Farley Grubb wrote in his piece at the Philadelphia Fed, “Franklin is clear throughout his career: It is not legal tender laws or fixed exchange rates between paper money and gold and silver coins but the quantity of paper money relative to the volume of internal trade within the colony that governs the value of paper money.” And in our world, today’s world, you don’t get that volume of internal trade without jobs.)

        2. Dan Kervick

          Piketty basically admits his theory doesn’t come from his evidence, they run on two separate tracks.

          That’s a stretch. It seems to me that in each of the key chapters 9, 10, 11, and 12, Piketty attempts to base his judgements about the causal factors that are responsible for the observed changes from the evidence. But if all you mean is that an extrapolation to the future from the past is alwasy iffy, I suppose that’s always true.

  2. Fiver

    So greater displays of r > g occur during periods of great corruption vs r = g is delivered in the form of legal, enforced rules as the antidote ?

    I think it is taken as evident around most of the world that r is usually > than g, and that capitalism as now practiced globally, has an innate tendency to create conditions for further wealth consolidation, that the markets themselves are designed to maintain and enable this process within an operational environment that every day confirms the utter defeat of equal treatment under the law and the gargantuan ‘security’ apparatus built to preserve that odious state.

  3. Roland

    How can anyone dispute that under capitalism, capital tends to accumulate in the hands of capitalists?

    The only question is how to fix the problem.

    My own preference is to fix the inequality first, and worry about the Utility later.

    1. Yves Smith Post author

      There have been huge periods of wealth destruction. Look at the Great Depression and the financial crisis, or the great railroad boom and bust in the later 19th century. All reduced wealth inequality substantially (even though the day-to-day consequences were worse for ordinary people).

      Wealth concentration is a function of political arrangements. Japan industrialized in the 20th century yet continues to have little in the way of wealth disparity. America’s best growth period was also during a period where political arrangements limited wealth concentration.

      1. porge

        “There have been huge periods of wealth destruction. Look at the Great Depression and the financial crisis, or the great railroad boom and bust in the later 19th century.”

        This is inaccurate.
        No wealth was destroyed during these events….it was merely revalued on paper and changed ownership.
        Wealth was actually destroyed in all these wars of history and actual redistribution took place as a result.
        Wealth does not exist on paper or on computer hard drives as bits and bytes. These “score cards” of wealth exist only in the mind and are artifacts that are enforced by the system of financial capitalism.

        1. Binky Bear

          this is of course a distinction without a difference unless you are proposing to hand Yves all your paper money, bonds, treasuries, checkbook and credit/debit cards. After all, they are just manifestations of a mental system and not “real” things. Right? Ok, go!

          1. porge

            My point is that wealth was not destroyed.
            The only things that changed during the depression and the 2008 financial crisis were the arbitrary numbers that represent the real wealth and the score cards that the numbers were written on.

            A walk through 1945 Dresden(or many other European cities) is wealth destruction.
            A walk through 2009 Manhattan?

            1. Yves Smith Post author

              Absolutely false.

              Large numbers of businesses failed in the Great Depression and in the financial crisis. Those are real losses, and had knock-on effects, the biggest being higher unemployment.

              Do you always make stuff up?

        2. Yves Smith Post author

          Huh? Did you miss the massive bank failures, business failures, the high levels of unemployment, homeowners being turfed out? My grandparents lost all their money in three banks, they got 3 cents on the dollar back from one. That was not paper wealth, that was hard dollar cash that was torched.

          It’s astonishing that you can write something that detached from reality and actually believe it.

          1. Kurt Sperry

            Was that wealth destruction or essentially redistribution through fraud–theft in other words? Maybe some of each?

            1. Yves Smith Post author

              Lots of real economy businesses failed. I’m not talking about Lehman or AIG, which should have been dismembered.

      2. impermanence

        “Wealth concentration is a function of political arrangements.”

        Indeed. This might lead to one to speculate that wealth, in and of itself, is a political [legal], not an economic function.

    2. ewmayer


      How can anyone dispute that under capitalism, capital tends to accumulate in the hands of capitalists?

      The only question is how to fix the problem.

      No, there are at least 2 key questions:

      [1] By what means that wealth concentration occurs;

      [2] How to fix the problem.

      You ignored [1] (which is under discussion here) and skipped straight to [2]. Cart before horse, “let’s treat the patient even though we disagree as to what ails him.” That may work in TV med-dramas like House, but the real world is a different story.

      My first thought on seeing a synopsis of Piketty’s thesis – and again on reading this post – was “what about those recurrent terrifying historical episodes during which ‘greed for more r’ falls victim to its own excesses?” A few hours in 1929 wiped out many years’ worth of ‘excess r’ for a large class of speculators. Yves beat me to the punch in commenting on that, but the point needs further discussion. I would argue that the looter elite having their bad bets made good at the expense of the rabble – which is the basis for the “Greenspan put” and as has been nearly-universal central bank policy around the world post-2008 – is at least as important a source of inequity as is longer-term stacking of the deck (e.g. tax breaks for the rich). And in the aspect that such bailouts tend to involve large-scale and high-level subversion of the law, either via ‘aggressive nonenforcement’ or actual illegal actions by th PTB, I further assert that bailouts of speculators and mega-crooks are far more damaging to societies.

      Of course such far-from-equilibrium, human-irrationality-riven phenomena such as speculative booms and busts are distinctly harder to model than lovely gradualist fantasies like “assume r slightly exceeds g for all time … presto! Massive wealth concentration. Now let’s debate what government policy should be…”, making such nonlinear-feedback-dominated ‘punctuated equilibrium’ (to borrow a term from evolutionary theory) models much less favored by mainstream economists. Nonlinear maths is harder than simple extrapolation and curve-fits of cherry-picked datasets, and such dynamical systems defy long-term predictability. As an economist/policymaker, if you can’t long-term predict it, you may start questioning your own omniscience, which is as dangerous as it is ego-deflating.

  4. indio007

    “Wealth concentration is a function of political arrangements.”
    There’s no contract like a no-bid value added gov’t contract!
    or the alternative,
    Front running legislation.

  5. craazyman

    I can’t speak for others, but in my case “r” is certainly a lot less than “g”. That’s the problem when you’re not lucky, when you think you can outsmart things and end up flat on your back with r as dead as a flat tire watching g roll over you while GLD sits like a load of bricks on your chest, heavy as lead. The laughter in your head isn’t you, it’s “them”. haha

    that’s not luck. watching “g” is like watching a Formula One race, from the stands, from under the stands, from outside the gates, without a ticket, sitting on a bench, feeding pigeons, listening to the radio, drinking bourbon from a paper bag, not moving, not able to move, staring at the grass

    Why is “r” so lucky? Can it be lucky forever? These are deep thoughts. Why should inequality matter? Why care? Why worry if a few million people hit the skids? Isn’t it epic to build pyramids? To entertain history with awe and grandeur? Such a spectacle requires sacrifice! So what about r > g.. Just more sh*tters for the boneyard. What is a man, that we should be mindful of him? Or the son of man, that he should visit you? What does this have to do with money anyway? What does it have to do with “r’ and “g”? That’s the equation that’s missing.

    1. craazyboy

      Obviously your r>g when you can take 30% of other peoples money or labor, pocket it, and tell them that will make their r>g. That’s not luck! That’s smart investing. Then you can prove it works for them using macroeconomics and it’s Fundamental Law of Obfuscating Details. This way you can tell them that getting ahead is like waiting for Global Warming. It takes time, patience and a keen eye evaluating the macro data.

      So if we really want to get to the bottom of this wealth inequality thing, we should try reading the news, not macroeconomic equations. Before it’s too late!

      1. craazyman

        Even the news is complicated. The more of it I read, the more confused I get. People make stuff up and then other people believe them, and then somebody calls it news, and then it turns into r and g somehow. But it’s all just made up in people heads. After a while, you can actually see it hanging over things like a shimmering translucent cloud, shimmering like the air right above hot asphalt. I read once about some dude who was a wacky artist and he tripped on acid and he said he saw demons drinking people’s astral body energy through straws. That’s not the kind of thing that would garner a lot of analytical credibility in economic circles, I realize, but r and g aren’t any more real. People make so much stuff up. And then they believe it as long as other people believe it.

  6. Jim in SC

    I think Piketty is describing the world as he sees it from an Ivory Tower on the Seine. The world as I see it from the Piedmont of SC is more nuanced: there is plenty of downward mobility for the children of former capitalist barons. How many descendants of the mega-rich of a hundred years ago are now working stiffs? Quite a few, in my experience.

    1. hunkerdown

      For what it’s worth, I’ve seen a few kids of 1%ers that have failed to connect with their family ethos and traditions and left some or all of the associated money on the table. Unquestionably, fortunes can be lost or shifted, and the textile industry of the South is one example of local oligarchs losing out to global oligarchs, but failures of dynastic succession are also worth considering. Money is just a call on labor, even at scale…

      I’ve also seen home videos that, while they aren’t as decadent as a bunch of guys in leotards at that private function that reporter crashed, do show upper-middle-class toddlers being indoctrinated into retail partisanship, but I’d rather not let slip potentially identifying details until the contracts with the Daily Show dry and safe passage to my new identity in Costa Rica has been secured.

  7. Dan Kervick

    Piketty’s assertion that r has been persistently significantly and durably higher than g throughout history is based on empirical studies of the value of r over historical time and the value of g over historical time. It is not based on a theoretical model.

    r > g is certainly not an “accounting identity.” Not only can one not prove that r is greater than g on the basis of the definition of accounting terms, but there have been periods in the history of some countries when r was less than g. Piketty documents all of this in his time series.

    Contra Arestis, Piketty does not hold that s * r > g. For example, in a fairly typical economy where r is 0.05, g is 0.02 and s is 0.1, then s * r = 0.005, which is clearly far less than 0.02

    Taylor’s views, to the extent they are incompatible with Piketty’s, are not based on empirical studies, but on an a priori theoretical model.

    Contra Taylor, r > g does not “follow” from Piketty’s two fundamental laws of capitalism.

    To show that r > g “follows” from national income accounting, Taylor has to assume that g is “close to the growth rate of the capital stock,” and then has to supply values for π and s by either appealing to empirical facts, or by deducing that relationship from a theoretical model. Also, the claim that g is close to the growth rate of the capital stock is inaccurate as a general rule.

    Piketty is quite that the value of r can vary over time.

    Piketty is also quite aware that anything can happen. His interest is in what has happened historically, what causes have driven what has happened and therefore what is likely to happen in the future. Anybody can write down a model according to which the rate of return to capital decreases continuously until rentiers are euthanized. But if the empirical data shows r remaining robustly high, then there is something wrong with that model, isn’t there?

    1. craazyman

      “But if the empirical data shows r remaining robustly high, then there is something wrong with that model, isn’t there?”

      In theory, no. :-)

      Dan this is the public service we’ve been looking for, worthy of HuffPo’s editing together all the nude scenes from Game of Thrones into one 15 minute clip. The only way r can exceed g is if r doesn’t have to work for a living, or it wouldn’t have any time to look for good g to hitch itself to and ride. Reading 700 pages about the color of the sky is something that I’d consider to be work. I’d rather just look myself. Now I have lots of time to waste doing just that. In this brief moment in time, thanks to your “g”, my r is exceeding my g if r = relaxing and g = grinding away reading 700 pages about economics.

        1. craazyman

          more plainly put: you make a lot of sense and I suspect you’ve gotten to the heart of the issue at hand with your observations and remarks. I’m sure folks can & will argue for years over points of theory, but empirically speaking, history is what it is. I appreciate your synopsis and synthesis of this enormously long book.

    2. Alejandro

      Dan, can g be viewed as a macrocosmic average, while r being viewed as an average of microcosms? After all one can argue that everybody contributes in one way or another to g but only small percentage benefit from r…e.g., Berkshire Hathaways’ r has been higher than S&P 500s g, though not every year.

      Certainly the distinction between ‘saving’ and ‘investing’ need further clarification as was made evident from yesterdays’ thread. However, from my POV, Picketty has made it crystal clear that the rich ‘save’ more because they CAN and the vast majority don’t because we CAN’T.

      1. Dan Kervick

        “… but only small percentage benefit from r…”

        Right. Capital is always unequally distributed, and thus the income derived from it is alwasy uqually distributed as well. As Piketty points out, the bottom 50% of society basically owns next to nothing in neet terms.

        r is the sum of all capital-derived incomes in a given year divided by the total net wealth for that year. It’s thus a national average. Some capital owners may receive substantially higher average rate of return while others receive substantially less.

      2. Dan Kervick

        As far as I can tell, Piketty offers no theory of investment. His book is almost entirely about the dynamics of distribution, not the determinants of growth. For Piketty, national saving for a given year is just the net increase in wealth for that year. The national savings rate is national saving as a percentage of national income.

    3. EmilianoZ

      Piketty’s assertion that r has been persistently significantly and durably higher than g throughout history is based on empirical studies of the value of r over historical time and the value of g over historical time. It is not based on a theoretical model.
      This is the most important point. All this arguing about observed facts is just tiring. It shows that economics and finance folks still have no solid understanding of what the scientific method is.

      Rule 1: you accept observed facts, you respect them. You work the theory to fit the facts, not the the other way round. It makes no sense whatsoever that the speed of light be an absolute constant or time be relative to space. It goes against all previous theories, it goes against common sense, it goes against intuition. But physicists accept that because it is what we observe and measure. The theory is then built to account for the facts.

      And it’s not even all that hard to accept in the present case. Just the other day, there was a link to an article saying that poor people were spending 40% of their income paying for the rent. It could be worse. There’s still some margin. We can make people live in Dickensian conditions, that’ ll boost profits even in no growth.

      I’m starting to suspect that opposition to the facts is ideologically motivated. People who dispute r>g probably think that capitalism is fundamentally good. It may have strayed a bit lately but nothing that cant be fixed by some more regulation here and there. Maybe they’re right, I dont see any alternatives being formulated right now. But all this bickering about observables is just positively medieval.

      1. Yves Smith Post author

        No, Piketty’s work has been given a free pass. And Im not talking about the stupid FT spreadsheet fight.

        There is no way to measure wealth accurately, particularly over long period of time and across countries. He’s taken some fragmentary views and argued forcefully for conclusions that go way way beyond what you can surmise from what he has looked at. There is a word of difference between “lots of data points” and intellectual rigor.

        He has NOT proven what he’s claimed he’s proven, that high returns to wealth are durable. He’s even got a chart in the book that shows high returns to capital going back to 1000! There are just about no records of ANY kind for 1000 to 1200, let alone good financial records. The fact that he’s put up a clearly bullshit chart like that and no one has called him out on that is telling.

        The simple disproof of his thesis is the churn among the top wealthy. If returns to wealth under capitalism were durable (his claim), you’d see the same families in the top wealthy over hundreds of years, just like the old medieval nobility. Yet the Astors and the fur barons were displaced by the few successful railroad speculators, who were displaced by the early oil barons and the entreprenuers of the early 20th century technology revolutions of cars, electricity, and radio. Those have been displaced by later waves: computers, then the PC innovators, then the Internet and financiers. Look at the Kennedys. Joe Kennedy was close to the very top in his day. His grandchildren have a great name but not a lot of scratch.

        And the Cambridge capital controversy shows that Piketty’s claims are circular. First, there is no unitary “return to capital”:

        Piero Sraffa and Joan Robinson, whose work set off the Cambridge controversy, pointed out that there was an inherent measurement problem in applying this model of income distribution to capital. Capitalist income (total profit or property income) is defined as the rate of profit multiplied by the amount of capital, but the measurement of the “amount of capital” involves adding up quite incomparable physical objects – adding the number of trucks to the number of lasers, for example. That is, just as one cannot add heterogeneous “apples and oranges,” we cannot simply add up simple units of “capital.” As Robinson argued, there is no such thing as “leets,” an inherent element of each capital good that can be added up independent of the prices of those goods.

        Second is the circularity issue:

        However, Sraffa then pointed out that this accurate measuring technique still involved the rate of profit: the amount of capital depended on the rate of profit. This reversed the direction of causality that neoclassical economics assumed between the rate of profit and the amount of capital. Further, Sraffa showed that a change in the rate of profit would change the measured amount of capital, and in highly nonlinear ways: an increase in the rate of profit might initially increase the perceived value of the truck more than the laser, but then reverse the effect at still higher rates of profit. See “Reswitching” below. The analysis further implies that a more intensive use of a factor of production, including other factors than capital, may be associated with a higher, not lower price, of that factor.


        It also ignores that capital goods have a large labor component, so untangling returns to capital v. labor isn’t set in stone either.

        1. gaddeswaruip

          “It also ignores that capital goods have a large labor component, so untangling returns to capital v. labor isn’t set in stone either.” It seems to me that this is what Seth Ackerman addresses. And towards the end of the article Ackerman’s interpretation of Piketty’s observation is “Think about how r – g works: it increases the pace of wealth accumulation for capital income earners relative to labor income earners, for any given pattern of saving rates between the two groups. But the same logic can apply within the universe of labor-earners — that is, between the top earners (say, the top 1% or 5%) and everyone else. To the extent that the growth rate of labor income at the top exceeds that for the bottom — call it t > b — the relative pace of wealth accumulation for the top group will be faster than for the bottom (for any given pattern of saving rates). And as long as the children of top labor earners are disproportionately likely to become top labor earners themselves — which is true in spades — then top wealth will accumulate across generations, not just over lifetimes, and top labor earners will become not only high-paid “workers” but heirs as well.
          On the surface, this dynamic differs from Piketty’s r > g scenario in that Piketty’s rentiers can be totally idle, rather than being worker-heirs. But if we admit that mores have changed, and that tomorrow’s heirs will most likely work even if they don’t “need” to, the distinction between r > g and t > b collapses.”
          I look forward to your interpretation of Ackerman.

  8. PopeRatzo

    enhanced worker power

    My father, grandfather and four uncles, who were all active members of labor unions (railroad, Teamsters, musicians’ union), would be happy to hear you say this. We used to know instinctively that “enhanced worker power” was the key to a strong and healthy economy. In the concerted effort by neoliberals to kill the labor movement, that wisdom has been mostly lost.

  9. gaddeswarup

    As far as I can see, the Jacobin article by Seth Ackerman reinterprets ‘r’ towards the end of the article: “The skyrocketing of top-end income inequality we’ve actually witnessed so far in the English-speaking world has mainly come in the form of inflated “labor” earnings, rather than pure capital income.” and changes ‘r > g’ to ‘t > b’.
    The earlier discussion about Cambridge controversy leads to a correction of Piketty’s explanation of the above inequality using classical models and elasticity of substitution. Ackerman says “… a fundamental critique of the production function literature advanced in an important book published just two months before Piketty’s — the elasticity of substitution simply cannot be regarded as a meaningful measure of an economy’s technology (or anything else), or as providing any clue to its future.” This seems to more of a critique of neoclassical economics. Ackerman goes on to say “What’s essential, rather, is Piketty’s empirical demonstration that the rate of return on wealth has been remarkably stable over centuries — and, contra Summers, with no visible tendency to vary in any consistent way against the “supply of capital.”” and then goes on to interpret as mentioned earlier.

  10. Jim Haygood

    ‘There are important differences between, for example, the rate of return on government bonds and the rate of return on equity with regard to their level, their implications for distribution along with the risks and uncertainties involved.’

    Indeed there are. That’s what the Capital Asset Pricing Model is all about: a relationship between return and risk.

    For instance, real returns on T-bills (defined, with a bit of literary license, as the ‘risk-free asset’) have been only slightly above zero since 1925, confirming the common sense instinct that one shouldn’t expect any reward for taking no risk.

    On the other hand, equity returns have substantially outpaced economic growth over the past 200 years in the U.S. But in some other countries — Japan and Germany, to name two — equity and bond values plummeted to zero during wartime.

    In the long run — as observers ranging from Warren Buffett to Rob Arnott and Peter Bernstein have pointed out — returns on capital can’t outpace economic growth, which provides the productive capacity necessary to manifest capital’s value. If Piketty’s empirical data shows otherwise, then he simply hasn’t collected enough data.

    1. Dan Kervick

      Isn’t the idea rather that the growth rate of return to capital can’t exceed the growth rate of national income in the long run?

      Why couldn’t an economy in a steady state with a 0% growth rate preserve an equilibrium where some fixed percentage of national income goes every year to rents paid to the owners of capital?

      1. craazyboy

        I’m not quite sure how this fits into Piketty’s definitions ’cause I haven’t done the heavy lifting, but somehow “productivity gains” factor into all of this. The econ definition being output per unit input of labor. We often hear these gains are supposed to be split between labor and capital, but lately capital seems to get the lion’s share. This of course is only looking at the productive economy – capital equipment and people making things and services – and would ignore the parasitic and predatory parts of the economy mostly living in the ever growing financial space.

  11. ScentOfViolets

    Maybe I didn’t read the book and it’s commentaries closely enough, but I read “r>g” as ‘the rich always and everywhere feel entitled to a certain rate of return on their wealth and are bound and determined to make sure this return is realized.” That’s why the low growth part of the thesis is so important.

  12. Steven Greenberg

    Does Piketty say that “rentiers always win”, or does he say that under the circumstances that exist through most (but no all) of history, rentiers win? Does he say that r is always greater than g or does he say with the rules the way they are now r is greater than g?

    Is there a particular reason why Naked Capitalism has trouble hearing what Piketty is saying.

    I do agree with what Naked Capitalism and New Economic Perspectives have to say about taxes funding federal government spending as opposed to what Piketty may think. In last night’s conversation with Elizabeth Warren, she was explaining her bill to let student loan debtors refinance their loans at lower interest rates. She sai the lower rates woul cut Federal Government revenues by $60 billion. The loss of revenue had to be made up somehow. This is the statement i would like to see her stop making. Though it was Warren who said this, I don’t think Piketty disagrees.

    I tweeted that “If the Fed could create out of thin air trillions of dollars to bail out the banks, the same thing could be done to bail out students.”

    1. hunkerdown

      I wish they’d all stop talking about government as if it were a corporation. The gruesome implications of that little bit of legerdemain are many: government ought to strive for efficiency, government must be profitable, government is a vehicle meant to inure to the benefit of its owners, that the authority of government or its delegates shall not be questioned except through approved (and often booby-trapped) channels, and last but not least that Your Comments in the suggestion box are even necessarily read, let alone carry any force of weight.

      And yes, the Fed could, but how’s that fit in to maintaining r > g? How’s that fit in to aristocrats buying your allegiance as cheaply as possible?

    2. Yves Smith Post author

      I do hear what Piketty is saying. I am opposed to people making popular arguments from poor foundations. It lays a path for poor policy recommendations and for the opposition kneecapping the thesis.

      I’m not saying that wealth inequality hasn’t been rising. Anyone living in a “world city” can see plenty of evidence on a daily basis. What I am saying is that Piketty reaches far more sweeping conclusions that either his evidence or theory support.

  13. Furzy Mouse

    I hope Yves forgives me for quoting a reply that she sent me about Picketty’s r>g maxim, which I have been poking at in a dimwitted fashion…I needed clarity!…Yves cleared the deck for me as follows:

    “Returns on capital cannot exceed overall economic growth all the time. It’s mathematically impossible.

    The fact that all sorts of economist are promoting this is a sign of massive intellectual dishonesty.”

    So only short term can returns can exceed growth, squeezed by the vampire squids, but the party will come to an end…!

      1. Yves Smith Post author

        Your formulas are a straw man.

        You’ve been told repeatedly that your thinking about savings v. investing is confused (see Cameron Murray’s remarks to you on his post earlier this week that we cross posted) and this is another example.

        You need to read the Taylor paper and bone up on the Cambridge capital controversy. You aren’t willing to do your homework and I am getting tired of having to deal with that. See this comment as a starter:



        1. Dan Kervick

          I don’t see any response my Murray to me in that thread, just one to Ben Johansen.

          I’m not sure what you think is wrong with the formulas.

          I have read the Taylor paper. It consists of three or four pages on Piketty whose framework he attempts to translate in a forced and inaccurate way into Pasinetti model, and then the rest consists of considerations on on the Pasinetti model alone. I have already mentioned at least three times the serious problem with his understanding of the basic inequality r > g, which is by no means an identity or a logical conclusion from the national income accounts, contrary to what Taylor says. He also says “Piketty relies on off-the-shelf neoclassical production theory to argue that r and π are jointly determined by the capital/labor ratio κ = K/L with a fully employed labor force L.” This is incorrect. Piketty gives no definitive theory about the forces that determine the rate of return on capital or the share of profits. He considers various proposal, but concludes the rate of return on capital is a consequence of a variety of economic, cultural and political factors. Piketty’s approach is empirical and the values he uses for his fundamental parameters come from empirical research; he doesn’t deduce them from models.

          So Taylor seems to me to be another economist with a favorite model burned into his brain, from which he deduces the conclusions he likes a priori, and which he then uses to interpret everything else he reads.

          As you have presented the central lesson of the Cambridge capital controveries the upshot is that the things we call “capital” are a diverse collection of very different kinds of things, like trucks and lasers, so any attempt to measure either the total wealth of societies or individuals is either circular or impossible. Frankly, that strikes me as a bizarrely obscurantist point. I suppose we shouldn’t even bother trying to determine, then, whether Bill Gates is richer than Old MacDonald, because who can say whether a software development facility is worth more than a milk cow? The fact is, things have market prices, and while rough, those prices give us a fairly good way of estimating how highly people value things, and therefore comparing stocks of wealth, even when that wealth comes in different forms.

          I wonder why it is that people think of themselves as not “faux-gressives” but some kind of true progressives are so interested in putting up obscurantist walls around attempts to measure how rich people are.

          1. Yves Smith Post author

            Your formulas are obfuscation.

            You do not deal with the implications of Piketty’s clearly-stated r > g. The implications of that can be demonstrated with a calculator. You instead create your own definitions and your own formulas, which are NOT derived from r > g but insist that we treat then as the same.

            That is a classic straw man argument. The fact that you do it with formulas does not change the nature of the sleight of hand.

  14. Enrique Fleischmann

    I am afraid that the main problem of Piketty is the narrowness of his analysis, or its focus on national inequalities.
    As a matter of fact, the figures he shows are on NATIONAL levels , which is ok BUT let us remember that we are dealing with a globalized economy. In modern economies products are far from being “national” : They are designed in country X, financed by banks in country Y, HQ is located in country Z , the company is registered in offshore XX , production at M , assembly in B , and sales around the globe…… so where is the nation??? Even the most fierce capitalist would agree that a debate limited to national boundaries is flawed or even meaningless.
    Why is that important? Because the question of distribution is basically a question of how much out of the social product any economic agent receives. In other words, we all make the economic pie, but some of us get a bigger portion than others. So if the product added value comes from five continents, the national perspective of “distribution becomes meaningless .
    Now, if a Western consumer (like me ) can buy Chinese tools or cloths at very low prices ( sometimes ridiculous) prices , or consume cocoa , sugar or oil traded at unfavorable terms of trade ( in comparison to machinery, of high added value products ) this is another way of appropriation of the GLOBAL social surplus. So, to deal with inequality on a national level misses the main “achievement” of Capitalism, which is the polarization between poor and reach countries.
    So Prof. Piketty has opened the door, like any pioneering work and should be recognized for that. . However it requires a broader perspective in order to become really relevant. The r>g should be analyzed in that context though it seems that it still lacks a profound theoretical basis (such as the original Marx´s original Capital , which basically ended the Classic era in economics) . As long as it is based mainly upon empiric data “observations”, it will be remain the perfect candidate “theory” to be rebutted.

    1. Dan Kervick

      Chapter 12 of Piketty is about “Global Inequality of Wealth in the 21st Century.” It deals among other things with the role that the international movement of, and competition for, capital have on the astronomical growth of the top incomes, on how this helps create different rates of return to capital for different classes of wealth owners, on on the role of hidden or sheltered wealth in the global economy.

      1. Enrique Fleischmann

        True, Prof. P. deals with the international aspect ( Chapter 12 ) of inequality but just as a side remark. The chapter is based upon a rather limited set of data ( Forbes´ list of billionaires and some publications on private wealth) which are mere indications ( what can be said from 1% of wealth ownership?) and for a limited period of time ( since 1987) . Not enough for dramatic conclusions and serious debate

        With all modesty I claim that global inequality is THE issue , much more important than the national perspective, especially in a globalized economy. The benefits from wealth transfer from poor countries to rich countries ( through terms of trade, trade barriers , barrriers to human labor free movement and other mechanism) are perceived by the rich country consumer but go mainly to the higher stratus through constant pressure on salaries and wages. Another backwind to national inequality.

        If we are serious about it , it is possible, for example to begin with the wealth gap between the average OECD citizen ( not on PPP terms, but on real money) and the average third world citizen.

  15. kevinearick

    Perspective, Intelligent Discernment, and Discrimination

    It’s easy to get into the something for nothing, artificial supply and demand casino. All you have to do is ignore the nothing for something cost in the future, with the disjointed mythology of money as an excuse.

    Parenting is about showing children the feedback loop between priorities and outcomes over time. Public housing, public education and law enforcement attempt to replace parents with fiat, removing equity and responsibility from parents to feed government replication.

    The resulting real estate price inflation has all but wiped out the purchasing power of Social Security, and government is directly confiscating the rest with more arbitrary debt assignments. The education complex, built by the military, is exceeding its parent, with debt acceleration. And Homeland Security is systematically liquidating the middle class by shutting down all unregulated commerce supporting it.

    Any theory that involves stealing from one individual to give to another as a means of employing another is going to fail, as all have failed for centuries. If you join, the virus grows. If you resist, virulence grows. Let the virus run its course, as the DNA return line.

    Digital currency control is no threat to labor. Without intelligent labor, there is no capital adaptation. Public education splits intelligence from labor, creating the middle class consumption gradient as a means of control, inserting the assumptions that life begins with capital, and is to be redistributed by peer pressure. As a result, the automatons are replacing themselves with technology they don’t understand, growing opportunity cost exponentially.

    The so-educated middle class consumes itself into slavery, assuming that labor is stupid, which it turns out to be, but it’s not labor. The economists have no idea what is going on outside the bubble they are confirming, or whether they are going to get the technology they need to live another day.

    Peer pressure dependency can only produce automatons. The magic of replacing purchasing power lost to fiat inflation with more inflation, to produce the illusory wealth effect of money, is running its usual course, undermining all currencies. The planet always wins.

    International trade is quite simple. I trade natural resources under my control for slave labor under your control, and vice versa, swapping disaffected immigrants. We issue debt as money backed by resource control and assign the debt to the slaves, baking inflation into their prices. We blame each other for scarce resource outcomes in an artificially closed system and pit our slaves against each other in war.

    International trade is all about bullying, from the top down, to get natural resources flowing from the bottom up, greased by inflation and reset by deflation, like a global combustion engine. That ‘works’ for the big city voters and the small town tyrants, until it doesn’t.

    All politics is local because the local tyrant is the weak link, which is why small towns with resources remaining are heavily occupied by the State. Make-work jobs are defined by the material possessions associated with them, not skill. That’s what certification is all about. Develop the skill and throw away the piece of paper.

    The certified compliant majority works in the part of the economy running exactly backwards, toward legacy, incrementally forward only relative to their entitlement duration frames of reference, until the planet responds with increased variability. The landlords are raising rents because the last time they raised rents the Fed printed away the losses, for the corporations, and China printed, massively, all assuming that the empire real estate scam is all powerful.

    Labor builds the economy with an open system, splits, and legacy liquidates the economy, once recognized, employing the middle class, positive feedback serving as negative feedback to positive feedback, across a transformer and back. The middle class relying on rent for income is demolishing houses to maintain artificial demand for excess housing, assuming re-ignition of

    Legacy has an army of expendable entitlement slaves volunteering to protect the status quo of dependency. You have you. Your advantage is the ability to do. Your immediate priorities are your spouse, boss and landlord, adjusting the wage/rent ratio to provide for your children.

    The majority wants you to sort according to its priorities, fear and extortion. That’s the point of peer pressure. Put yourself in a position to practice intelligent discernment and you will see the bridge forward. Let the majority complain about discrimination, while you develop a consistent perspective.

    We are talking about a weak force and a strong force, and a gas exchange translating the fulcrum until the system spins on its axis, creating a magnetic pole, essentially circuits separated by gas equilibriums. Whether you employ them as a switch, signal, memory, or an economy depends upon your purpose. (The solar system is a sub-fulcrum of fulcrums)

    The percentage capable of serving well as spouse, parent, boss and landlord is quite small, and getting smaller, because most want the benefits without the responsibility, as promised by agency. You might want to tread lightly, or not and be priced into healthcare extortion, racing from artificial paper deadline to artificial crisis and back again.

    Public education only increases your debt as income if you expand the ponzi with conspicuous consumption as an example to increase participation, liquidating the productive assets of all. The majority doesn’t need you so much as it needs your children, and it will take them to feed the ponzi. If you are recognized as non-compliant, you are a threat to all.

    That’s why you throw your baby into the deep end from the get-go, to awaken the instinct, to turn mistakes into blessings. Let me get this right; you are going to throw my child into the briar patch for non-compliance?

    Parenting is all about providing for an ignorant majority, and government fills the vacuum. Don’t send your kids to school looking for an example of make-work compliance and expect them to return with skills. If you can keep them from killing each other until they find their own way, you have done pretty well.

    Distance is a perspective, of the transformer employed. Build your own, or increase price on falling artificial infrastructure demand and increase price on increased demand, floated by bonds, paying interest on interest to infinity, until you can’t. History isn’t a well-trodden path by accident.

    1. so

      I thought I was going to lose my mind if I saw another r=g, but like a crystalline pond I saw your post.
      It seems to have become a habit that your observations come just when the insanity has reached
      fever pitch.Thank You.

  16. vlade

    Technically speaking, it’s impossible for it to be forever, but it’s possible for any length of finite time. Although the r would limit to g to the point of there being no practical difference between saying r=g instead of r>g, and given the measurement error even r g by 1e-20th of g, it can last for a very very long time, but how much would it really matter past a certain point? That is, if we would get a (theoretical) society where everyone woudl be (well) fed, housed, and could spend their free time as they wished, would it matter that all of the “superfluous” wealth would be accumulated by someone else? What would they be able to spend it on anyways except status? Not that I think this will every happen as the “except status” is anything but “except”.

    When r>>g (r is much larger than g) it makes status quo for the rest worse faster, then you too get the revolution much much faster.. But it all depends on the magnitude and the status quo, which Piketty both ignores as far as I can tell w/o reading the actual book.

    1. Dan Kervick

      I don’t see why r would approach g as a limit, vlade. You might be confounding the rate of return on capital with the growth rate of capital income. Here’s a simple example to clarify the framework:

      Suppose we have a society of barons and serfs. There are 100 barons and 1000 serfs. The barons own all the land, which the serfs farm. They also own all the guns, whips, stocks, pikes, etc., which they use to control the serfs. In addition to farming the land, some serfs are put to work manufacturing new guns, whips, stocks and pikes to replace the old stock as it depreciates. However, they always manufacture only just enough new stuff to cover the depreciation of the old stuff, so there is no net saving, the net stock of fixed capital never changes, and there is never any net annual income in the form of additions to fixed capital.

      The barons do no work to speak of, except perhaps for the occasional whipping of a serf when he gets out of line. So virtually all labor income goes to the serfs.The serfs produce 500 pounds of grain per worker per year, for a total of 500,000 pounds. That’s the net annual income in this society. Of this amount, 100,000 goes to the barons for their consumption. The serfs divide the remaining 400,000 pounds. So the annual return to capital is 100,000 pounds of grain, and the annual capital share of income is 100,000/500,000 = 20%. The labor share of income is thus 80%

      Sometimes the barons trade land or grain among themselves, and based on the prices that prevail when these exchnages are made, they have computed that the total value of all of the owned land and all of the fixed capital stock of guns, etc. combined is equal in value to 2 million pounds of grain. Thus the ratio of total owned wealth to annual income is 2 million divided by 500,000 or 4/1. That’s Piketty’s capital-to-income ratio. The annual rate of return to capital is equal to the total annual return to capital divided by the capital to income ratio, which in this case is 20% divided by 4, which is equal to 5%. That’s Piketty’s r.

      Due to rigid reproduction regulations, the population is absolutely stable: the serf population remains at 1000 year after year, and the barony remains at 100 year after year. And the economy never grows: the annual income is 500,000 pounds of grain each year, year after year. So the growth rate is 0%. That’s Piketty’s g.

      So in this case, since 5% > 0 %, r is clearly greater than g. It’s completely stable. There is no reason to think there is any kind of long-term unsustainability. This is true year after year after year. Total income doesn’t grow; nor does capital income.

      Note that in this particular case, none of the return to capital is reinvested. Each year, 100% of the capital income is consumed. There is also no growing inequality, although things are clearly unequal since the serfs own nothing and the baronbs own everything, and because the per capital income of the barons is 1000 pounds and the percapita income of the serfs is 400 pounds. On Piketty’s framework, r being greater than g does not in itself suffice to explain growing inequality. Growing inequality in our world is determined (in part) by the fact that capital owners save significant portions of their wealth, and earn a rate of return on it that increased wealth that either doesn’t decline at all from where it was before, or declines more slowly than the capital stock grows. Over time, Piketty acknowleges, with the buildup of wealth, the price of capital may decline to such a degree that inequality is no longer increasing. But between now and then, things might get horrible, and then stay there for a long time afterward.

      As I said before, a fequent error in the interpretation of Piketty is the assumption that r is some kind of growth rate, like the growth rate of capital income. But that is not the case. r is not a growth rate. It is just the ratio of capital income to wealth.

      1. vlade

        If you assume that all of the return on capital is either consumed or wasted (doesn’t really matter which), then yes, you can have a stable situation w/o any limits. But in real world, something gets saved, sometimes – or alternatively, destroyed by natural catastrophes.

        Once you assume savings, then I believe (w/o thinking about it more than 10 minutes) that either r will move towards g, or the share of labour will fall under levels of sustainability of life for labour (which means destruction of wealth or revolution) in finite time. That “level of sustainability of life” is the clear hard floor for labour income, but in reality we have a soft floor that is status-quo dependant and can move with time (both ways).

        If we assume no savings but allow for cathastrophies (which destroy wealth), then the whole system grinds to halt in a finite time and everyone dies off.

        Clearly, for any realistic system we have to allow for catastrophies.

  17. Bill Smith

    r > g?

    Instead of transferring, lets invest SS payroll taxes and all our children will be rich!

  18. Peter K.

    “Thus there must be doubts as to whether the scenario portrayed by Piketty could continue with r > g. Something would have to give.”

    This is what I have a problem with. Piketty says that inequality increased 100 years ago until finally something did give and we got WWI, the Great Depression, and WWII. Then things reset, with r coming way down and g going up for 20-30 years. But now g has come back down and r is going up again as inequality increases.

    He suggest a global wealth tax as way to avoid further disaster which would inevitably follow high levels of inequality. It would provide more accurate data on wealth and inequality and it would dampen the political power of capital to keep r up and g down. It would probably provide some room to increase g.

    The neoclassicals and academic economists (for the most part) and some heterodox insist there are some sort of equilibrilizing features of the economy which would counteract the tendencies Piketty maps out, but I just don’t see it. We’ll see if they’re right. The only countervaling force is politics and people somehow organizing against the corrupting influence of money. Or disaster.

  19. scraping_by

    I think economists are protecting one of their basic simplifying assumptions; wealth equals capital. It makes calculations easier, and has certain political supporters, but it’s simply not an equality. It’s an assumption that runs up against real world contradictions.

    The savings of the wealthy aren’t the only way to accumulate capital, even if measured in money. Excess income can and is accumulated by broader saving groups. Much of ROI is nothing more than a slice of the savings of the broader population, taken though interest, fees, etc. There are other methods of accumulating and directing investment, and though bureaucracy has its shortcomings, its long term effect is higher than median blandness. It’s a blandness we can live with.

    The behavior of the wealthy also contradicts this. Much of their wealth goes to comically unproductive spending, status objects and group dues. Somebody buys a canvas covered in splatters by a safely dead artist for $84 million, it’s just exchange with another elite, not a productive activity. The same money could build or buy something that really increases the utility, therefore the value, of real world assets. Something of the same process, not the same purpose.

    Alternate methods of saving and unproductive spending makes capital accumulation by individuals unnecessary. Yet, I’ve never seen a percentage taken out of any calculation of capital accumulation to account for this sort of financial friction. Economists will hold onto this identity until there’s a good mathematical expression of ‘more money than brains.’

  20. Paul Tioxon

    Piketty has taken a side, and can be viewed much like FDR, as a traitor to his class. This unforgivable Mortal Sin of course needs a Crusade of Epic proportions to wash the stain out of the capitalist edifice of standard mainstream economic theory. Then of course, there is also the garden variety academic quibbling, jealousy and faculty supper club snide shunning. But, it’s not all academic in this case. The subject matter is for once, a substantive political issue in its own right, not just the smartest people in the room arguing with one another over useless and pointless knowledge to score brownie points in the status games of universities. This inequality game is a matter of life and death for hundreds of millions, not unlike the fictional Hunger Games metaphor for society as it really is right here and now.

    The central issue at stake is abstracting from the empirical basis of information of income, from dozens of countries income tax data, a structural feature of capitalism r >g. And that this feature is so stable over time, the last 100 years or so tax collection records, that it constitutes a scientific law about the social order that permits a capitalist economy to take hold over and over again amidst the booms and busts of the business cycle. That law is capital maintains a higher rate of return than the rate of growth the economy in almost any national economy, based on the many studied so far. Now, arguments over the precise mechanism of inequality seems to be the problems, not that there is inequality. But if a theory can rise up as the inescapable conclusion of an empirical study, that is a problem to be argued over by the academics and not only over quality of data, methodology and but with other established economic laws that may be at odds with the new one. Getting everyone on the same page, an intellectual consensus, will not be determined until the arguments are exhausted. And as Piketty says, all of this information is on line. There are two published studies so far using this data base, and over time, more nations will be studied, methodologies will be refined and more academic publications will comb through the debate. So, this is the beginning of the scientific process, as far as laws of economics goes.

    Look at the political push back over climate change. There are still some holdouts, around 3 %, of the published scientific community to be skeptical over the climate change conclusion. Piketty may have to answer to well informed economic intellectuals who can take him to task over data, methods and theory formation, but economics is not the only social science to have demonstrated what the guy in the street already knows: THE RICH GET RICHER AND THE POOR GET POORER.

    Apparently, the biggest theory inconsistent with r > g is the widely held marginal increases in production and diminishing returns to investment over time. This seems obvious, and that is because it is a lesson well learned by capitalism over 500 or so years. Namely, the limits to profit taking are manifold. Obstacles to keep making a profit at the rate they were first made from the beginning of a successful enterprise develop and profits can not be sustained. That’s why the mobility of capital, it’s ever changing state, has allowed capitalism to overcome hitting the wall of diminishing returns and continue to grow and produce vast personal fortunes, the hall mark of the concentration of wealth and the reason for poverty. In this same blog, Private Equity is being discussed with a greater emphasis than ever before. And why does PE exist at all? To surpass the returns of the market. One adaptive response of capitalism is to try to extract superior returns than the market itself provides. That is the very r > g proposition put forth by Piketty. And where have returns been so great, as to dwarf the real economies in their nominal contracts with one another? None other than the world of fictitious capital with its credit default swaps with the London office of AIG, the synthetic CDOs of Magnetar, outlined in Yves own book. And when did the returns of these adaptive moves to provide greater returns cause the entire flow of capital back and forth to create galatically huge fortunes falter? According the Vintage Fig 1, in 2006 and then down the toilet from 2007 til now. An internal contradiction of capital causing it flows to freeze up and stall out the economy at large.

    Other tactics to overcome diminishing returns can be seen in the classic economic re-investment in plant and equipment to increase productivity without increasing the cost of labor. Diminishing returns is a real problem, but one that has been resolved time and again with the use of fictitious capital and technological advancement, among others, which would include burning fossil fuels to replace human and other animal power in the economy. Piketty’s data base is a bunch of numbers in need of history to make some sense out it. But then, the other side would like us to remain in a mystified state of uncertainty about everything other than their right to be so rich among so many made less fortunate by rules designed by the wealthy to never let them lose control.

    At Amazon: How many jobs will 10,000 robots replace?

    Read more at http://www.philly.com/philly/blogs/inq-phillydeals/Amazon-hiring-peaks-robots-will-take-over-report.html#8laRTJJXFyY2zbi0.99

    1. Yves Smith Post author

      No, you’ve been conned. Piketty is a false friend to the left. This from Mark Ames back in April:

      I asked a longtime friend of mine in Paris – a well-known writer and translator of American and Russian for a big French publishing house (Mailer, Limonov, etc). He hadn’t heard of Piketty. I told him Piketty is shaking up official economics discourse here in the US. Next day, my friend wrote back savaging Piketty as the worst sort of of co-opted fake French leftist insider, who threatens no one and keeps the Socialist Party scam going under yet another rhetorical guise.

  21. tiebie66

    What does Piketty have to say about debt and the growth rate of debt? Would this not factor into r and g and do so differentially? Thus the rate of growth of debt may be an indirect determinant of the rate at which inequality grows. I often get the feeling that all the accounting identities lead to apparently valid, but in reality erroneous, conclusions because not all the factors are accounted for.

  22. craazyman

    The Last Word

    holy smokes they’re still arguing about Professor Piketty’s equation like gerbils on a treadmill. If you think about it, r has to exceed g or there wouldn’t be any “wealth” at all

    it is a law

    consider 100 units of capital divided into ten. each year the capital is invested with an expected return of 6%, but you don’t always get lucky. only 9 units return 6%, 1 unit returns nothing and then it’s only worth 5 units at year end.

    The return on capital averages 5.4/100 or 5.4% but one unlucky capitalist lost half has money by year end

    Year two starts with 95.4 + 5 or just over 100 units of capital, and they want 6% or they won’t iinvest, because one of them is gonna be unlucky and nobody knows who. The next year the same thing happens. So capital does grow slowly, real capital, but only because r is more than g.

    It doesn’t grow to the sky because some of it gets cut down, that’s how nature works and imagination works that way too. ‘you have to kill your darlings’ F Scott himself said. Even he wasn’t brilliant with every line.

    But if you decide to bail out the capitalist who lost, then required return goes down and r goes down but wealth goes up, at least at first. Later on, who knows? It depends on how lucky you are when you’re surrounded by your slaves. I wouldn’t call that capitalism, but some people might just because they’re really pissed off. After a while it would be hard to call it wealth or capital. At fiirst, you might have to call it “power” and then later you fall back on calling it “security” and then eventually you’re honest and call it misery and finally, in the end, you call it nothing at all, because that’s what’s left there among the ashes. but that’s a normative judgment.

  23. LAS

    I believe r > g for a somewhat more fundamental reason than argued here … we can work only so many hours a day, but a capitalist has no upper limit on the wealth that can work for him/her. Wealth can work for him/her even while he/she sleeps. That doesn’t mean that wealth will always pay more, but on average it will because it has no upper bound.

    1. Dan Kervick

      Well, r > g doesn’t say that the return to capital is greater than the return to labor, so while you might be right, I’m not sure the point you are making really connects to r > g.

    1. Dan Kervick

      Yeah, I guess the super-rich have no problem accepting the reality of the phenomena Piketty is describing.

  24. chris herbert

    Yves I love you sweetheart, but I think you’re losing this argument. I’m reading Piketty, and like Keynes he’s making a ton of sense.

    1. Yves Smith Post author

      You are misconstruing my point.

      1. People are jumping on the Piketty bandwagon because they like his conclusions. So they are giving his methods and the strength of his evidence a free pass.

      Saying that wealth inequality is rising is hardly controversial. Look at what has happened to real estate prices in prime residential locations in “global cities”. The enthusiasm about his general observation is vastly disproportionate. David Cay Johnston, among others, have been writing about rising inequality for over 30 years. Emanuel Saez, formerly with Piketty, has been documenting rising income and wealth inequality for over a decade.

      2. Piketty’s data sets suck. They aren’t clean and aren’t comprehensive enough to allow for grand claims about wealth as inclusively as he defines it. They should be treated like well documented anecdotes. They don’t rise to being proof because way way too much is not captured.

      3. His theoretical arguments for r > g also have been debunked, see Taylor and the fact that the Cambridge capital controversy is deadly to it too. He doesn’t even bother trying to finesse it in passages like this:

      Concretely, real estate values and stocks fell to historically low levels in the 1950s and 1960s relative to the price of goods and services, and this goes some way toward explaining the low capital/income ratio. Remember that all forms of wealth are evaluated in terms of market prices at a given point in time. This introduces an element of arbitrariness (markets are often capricious), but it is the only method we have for calculating the national capital stock: how else could one possibly add up hectares of farmland, square meters of real estate, and blast furnaces?

      The Cambridge capital controversy had as one of its major arguments the circularity of using market prices to determine return on capital:

      However, Sraffa then pointed out that this accurate measuring technique still involved the rate of profit: the amount of capital depended on the rate of profit. This reversed the direction of causality that neoclassical economics assumed between the rate of profit and the amount of capital. Further, Sraffa showed that a change in the rate of profit would change the measured amount of capital, and in highly nonlinear ways: an increase in the rate of profit might initially increase the perceived value of the truck more than the laser, but then reverse the effect at still higher rates of profit. See “Reswitching” below. The analysis further implies that a more intensive use of a factor of production, including other factors than capital, may be associated with a higher, not lower price, of that factor.


      4. You are missing that the fact that he argues that r > g is a “fundamental law of capitalism” is actually deadly to those who favor redistribution. It is tantamount to saying that the state of nature in capitalism is for wealth inequality to keep rising forever. That actually is helpful to the right, in that the left is conceding that the “natural” operations of capitalism product wealth inequality, so the rich really do deserve all their winnings.

      Empirically, that just isn’t true, and he basically blows off the impact of periodic financial crises, which reduce wealth inequality (the rich have more to lose and do lose it).

      5. The fact that an argument appeals to your priors does not mean it is correct.

      1. NoFreeWill

        Yves your number 4 is, like Marx’s famous ‘tendency for the rate of profit to fall’, actually a reason that Piketty, however weak his policy perscription, is a friend to the left. The real left demands revolution, not reforms, so the fact that a semi-mainstream economist can admit that the flaw is fundamental to capitalism is a blessing. It is obvious to many people today that change is not going to come from inside the system. The same is true with respect to capitalism and global warming: to solve the problem you need to dismantle capitalism.

        1. Yves Smith Post author

          No, Piketty is calling for a global wealth tax as his only proposed reform.

          And on top of that, as I note earlier in this thread, he has a history of being an apologist for the Socialist Party in France, which has adopted neoliberal policies.

          And Piketty’s r > g is being debunked by both heterodox and mainstream economists. Making overreaching and unnecessarily bold claims isn’t sound rhetorically or in designing good policy responses. The fact that Krugman and Stiglitz are promoting Piketty is proof that they are only giving r > g lip service, they really don’t buy its implications.

          Oh, and thank you for reminding readers that Piketty contradicts Marx on the durability of profits. There is actually lots of Marxist research on long-term profit trends and it seems to bear out Marx’s theories (admittedly of businesses enterprises only, but they are an extremely important source of total wealth).

          Moreover, as we discussed in an earlier post (http://www.nakedcapitalism.com/2014/05/democrats-using-pikettys-book-inequality.html), Piketty is being pushed hard by the Democratic party because inequality is one of the few topics that will lead voters these days to look more favorably on the Democrats, despite the fact that inequality got worse under Obama by virtue of all of the benefit of GDP growth going to top income cohorts. They’ll drop all this inequality talk like a hot potato once the midterms are past.

  25. JTFaraday

    I’m not paying real close attention to this Piketty brouhaha, but it seems to me that early reports on this particular door stop indicated that his historical research suggested r>g for the time period under investigation, with the exception of a brief spell in the 20th century, due to a particular confluence of historical events and political factors.

    More recently the result of this historical research, represented by the generalization r>g, has been transformed into the deterministic equation r>g. To this casual observer, what seems to have occurred between the early reports and these later reports, is that the Big Boyz from the Economics bubble weighed in.

    Does Piketty really propose an economic determinism, which The Economists (genuflects) now proceed to debunk (or not) so as to discredit Piketty, or did The Economists propose this economic determinism themselves?

    Projecting economic determinisms from a small set of facts does pretty much seem to be what all economic schools do do, so it would be believable to me if it should turn out that The Economists pulled this “economic law” out of their collective @ss themselves, due to their own mental habits.

    That said, few historians would turn their historical research into a general “economic law,” r>g, and then project it into the future, foreclosing the possibility of human action or future events that might interfere with their theoretical projection(s), (should they even be inclined to make any).

    Are we supposed to read Piketty like he’s an historian undertaking an investigation or like he’s an Economist making theoretical projections in which human action and future events have small purchase?

    Personally, I sort of doubt I would bother writing a 600 page tome only to undermine my own historical thesis. To me, it looks like Piketty’s historical thesis was sabotaged by the Economics Bubble.

    But, like I said, I haven’t read it. Maybe Piketty does have his very own crystal ball, which reveals to him his very own favorite economic determinism that he’s determined to make into law, (like every other public policy entrepreneur).

  26. Rosario

    The Piketty critiques have gone to far, and they are all off the mark. There is no model for g and there is no model for r. It is irritating that we keep propping up the idea that mathematical economic models elucidate anything of holistic value. The only proper modelling of anything economic is in units of energy, and its application (at least at present) is nearly impossible. Energy usage and creation is the only thing that is scientific when discussing the economy of a system. Since we cannot feasibly do that we MUST return economics, at least partly, to the field of sociology and philosophy where it belongs. I’m beginning to feel that we really have no desire to remedy our poor economic decisions as we keep framing arguments and their subsequent critiques in terms of models that reveal absolutely no fundamental truth. Economics (currently) is an intellectual branch of an ideology, and that is okay so long as we are aware that it is so. This also goes for political science, business, law, etc. The analysis of data and its revealed “truths” in our ideological paradigms only serves to distract the mind further from the reality that these human made concepts can, must, and will be changed.

  27. skippy

    I found this tid-bit in the tubes quite curious.

    “Piketty’s book fails not because he condemns the 1%. His book falters in its understanding of history and the federal government’s inclination towards taxpayer gains – specifically, the largest enterprises and mergers buying off the federal government and receiving protections in return, which is an institutional disadvantage in and of itself.”

    Skippy… granted the ideological perspective is pro free market, yet, imperative agency seeming holds true.

  28. william bagnuolo

    Wasn’t there some other event besides WW1, WW2, and the Great Depression, say around 1917?

  29. 4D

    I have to agree with Chris herbert above Yves. I think you are losing this argument and I’m struggling to understand your points, despite this latest justification and cocnern over the semantics. Just a thought, but was “fundamental” the correcty translation from the original French?

    I see no logical flaw in r (persistently being) > g in ponzi global finance. The fact that the economists can pick holes in the argument based on imperfect data doesn’t detract from the logic of the argument.

    I would also note that Dan Kervick is the only one that seems to have read the book from cover to cover and can quote from it in support of his arguments. You are using second hand evidence of analysis from others as if it is gospel, yet you dismiss Picketty’s data and calculations.

    Bracing for the dreaded Yves backlash!!

    1. Yves Smith Post author

      I have not checked the French but Piketty’s translator is considered to be one of the best, so I highly doubt that this is a mistranslation. French is almost English, honestly. 70% overlap in vocabulary. I used to read it at a very high level (difficult poetry) and it’s not a hard to read or translate if you have any proficiency (translating elegantly, of course, is always a different matter).

      You need to pull out a calculator. r > g is OBVIOUSLY MATHEMATICALLY IMPOSSIBLE for any length of time. I am astonished that you can’t comprehend that. And it serves to justify poor policy responses to the issue. A wealth tax, Piketty’s only remedy, is not effective (and I don’t mean from a political will standpoint, you can make that critique of any effective approach). They have one in France and guess what, it doesn’t work because it is too easy to evade.

      r > g is a strong form argument that capitalism, in its natural state, will always and inevitably lead to increasing concentrations of wealth among CURRENT HOLDERS OF WEALTH. That is also empirically wrong. There are plenty of variant of capitalism (Japan for its entire history under capitalism, the US in the post-war era, Canada, Australia, and the European democracies until the post crisis era where the neoliberals became ascendant) where this has been demonstrably false. Periodic financial crises that reduce wealth concentration and often produce fundamental changes in who is in the top wealthy are another strong set of facts that counter Piketty’s claim.

      Quite honestly, your blind acceptance is a refusal to understand what Piketty is saying and look at the obvious implications. This site is about fostering critical thinking, and I am deeply disappointed that readers would rather stick with something that confirms their prejudices rather than look under the hood and see if the data and argument holds up to scrutiny.

      I am not saying all of Piketty is all wet, but this is a major point he argues, and it is patently false.

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