from Thomas Piketty & Marxist Meme "So accounting identities can be manipulated mathematically while still remaining necessarily true, and this is what Mr. Piketty does. His first law is simply rewriting some known identities.
First among these is that income is allocated between capital and labor. Income from capital is known as return on capital, while income from labor is called wages. The total income is the sum of the return on capital and wages. So it could be, for example, that 30% of total income is awarded to capital, while 70% is awarded to wages. The fraction of total income that's awarded to capital is called alpha.
The second identity is a relationship between the average global return on capital (let's designate that by r), and the rate of growth of the global economy (let's call that g). Piketty shows that if r >g, then alpha must get bigger over time. That is, a larger and larger fraction of the global wealth will accrue to capital, with an ever smaller fraction going to wages.
Conversely, if r < g, then the reverse is true--wages will grow relative to capital.
In the former case, r > g, reasonably assuming that rich people own most of the capital, then more and more wealth will accrue to the 1%. The rich will get richer, and the poor, while perhaps not getting poorer, will certainly be getting richer a lot slower. In the latter case, r < g, the premium goes to wages, and so wealth is more evenly distributed across society.
So which is it? The relative values of r and g depend on empirical fact rather than accounting identities. And here Mr. Piketty apparently excels--he has collected extensive data from most of the capitalist world from before the French Revolution to the present. He has found that for most of the last 200-300 years that r > g. The exception has been the period from 1913 to 1970--during that time r < g. His conclusion is that r > g is the normal state of capitalism, while r < g was an aberration that will likely never be repeated.
Today global growth is in the 2-3% range, while the average return on capital is roughly 4-5%. Thus r > g, and accordingly an ever increasing fraction of wealth is accruing to the top 1%. This is certainly true in the US, evidenced by high unemployment, declining labor force participation, and stagnant wages. Piketty argues that global growth can't get much higher. It depends predominantly on two things: population growth (stagnant), and improvements in technology (yielding approximately 1.5%). Growth is as high as it is because of China, but as it becomes fully integrated into the capitalist system its growth rate will slow, taking global growth down with it.
The return on capital has averaged 4-5% over the past two centuries, and barring exceptional circumstances is unlikely to change significantly. So Mr. Piketty forecasts r > g for as far as the eye can see.
The exceptional period from 1913 to 1970 was due to the World Wars (echoing my Trotskyist friends). By destroying so much capital, the return on capital was greatly reduced (perhaps even negative in some years). Further, rebuilding Europe and Asia enabled very strong growth. So, with r < g, this was the heyday of labor, when workers could claim an ever larger share of the pie. Unfortunately, economists coming of age during that time thought that was normal, and that capitalism would inevitably lead to a richer and more equitable society. Mr. Piketty says that's wrong.
Piketty's view is very pessimistic, essentially condemning a large fraction of the population to relative poverty. He suggests that 50% of the population will generally benefit from the trend toward capital, but that the bottom 50% will be losers."
First among these is that income is allocated between capital and labor. Income from capital is known as return on capital, while income from labor is called wages. The total income is the sum of the return on capital and wages. So it could be, for example, that 30% of total income is awarded to capital, while 70% is awarded to wages. The fraction of total income that's awarded to capital is called alpha.
The second identity is a relationship between the average global return on capital (let's designate that by r), and the rate of growth of the global economy (let's call that g). Piketty shows that if r >g, then alpha must get bigger over time. That is, a larger and larger fraction of the global wealth will accrue to capital, with an ever smaller fraction going to wages.
Conversely, if r < g, then the reverse is true--wages will grow relative to capital.
In the former case, r > g, reasonably assuming that rich people own most of the capital, then more and more wealth will accrue to the 1%. The rich will get richer, and the poor, while perhaps not getting poorer, will certainly be getting richer a lot slower. In the latter case, r < g, the premium goes to wages, and so wealth is more evenly distributed across society.
So which is it? The relative values of r and g depend on empirical fact rather than accounting identities. And here Mr. Piketty apparently excels--he has collected extensive data from most of the capitalist world from before the French Revolution to the present. He has found that for most of the last 200-300 years that r > g. The exception has been the period from 1913 to 1970--during that time r < g. His conclusion is that r > g is the normal state of capitalism, while r < g was an aberration that will likely never be repeated.
Today global growth is in the 2-3% range, while the average return on capital is roughly 4-5%. Thus r > g, and accordingly an ever increasing fraction of wealth is accruing to the top 1%. This is certainly true in the US, evidenced by high unemployment, declining labor force participation, and stagnant wages. Piketty argues that global growth can't get much higher. It depends predominantly on two things: population growth (stagnant), and improvements in technology (yielding approximately 1.5%). Growth is as high as it is because of China, but as it becomes fully integrated into the capitalist system its growth rate will slow, taking global growth down with it.
The return on capital has averaged 4-5% over the past two centuries, and barring exceptional circumstances is unlikely to change significantly. So Mr. Piketty forecasts r > g for as far as the eye can see.
The exceptional period from 1913 to 1970 was due to the World Wars (echoing my Trotskyist friends). By destroying so much capital, the return on capital was greatly reduced (perhaps even negative in some years). Further, rebuilding Europe and Asia enabled very strong growth. So, with r < g, this was the heyday of labor, when workers could claim an ever larger share of the pie. Unfortunately, economists coming of age during that time thought that was normal, and that capitalism would inevitably lead to a richer and more equitable society. Mr. Piketty says that's wrong.
Piketty's view is very pessimistic, essentially condemning a large fraction of the population to relative poverty. He suggests that 50% of the population will generally benefit from the trend toward capital, but that the bottom 50% will be losers."
See also the rest of the author's comments. About the last point, Gabriel Palma's views mentioned earlier. the losers are the bottom 40 percent, the top ten percent ain and the the other fifty percent take half the income. from data of about 135 countries http://oxfamblogs.org/fp2p/its-the-share-of-the-rich-stupid-brilliant-inequality-stats-politics-from-gabriel-palma/
P.S. Another note about Palma http://blogs.worldbank.org/publicsphere/inequality-all-about-tails-palma-gini-and-post-2015
P.S. Another note about Palma http://blogs.worldbank.org/publicsphere/inequality-all-about-tails-palma-gini-and-post-2015
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