Tuesday, July 08, 2014

Piketty (9) r>g

The implication of Piketty's two laws is that if growth (g) is slower than the rate of return (r) ie r>g, and saving rates will remain high, then the capital/income will increase. This leads to increased inequality.

For example, if g=1% and r=5%, saving one-fifth of the income from capital (while consuming the other four fifths) is enough to ensure that capital inherited from the previous generation grows at the same rate as the economy (351).
The basic point of these two laws is that if r>g it is easy for those with existing wealth to grow their wealth faster than the economy is growing. As wealth is unequally distributed, this increases inequality.

When growth is faster, it becomes easier for holders of wealth to save a much greater share of their return on capital and grow their wealth faster than the economy is growing.

β=s/g implies that the capital/income ratio will increase significantly in the twenty-first century, as we return to the equilibrium for a low growth economy with a savings rate of about 12 percent. r>g suggest that most of this new capital will go to the holders of existing wealth.

If the increase in wealth goes to those who already hold wealth, the mass of the population, who own no wealth is left to share out the remainder amongst themselves.

The reason the accumulation of wealth is a problem is that the existing distribution of wealth is so unequal. I will say more on this in future posts, but the fact that wealth begats wealth is not the problem. The problem is that wealth is so unevenly distributed that only a few benefit from the accumulation of capital.

There are two important questions that Piketty does not answer.
  1. Why do so few families own any capital, beyond their residential dwelling, which is not really capital at all?
  2. Existing wealth is distributed unequally. Is this legitimate or not?

No comments: