Nit Piketty (18) Flaw in Capitalism

Piketty thinks that he has found a flaw in capitalism: the fact that the return on capital is greater than the growth rate of the economy. He attributes the increasing inequality to a flaw in capitalism. The key is r>g. He writes,

The overall conclusion of this study is that a market economy based on private property, if left to itself contains... powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based.

The principal destabilising force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g.

The inequality r>g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental local contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labour. Once constituted, capital reproduces itself faster than output increases. The past devours the future.

The consequences for the long-term dynamics of the wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake and that the divergence in the wealth distribution is occurring on a global scale.

r>g is not a flaw of capitalism. It reflects the nature of the world. Capital makes people more productive. This makes everyone better offer off, including labour.

Therefore increasing the capital income ratio is good. The question is who benefits. It seems reasonable that those who do the saving should benefit most. They should benefit more than those who did not save.

Piketty grudgingly seems to accept this reality, but then moves quickly on to attacking inheritances.