Picking Piketty Apart (11) Push-back

Piketty's analysis has been challenged by various economists.

1. Rate of Return
Some economists have questioned his suggestion that the rate of return on capital is consistently above 4 percent.

Lawrence Summers argues that the largest single component of capital in the United States is owner-occupied housing. The return comes in shelter services which are consumed.

Robert P Murphy says that Piketty confuses the rate of return with the rental price of capital. He bases his critique on Eugen Böhm von Bawerk who wrote Capital and Interest (1881).

2 Savings
There have been debates about whether savings rates are as high as Piketty claims.

Debraj Ray argues that r>g has nothing to do with whether equality goes up or down. The key force driving rising inequality is “the savings propensities of the rich.

The owners of capital income also happen to be richer than average, and richer people can afford to (and do) save more than poorer people. But that has to do with the savings propensities of the rich, and not the form in which they save their income. A poor subsistence farmer with a small plot of land (surely capital too) would consume all the income from that capital asset. It may well be that the return on that land asset exceeds the overall rate of growth, but that farmer’s capital income would not be growing at all.

This is probably correct, and all that is needed to explain the inequality of wealth.

I expect there will be continuing debate about the economic explanation provided by Thomas Piketty.

I do not think we can be too certain about what will happen in the future. As g declines, the rate of return on capital (r) could decline. If the fall n growth is serious, savings rates could decline too. If either of these happened, Piketty’s prediction would fail.

In some ways, the debate about r>g is irrelevant. A variety of economic, social and legal factors affect the share of national income going to the owners of wealth. Attempting to explain this with two equations is overly ambition.

However, there is no doubt that wealth is currently very unequally distributed. Understanding why this has happened will require a great deal more economic, social and legal analysis.

Arguing about r>g will be a distraction from the real work that needs to be done.