Picking Piketty Apart (3) Caital/Income Ratio

Part 2 of Capital by Thomas Piketty is called The Dynamics of the Capital/Income Ratio.

Piketty measures capital (a stock) in terms of national income (a flow).
In the early 19th century, capital was dominated by land. By 1910, land was unimportant and the capital of firms incredibly important. Public wealth is insignificant, because most assets balanced by debt.

In Europe, the Capital/Income Ratio was 700% from 1700 to 1910. It dropped to 3000% between 1915 and 1950. It has been rising slowly since then to reach 400%.

The United States was more stable. The Capital/Income Ratio was about 450% from 1870 to 1925. It dropped to 350% from 1930 to 1970 It has risen slowly since then to above 400%.

Piketty argues that Capital/Income Ratios will return to the level that prevailed in the 19th Century.

He then goes on to look at the split in income between labour and capital.

Capital’s share of income was on the order of 35-40% in both Britain and France in the late eighteenth century and through the nineteenth, before falling to 20-25 in the middle of the twentieth century and then rising again to 25-30% in the mid-twentieth and early twenty-first centuries.

Piketty is very thorough. He lists numerous factors that may modify the results he is predicting. He provides a clear explanation of most of these issues.

• Land Value
• Durable goods
• Valuables
• Foreign Assets
• Tobins Q
• Cobb Douglass production function
• Foundations
• Public wealth
• Slaves
• National accounts
• Retained earnings
• Mixed income
• Sovereign Wealth Funds
• Marginal Production