Many conservatives, dismissive of Piketty have taken issue with his extrapolation of R>G. Even reviews of him that are less hostile have tended to be rather impressed with this central tenet of R>G. Here is David Glasner who seems to Piketty a reasonably fair hearing:
"But I would also add a cautionary note that, because the population of individuals and publicly held business firms is growing, comparing the composition of a fixed number (400) of wealthiest individuals or (500) most successful corporations over time may overstate the increase over time in the rate of turnover, any group of fixed numerical size becoming a smaller percentage of the population over time. Even with that caveat, however, what this tells me is that there is a lot of variability in the value of capital assets. Wealth grows, but it grows unevenly. Capital is accumulated, but it is also lost."
P.S. To an extent R>G is not hard to understand. Naturally when someone begins an entrepreneurial venture, they hope to make enough money to the point where their money makes money for them. For teh poor their money is constantly subject to Zarathustra's Spirit of Gravity: the tendency is always for what meager money they have to dissipate.
At some point a fortune gets to a point where the force of inertia works the other way and the Spirit of Gravity seems to increase one's money rather than the much more typical reverse. If your own personal return to your money isn't more than the growth rate this basically means you're not gaining ground. So I even might believe that there could be a need for this as incentive for taking on risks in the first place.
UPDATE. Piketty does refer to R>G as a contingent, historical fact. Still, even if this is true, it's very striking how rare have been the societies that it hasn't held. Basically just the shocks of two world wars and a worldwide depression in which the return on capital precipitously fell-1914-1945-and then the period where Europe recovered from these shocks-1946-1980-and while the return on capital recovered, the growth rate was just for this one period even higher than the return on capital-but this was catch up growth for Europe and Japan vs. the U.S.
UPDATE: An important caveat though is that while according to him, the historical return on capital has been 4-5%, this is before taxes. Until the 20th century, these taxes were quite low in the developed world, however, today they are not negligible.
"But I would also add a cautionary note that, because the population of individuals and publicly held business firms is growing, comparing the composition of a fixed number (400) of wealthiest individuals or (500) most successful corporations over time may overstate the increase over time in the rate of turnover, any group of fixed numerical size becoming a smaller percentage of the population over time. Even with that caveat, however, what this tells me is that there is a lot of variability in the value of capital assets. Wealth grows, but it grows unevenly. Capital is accumulated, but it is also lost."
"Does the process of capital accumulation necessarily lead to increasing inequality of wealth and income? Perhaps, but I don’t think that the answer is necessarily determined by the relationship between the real rate of interest and the rate of growth in GDP."
http://uneasymoney.com/2014/06/19/further-thoughts-on-capital-and-inequality/
I think R>G is a lot more impressive than Glasner seems to think. Incidentally, I think he misses the mark here:
"Many people have suggested that an important cause of rising inequality has been the increasing importance of winner-take-all markets in which a few top performers seem to be compensated at very much higher rates than other, only slightly less gifted, performers. This sort of inequality is reflected in widening gaps between the highest and lowest paid participants in a given occupation. In some cases at least, the differences between the highest and lowest paid don’t seem to correspond to the differences in skill, though admittedly skill is often difficult to measure.
"This concentration of rewards is especially characteristic of competitive sports, winners gaining much larger rewards than losers. However, because the winner’s return comes, at least in part, at the expense of the loser, the private gain to winning exceeds the social gain. That’s why all organized professional sports engage in some form of revenue sharing and impose limits on spending on players. Without such measures, competitive sports would not be viable, because the private return to improve quality exceeds the collective return from improved quality. There are, of course, times when a superstar like Babe Ruth or Michael Jordan can actually increase the return to losers, but that seems to be the exception."
I notice that often when when the subject of 'winner take all' society comes up the conversation is steered towards sports-others move it to music, actors and celebrities in general-but what Piketty actually shows is that in the top levels of income the percentage of that level made up of sports stars or Hollywood actors, etc. is pretty small, no more than 5 percent. This doesn't mean that athletes don't make a lot of money but just that there are very few athletes this talented in the world. In truth they are something of a special case not really comparable.
Comparably those in finance are 20 percent in the top 1% income level. When discussing 'Winner Take All' in today's society-which is primarily an American-and British phenomenon, and to a lesser extent, an Anglo-Saxon phenomenon-what has driven it is not about athletes, but the rise of the supermanager, the super high earning CEO of both financial and nonfinancial firms.
I have to disagree with Glasner here: I find the occurrence of R>G much more impressive than he does-or most reviewers of Piketty.'
UPDATE: Actually, it seems that Glasner misonstrues R>G here: R is not the real interest rate but the overall return to capital. I don't think this is one in the same thing.
Unlearning Econ documents many of the lies that have been told about Piketty-one of the big ones being that he claims that R>G is a law:
"The claim: Piketty's 'fundamental laws of capitalism' are not fundamental at all."
"The reality: Although calling them 'laws' is misleading, at no point does Piketty claim that his laws are inviolable. They are instead tendencies (with the exception of the first law, which is just an accounting identity) which push capital's share of income in a certain direction over time, but can be counteracted by any number of things, and only take hold over a long timespan."
"Piketty's second law states that the capital/income ratio equals the savings rate over the rate of growth, or β = s / g. Krussel & Smith (KS) interpret this as a straightforward equality, but Piketty makes it clear this is not the intention:
"...this is an asymptotic law, meaning that it is valid only in the long run: if a country saves a proportion s of its income indefinitely, and if the rate of growth of its national income is g permanently, then its capital/income ratio will tend closer and closer to β = s / g and stabilize at that level. This won’t happen in a day, however: if a country saves a proportion s of its income for only a few years, it will not be enough to achieve a capital/income ratio of β = s / g."
"The law is supposed to tell you how the capital/income ratio will change for a given savings rate and growth rate, rather than what its value will be at any one time."
"Piketty's "fundamental force for divergence [of income/wealth]" (not sure why this isn't called his third law) states that the rate of return on capital will exceed the rate of growth, increasing inequality over time, or r > g. A common misconception is that 'r' represents some sort of rate of growth for capital, but it actually represents the returns to ownership of capital in a given year. If growth is low, and the returns to capital are high, then accrued wealth from these returns will begin to dominate other income. It is not required that the returns themselves grow for this to happen. Again, Piketty is aware that empirically, r > g "is a contingent historical proposition, which is true in some periods and political contexts and not in others".
What's more, Piketty's version of his third law is not the same as the popular interpretation that seems to be floating around, characterised by Dan Kervick as “r > g, therefore disaster!” For Piketty, r > g is only a necessary, not a sufficient condition for inequality to increase: if r is "distinctly and persistently" greater than g, this is a "powerful force for a more unequal distribution of wealth". As he makes clear, other things can offset this effect."
http://www.pieria.co.uk/articles/perverting_piketty
Actually, Kervick misses the point here too in saying that if R>G, then disaster. First and foremost it's simply a historical fact. In fact, what is striking to me, and what I do find impressive is that even if R>G is not to be called a law and Piketty takes pains to emphasize it's not a logical necessity just a tendency, it's a very pervasive tendency throughout the history of human societies. Those instances where we have not seen R>G are the-very-special cases. According to him basically the period between 1914 to 1980 and that's about it. In the period 1914 to 1945 this was due to the shocks of two world wars and a very sharp worldwide depression. In the 1946 to 1980 period it was driven by an unprecedented rate of growth even as the return on capital recovered.
So it's not simply R>G, then disaster as this has been the rule throughout most of human history. I must say, if we're not allowed to call this a Law-and Piketty himself doesn't believe we should-it's still notable that this tendency has held so widely, almost universally in the history of human society. It's been much more reliable than many things that your typical Neoclassical mainstream economist is willing to call a law-like EMH or the tendency to equilibrium.
A very obvious question is why has this held up so often throughout history? Part of the answer is that throughout most of human history, until about 1700, economic growth was virtually nil.
Even since the Industrial Revolution of the 19th century it's still over the long hall only been about 1.5%-as we noted above, only in the 1946-1980 period was growth so high that it outstripped the return to capital.
As Piketty notes, historically throughout history, the return to capital was always 10 to 20 times greater than growth. He also notes that to a large extent this fact is the very foundation of society itself, it's what allowed a class of owners to devote themselves to something other than their own subsistence.
https://read.amazon.com/?asin=B00I2WNYJW
This is probably the basis of human progress-the ability to devote oneself to something other than one's own subsistence. It's what is perhaps the big hope of modern economics-to see how many can achieve this-what Neoclassicals call 'leisure.' Marxism thought that the answer should and could be everyone but what's certainly become clear since Marx is if this is so it's not at all easy to achieve regardless of your system in place.
So to a large extent if R is going to again run so far ahead of G this would just be a return to a very old historic norm. So what might be able to arrest this tendency? I haven't finished the book yet-am just 45% through according to Kindle-but it's clear that in the American case-and British-Piketty thinks that a big part of the tremendous rise in CEO pay was the steep drop in income taxes for the rich in both countries-prior to 1980 both countries had virtually confiscatory tax rates on the top.
Of course, this is just the U.S.-and Britain-and if anything this rise huge rise in labor income for the supermanager is tangential to his main point: as the rise in their pay is still labor income it doesn't even bear on R>G which he actually sees as increasing more in Europe.
Anyway, I will keep you posted on other thoughts that occur to me as I read, but I will say that no matter what you think of R>G, it's pretty impressive that this tendency has held so long and so widely. It's not surprising that many may find this tendency very off putting and not want to discuss it as conservatives along with many others clearly don't.
At some point a fortune gets to a point where the force of inertia works the other way and the Spirit of Gravity seems to increase one's money rather than the much more typical reverse. If your own personal return to your money isn't more than the growth rate this basically means you're not gaining ground. So I even might believe that there could be a need for this as incentive for taking on risks in the first place.
UPDATE. Piketty does refer to R>G as a contingent, historical fact. Still, even if this is true, it's very striking how rare have been the societies that it hasn't held. Basically just the shocks of two world wars and a worldwide depression in which the return on capital precipitously fell-1914-1945-and then the period where Europe recovered from these shocks-1946-1980-and while the return on capital recovered, the growth rate was just for this one period even higher than the return on capital-but this was catch up growth for Europe and Japan vs. the U.S.
UPDATE: An important caveat though is that while according to him, the historical return on capital has been 4-5%, this is before taxes. Until the 20th century, these taxes were quite low in the developed world, however, today they are not negligible.
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