A review here.
High elasticity of substitution is necessary to make r remain relatively stable in the face of an increase in the K/Y
ratio. The extreme example is a society where the entire output is produced by robots. The returns will go entirely
to the owners of robots and factoral income distribution would be 100% capital, 0% labor. Piketty (Chapter 6, p.
343) mentions this possibility. Generally speaking, Piketty tends to believe (Chapter 6, p. 350) that the “volume
effects” (increase in K in this case) tend, in the long-run, to dominate the “price effects” (decrease in r).
That cannot actually happen.
Well, it can, if we measure income as the amount of money you get. But that’s not a useful definition of income: what is a useful definition is what you can consume. And if the robots are producing everything then everyone gets to consume great gobs of stuff: because there’s great gobs of stuff to consume. Thus incomes are high: even if you don#t own a robot.
This is good too:
Even if we disregard these problems, Piketty’s calculations refer mostly to market income, that
is income before government transfers and taxes. It is quite possible that an increased concentration of
market income (such as Piketty and Saez report for the United States) is not accompanied by increased
concentration of disposable income if taxes and transfers have become more redistributive. 19 It could
even happen that disposable income inequality declines. It did not happen in the case of the United
States, as we know from the detailed work by Burkhauser et al. (2012) who have compared non-topcoded
US household surveys with Piketty’s results. 20 But such a divergent movement cannot be
excluded in principle.
And there’s a philosophic problem I have with the basic thesis. Piketty is taking it as read that a world in which people do not have to work is a bad one. Therefore he is describing what must be done to make sure that no one can indeed not work for a living.
Myself I’d describe a world free from the curse of the drinking classes as a rather good one. Take it to the extreme: the robots do everything, there’s vast amounts of gubbins for all to consume and, umm, what’s wrong with this vision of being free of Adam’s Curse?
I think we’d find pretty much anywhere in Europe that disposable income inequality (or consumption inequality) is nowhere near Victorian levels. Simply because we do have redistribution.