Explaining Piketty’s argument

This new book of Thomas Piketty’s, Capital in the 21 st century. There’s a terrific chart at the New Yorker explaining the whole argument.

piketty

So, just to recap his basic argument. If the return to capital is above growth then wealth becomes more concentrated, inequality rises. If growth is above the return to capital then inequality falls.

OK, pretty basic.

But look at that assertion! All is going to be woe for the rest of the century because the return to capital has blipped above growth a couple of years ago and I’ll project that out for 87 years. Or, perhaps, I’m predicting that it will in a few years and continue to get worse.

And someone seriously is predicting this when we’re in the middle of a vast technological revolution based upon computing and telecoms? Seriously?

 

16 comments on “Explaining Piketty’s argument

  1. Why oh why oh why can’t people put dotted lines for their projections?

    It’s almost as if they *want* people to get confused about what is factual record and what is hypothetical projection!

  2. Thomas Piketty is a French intellectual. We can apply Daniel Kahneman’s hypothesis of fast and slow thinking to him. Piketty’s group identity (Catholic/Marxist) produces a gut reaction (System 1) of “Soak the Rich”. He then devotes his considerable research abilities, which no one denies (System 2), to explaining over hundreds of pages why we should soak the rich. Confirmation bias in all its glory.

  3. I was also puzzled by 1820-1913 showing steadily declining returns to capital.

    I can believe that 1820 was high and 1913 low (inflation and taxes starting to kick in), but I’d guess that drawing a straight line between the two hides something rather different.

    That was the era of industrialisation, mechanisation and globalisation so I’d have expected returns to capital to be high for most of that period and then to fall off a cliff once governments started buggering it up.

    Certainly that was the time when lots of people got very wealthy from businesses and investment (rather than Royal favours, land grants and monopolies), or perhaps it’s just my Lancastrian roots making me think of mills.

  4. Why would an increase in return to capital lead to inequality? Corporations are owned by the masses. The Age of Robber Barons ended a hundred years ago.

  5. Perfectly believable extrapolation.

    Green parties comes to power across the west in the near future. Industrialisation is put into reverse. The conditions prior to Capitalism resume (sometime between 1700 and 1820 on the chart).

    What’s not to like?

  6. Richard, on 1820-1913, why should a period of growth and industrial progress be good for capital rather than, say, t’workers? The stuff you invest in keeps getting out of date and t’workers keep asking for pay rises.
    Stagnation and lack of competition
    Is probably better for capitalists. (Like our host, I am not treating “free market” as a synonym for “capitalist.”)

  7. What the heck happened in 2012 that caused such a reversal of centuries of steady increase, is this based on the Mayan Long Count or something?

  8. Have to agree with TDK (#9) – albeit for slightly different reasons.

    I’d be interested to see independent estimates for the progress over the next 80/90 years of the existing ‘Courageous States’, Cuba and North Korea (assuming the current regimes remain in situ) – if Murphy’s ideas are implemented in the UK and EU(and momentum seems to be with him sadly) then technological progress will collapse and the income distribution should revert back to pre – Industrial levels in fairly short order as powerful disincentives lead to mass emigration and those unfortunates left atrophy in economic terms.

  9. “Pellinor
    March 27, 2014 at 11:21 am
    Why oh why oh why can’t people put dotted lines for their projections?”

    Or better still a fan chart like BoE uses for inflation forecasts.

  10. It isn’t because we have reached the end of technological progress because, measured by things like Moore’s Law or increases in strength of materials, progress is far faster than at any time inn human history.

    Rising graphs like that are indicative of being at the foot of an S curve – human wealth should be increasing not just at the 1913-1950 rate (which would mean 6% annual growth now – pretty much what the non-EU/US countries are doing) but well above it – a bit speculative but at least 12% seems likely looking at the increasing of the slope between 1820-1913 & 1913-1950. Had we had growth of 6% average over the last 62 years we would all be 4 times better off. If we had had growth starting at 3% and rising to 12% (ie averaging 4.5% ahead of reality) we would ALL average 16 times better off.

    The only reason we know of to explain that is the growth in state regulatory parasitism. I have also noted the same tailing off of growth in nuclear power where, had the pre-1980 trend continued we would now all have at least 4 times as much power and be 4 times wealthier. Government parasitism has banned cheap power; it has banned cheap GM foods, it has destroyed at least 75% of the economy we could have had. And so on.

    http://a-place-to-stand.blogspot.co.uk/2014/03/more-staistical-proof-recession-is.html

  11. @ Neil Craig
    You have omitted the requirement for companies to have remuneration committees which then commission independent reports and want to pay their CEO at top quartile levels because they want a top quartile CEO. Now you and I can see that only one in four CEOs can be top quartile so this means that three-quarters of CEOs will be overpaid in year 1 of the new policy but in year 2, almost all CEOs are getting top-quartile pay so the new standard for pay approaches top-sixteenth and roughly nine-tenths of CEOs are overpaid, then in year 3 companies up the pay they are offering to the handful who actually deserve their salaries and the top of the salary scale rises.
    Repeat every three or four years and you get obscene salaries. When overpaid asset managers start to say that the pay of the CIO of Pimco is “Grossly indefensible” (at getting on for 100 times the pay of the CEO of the parent company, despite some lousy performance recently) we all know that something is wrong.

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