I will confess that I haven’t read Thomas Piketty’s notorious new book. It is on my long list of things to do. So my comments are based on what I have heard others say about it, rather than a direct read. Nevertheless, I do have things to say.

Certainly, I share with him a general concern about inequality; as I have said, I think too much inequality is bad because of its social effects and because it tends to restrict growth.

However, I disagree with Piketty’s diagnosis of the cause and hence his prescription (a global wealth tax).  I don’t think it’s nearly as simple as he makes out and in particular I don’t agree that it’s about a difference between the rates of return on capital and labour.  One of the features of twenty-first century capitalism is  low capital rents as a result of very high asset prices. Capital assets generate returns for their owners not through income but through capital gains. For ordinary people, savings give a poor return.

My other quibble with Piketty as summarised by the pundits (which may not be borne out following a full reading) is that he hasn’t considered demographics.  Globally, rather than regionally, we are coming to the end of a baby boom.  Labour costs on a global scale are low because of the bulge in China’s working-age population which will start to contract rapidly over the coming decades as the little princes of the one-child generation leave the workforce. This will shift the balance of power towards labour.  We will see a similar process in the West, sooner: our ageing population needs lots of local labour to care for it.  We didn’t need local labour to supply our needs in a consumer society – cheap Chinese labour made the stuff we bought – but we will need local labour to empty our bed-pans.


2 comments so far

  1. ejoftheweb on

    As anticipated, I will have to revisit Piketty. I have now started reading Capital in the 21st Century.

  2. ejoftheweb on

    “If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high.” My point here is: an above-trend rate of return on capital must be illusory, therefore only inflation can create it. Loose monetary conditions lead to this above-average rate of return, which arises from inflation of the value of the capital asset not from the rents it generates. On average, capital can only generate rents in line with economic growth. Aggregate capital rents must equal growth. <<< there is an identity here but I don't think it's quite these two quantities.

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