I want to turn your attention to an interesting post at The Economist’s blog. It seems that an MIT grad student (and blogger!) has mounted a very credible counter-argument to Thomas Piketty’s thesis on capital and wealth, expressed in Dr. Piketty’s best-selling book, Capital in the Twenty-First Century, that captured so much attention last year. Here’s the substance of the post:
In his book, Mr Piketty argues that over the long run the rate on return of wealth exceeds economic growth: a dynamic summed up in the equation r>g. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labour (everyone else) falls. He also argues that the return on capital in recent history has been remarkably stable, even as economic growth has fallen, and that this trend will continue in the future.
Mr Rognlie mounts three main criticisms of these arguments. First, he argues that the rate of return from capital probably declines over the long run, rather than remaining high as Mr Piketty suggests, due to the law of diminishing marginal returns. Modern forms of capital, such as software, depreciate faster in value than equipment did in the past: a giant metal press might have a working life of decades while a new piece of database-management software will be obsolete in a few years at most. This means that although gross returns from wealth may well be rising, they may not necessarily be growing in net terms, since a large share of the gains that flow to owners of capital must be reinvested.
Second, Mr Rognlie’s research suggests that Mr Piketty has overestimated how high the returns on wealth are likely to be in the future. These should also decline over time, he reckons, unless it is very easy for the economy to substitute capital (like robots) for workers. Yet the historical evidence suggests that this is far harder than he suggests.
And third, Mr Rognlie finds that the growing share of national income deriving from capital income has not been distributed equally across all sectors. The return on non-housing wealth, in fact, has been remarkably stable since 1970 (see chart). Instead, surging house prices are almost entirely responsible for growing returns on capital.
There’s more at the linked post.
If you’re the sort of person who skips to the end of a mystery story to find out whodunnit, in Mr. Rognlie’s view the culprit is homeowners rather than “top-hatted capitalists or famous hedge-fund managers” who are responsible for the phenomena Dr. Piketty has pointed out. Which is another way of saying how terrible our policies have been over the period of the last 60 or 70 years but that’s a subject for another post.