Well, I just got Capital in the 21rst Century and started in on it. It looks exciting, but I confess to being puzzled by the claim that r>g means that inequality grows inexorably. We have the capital share = r (K/Y), and K/Y in the long run equal to s/g (These are Picketty's "fundamental" equations) where g is the sum of population and per capita output growth rates and s is the net saving ratio . Nothing to quarrel with there. But then the capital share in the long run will be (rs)/g. Then if r and g are constant ( and s as well) -- the capital share remains constant whether r>g or r< g. What am I missing?
Krugman had a blog post where he spells out Picketty's argument that a decrease in g will increase r/g and thus the capital share: r will fall by less than g if, as Picketty argues, production is CES and the elasticity of substitution is greater than 1. That makes sense, but this will be so whatever the initial level of r is relative to g, whether above or below unity.
?Help!
3 comments:
James Galbraith has pointed out that Piketty is too quick to accept measures of aggregate capital and to insert these into serious aggregate production functions for his analysis, while applauding his overall thrust. He notes that out of the long book (which I have paged through but not yet read) he apparently only mentions the Cambridge capital controversies once for a couple of paragraphs, largely to dismiss them. Much of this gets back to his focus on this simple equation to explain nearly everything, and I suspect that he has overdone it, which does not make his empirical analysis of trends wrong.
I do not know conventional economics but have read Piketty with partial understanding. Piketty and Branko Milanovic seem to think this point as obvious. In chapter 10, Piketty gives an illustration (kindle edition and so I do not know the page number): "For example, if g=1%, and r=5%, saving one-fifth of the capital from income (while consuming the other four-fifth) is enough to ensure that capital inherited from the previous generation grows at the same rate as the economy. If one saves more, because one's fortune is large enough to live well while consuming less than one's annual rent, then one's fortune will increase more rapidly than the economy, and inequality of wealth will tend to increase even if one contributes no income from labor."
I think that is in the infinitely long term meaning the capital share approaches the limit from below, inexorable not meaning constant. (DeLong addresses Galbraith's point)
Post a Comment