Piketty: “[the powerful force behind rising income and wealth inequality in the US since the 1970s] has little to do with r>g.”

Much of the discussion about Thomas Piketty’s Capital in the Twenty-First Century has been concerned with his “law” of the relationship between the rate of return on capital (r) and the rate of economic growth (g), known as r > g. To such an extent that the Initiative on Global Markets at University of Chicago asked its panel of economic experts whether they agreed or not with the statement:

IGM Economic Experts 2014 Inequality and r versus g

The experts overwhelmingly disagreed.

Piketty’s reply in Slate was:

“I think the book makes pretty clear that the powerful force behind rising income and wealth inequality in the US since the 1970s is the rise of the inequality of labor earnings, itself due to a mixture of rising inequality in access to skills and higher education, and of exploding top managerial compensation (itself probably stimulated by large cuts in top tax rates), So this indeed has little to do with r>g.”

And he did indeed write e.g.:

“In short, two distinct phenomena have been at work in recent decades. First, the wage gap between college graduates and those who go no further than high school has increased, as Goldin and Katz showed. In addition, the top 1 percent (and even more the top 0.1 percent) have seen their remuneration take off. This is a very specific phenomenon, which occurs within the group of college graduates and in many cases separates individuals who have pursued their studies at elite universities for many years. Quantitatively, the second phenomenon is more important than the first. In particular, as shown in the previous chapter, the overperformance of the top centile explains most (nearly three quarters) of the increase in the top decile’s share of US national income since 1970. (p. 315)”

So why did the IGM ask this question in the first place? And why have so many economists been concerned with it? It is of course possible that they have not read the book. However it might also be the case that Piketty must take some of the blame and that in general it was not so clear in the book. At least the back cover text (on Amazon) is pretty ambiguous (though I hope the critics read more than that).

I should maybe disclose at this point that I have not read  Capital in the Twenty-First Century either, although now I might have to.



One thought on “Piketty: “[the powerful force behind rising income and wealth inequality in the US since the 1970s] has little to do with r>g.”

  1. Pingback: Review: Capital in the 21st Century by Thomas Piketty | Ø-blog

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