Why is capital re-establishing dominance over income? Because, Piketty writes, r > g.
In plain English: The return on capital (r) almost always exceeds economic growth (g). Piketty calls r > g an “inequality” rather than a formula because it isn’t “an absolute logical necessity.” Rather, it’s “the result of a confluence of forces, each largely independent of the others.” These include demographics (a rapidly growing population boosts g); the extent to which a country’s economy has matured (China has much higher g than the U.S. and Western Europe because it’s still catching up); and various “technological, psychological, social, and cultural factors” (all of which can cause r to fall). Typically, r is four to five times g, but the ratio gets larger as capital accumulates across generations. The dead—though worse off in most obvious respects than the rest of us—are wealthier than the living. “The past,” Piketty writes, “tends to devour the future.”
Piketty comes to this ghoulish conclusion after more than a decade spent meticulously compiling statistical data about wealth and income all over the world, often with Berkeley economist Emanuel Saez. (Together, the two economists wrote what is without question the most influential U.S. inequality study in a generation, which found that the top one percent had doubled its income share since 1979. Occupy Wall Street’s vocabulary came directly from Piketty and Saez.) France, Piketty observes patriotically, has the most precise records, dating to the French Revolution, when new taxes were imposed on nobles and clergy who’d been exempt from levies under the Ancien Regime. Much of Capital’s analysis, consequently, concerns France. But Piketty also provides extensive historical data from Great Britain, Germany, and the United States. Most of the pleasure in reading Capital lies in following the elaborate wealth and income patterns that Piketty traces through the centuries, blending economic, literary, and historical research. The clearest such pattern is that r really was, at most points in history, greater than g, if only because g was seldom much to write home about, especially back when economies were primarily agricultural. (Inflation, I learned from reading this book, didn’t really exist before the 20th century.)
Why, then, is it news to contemporary readers that r > g? Because for most of the 20th century that wasn’t true: Economic growth surpassed capital accumulation. That happy outcome, Piketty argues, was mainly because of the turmoil that began during the summer of 1914 and didn’t end until the summer of 1945. From the 1930s through the 1970s (and in some instances into the 1980s) the advanced industrial democracies saw their incomes grow more equal, even as the economy took off in the 1950s and 1960s. This is a trend many of us would like to find a way to recreate. But Piketty says it was brought to you by the Kaiser and the Führer, with an assist from some maladroit bankers—circumstances only a lunatic would wish to resurrect...
The big driver of income inequality, Piketty says, isn’t labor income. It’s capital. A series of charts demonstrates this by comparing the extremely high inequality in the U.S. circa 2010 with the extremely low inequality in Scandinavia circa 1970-1990. If you just look at labor income, then income share for the middle class (defined as the middle 40 percent) differs by only five percentage points. Only when you add in capital income does the gap widen to 15 percentage points. Thus far, that probably doesn’t reflect inheritance so much as the tendency of America’s one percent—really, the 0.01 percent, a cohort Piketty dubs “supermanagers”—to receive much of its remuneration in the form of stock options and other capital holdings. Still, the relative consistency of the middle class’ share of labor income was news to me. (It’s still getting smaller, though.)...
It’s always dangerous to project current trends into the future, but here’s one extrapolation I’ll subscribe to: predictions about the future will usually prove wrong. With regard to r > g, lets remember that most of Piketty’s evidence comes from the pre-industrial economy. The industrial and post-industrial economies are only about 150 years old, and for nearly half that time g was greater than r. That almost certainly means we lack sufficient data to determine how, or whether, capital accumulation goes haywire in the coming years.
