French Economist Thomas Picketty has published a new tome touted by the left entitled Capital in the Twenty-First Century. I picked up this book (downloaded the Kindle version, actually) because I simply could not believe what the progs were saying about it, which is that Picketty claims that, if the average return on capital (r) exceeds the rate of growth of the economy (g), then wealth inequality increases.
I read this and said to myself, “Self, these fool progs obviously cannot understand what this man is talking about. It is obvious that he must mean the growth in the valuation of the economy; that is, of all the capital goods in the economy.” This is, of course, quite obvious. If the average annual return on capital investments is 5%, but the total valuation of the capital of the economy increases 6% per year, then someone besides the original investors must own that newly created 1%. And if the total valuation of all the goods in the economy only goes up 4%, then the investors must be getting their extra 1% from someone else, and wealth inequality will increase.
Alas, the progs were right, and Picketty’s hypothesis, which they swallowed hook, line, and sinker, is a total dud. He really is using the wrong growth rate for comparison.
A simple example can illustrate the problem. Let us assume that economic output (GDP) does not grow from one year to the next. But the economy does still have output. It is still producing durable goods — cars, televisions, houses, etc. If the production of those goods is greater than the depreciation of existing goods (cars, televisions, and houses eventually wear out and are replaced), then the total valuation of the goods in the country increases. If that valuation increases more than the return on the capital invested to create them, then wealth inequality must decrease, even with no growth in output.
Still, Picketty’s tome is valuable for the data it presents. It will also be used as a tool for the progs to argue for a wealth tax (as Picketty recommends). Thus, the work is important because one must understand its premise, the data it presents, and the flaw in Picketty’s logic, so that one can successfully counter the arguments the progs will make based on this work. Thus, I will endeavor to write several posts on this book, one section at a time.