CAPITAL, GROWTH AND INEQUALITY IN PIKETTY'S APPROACH. A CRITICAL REVIEW

Abstract

The paper is a critical review of Piketty’s book “Capital in the XXI Century”. The 950 pages of the French original, and the 696 pages of the English translation, are packed with so many topics, insights, comments and observations that affect almost all spheres of economics, that no single review can summarize them. This review will focus mainly on the factors which can explain the trends regarding the concentration of wealth and of personal income distribution. It will also present some features of the theoretical framework and discuss some of the aspects which can be considered weak from an analytical and methodological point of view. Piketty uses simple economic models to investigate how the ratio between the saving rate and the growth rate of the economy determines the capital-output ratio, and consequently the share of capital in the national income. When the rate of returns on capital rises more quickly than the overall economy and taxes on capital remain low, a vicious circle of ever-growing dynastic wealth, and growing inequality takes place. “Capital is back because low growth is back”. Using the best available historical data, Piketty shows how the capital-output ratio, the capital share in national income, and the rate of return on capital, has evolved over time. Piketty discusses the changes observed, what the main social and economic forces at work are, why these forces change over time, and what we can predict about how the rate of return on capital will evolve in the twenty-first century. The last chapters discuss some policy proposals. Piketty claims that inequality is the result of policies. Only “good” policies can reverse a trend of rising inequality. It is necessary to introduce alternative policies because the composition of wealth is heterogeneous. Piketty suggests a progressive wealth tax on a global scale, based on the automatic exchange of bank information, not only as “useful utopia”, but as a proposal to think about and to discuss. In particular it would be necessary to adopt a progressive taxation on wealth on a worldwide level.