Capital in the Twenty-First Century

by Thomas Piketty

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.

Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.

in other words, how should the income from production be divided between labor and capital?

There are many reasons for excluding human capital from our definition of capital. The most obvious is that human capital cannot be owned by another person or traded on a market (not permanently, at any rate). This is a key difference from other forms of capital. One can of course put one’s labor services up for hire under a labor contract of some sort. In all modern legal systems, however, such an arrangement has to be limited in both time and scope. In slave societies, of course, this is obviously not true:

The First Fundamental Law of Capitalism: α = r × β I can now present the first fundamental law of capitalism, which links the capital stock to the flow of income from capital. The capital / income ratio β is related in a simple way to the share of income from capital in national income, denoted α. The formula is α = r × β where r is the rate of return on capital. For example, if β = 600% and r = 5%, then α = r × β = 30%.13

The country is thus caught in an endless alternation between revolutionary governments (whose success in improving actual living conditions for their citizens is often limited) and governments dedicated to the protection of existing property owners, thereby laying the groundwork for the next revolution or coup.

Finally, productivity growth in the service sector has generally been low (or even zero in some cases, which explains why this sector has tended to employ a steadily increasing share of the workforce), so that the price of services has increased more rapidly than the average of all prices.

Interesting

And if the latter country tends to save a little less than the former, perhaps because its population is not aging as rapidly, this mechanism will be further reinforced as a result. In other words, countries with similar growth rates of income per capita can end up with very different capital / income ratios simply because their demographic growth rates are not the same.

There is no better illustration of the maxim “Too much capital kills the return on capital”

it follows that growth is an intrinsically unstable process, balanced “on a razor’s edge.” There is always either too much or too little capital, which therefore gives rise either to excess capacity and speculative bubbles or else to unemployment, or perhaps both at once, depending on the sector and the year.

To give a preliminary idea of the order of magnitude in question, the upper 10 percent of the labor income distribution generally receives 25–30 percent of total labor income, whereas the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth (and in some societies as much as 90 percent). Even more strikingly, perhaps, the bottom 50 percent of the wage distribution always receives a significant share of total labor income (generally between one-quarter and one-third, or approximately as much as the top 10 percent), whereas the bottom 50 percent of the wealth distribution owns nothing at all, or almost nothing (always less than 10 percent and generally less than 5 percent of total wealth, or one-tenth as much as the wealthiest 10 percent).