Economics: Thomas Piketty and the search for ‘r’

Michael Roberts will be reviewing this book

by Michael Roberts

Just about every man and woman and his dog has reviewed French economist Thomas Piketty’s magnum opus, Capital in the 21st century.  Most reviews are laudatory (but not all) and most reviews are superficial (but not all).  “A watershed in economic thinking” Branko Milanovic; “could change the way we think about the past two centuries of history” The Economist; “a defining issue of our era” John Cassidy, New Yorker and so on.

I am not going to review Piketty’s book here as I have been asked by the Historical Materialism journal to do a review and I don’t want to steal the thunder from that.  But as that won’t be published for some time, I can’t resist posing a few questions for everybody to consider if they plan to read the 677 pages plus a myriad of statistics and charts offered by Piketty.

The book’s title immediately suggests a reference to Marx’s Capital, written in the 19th century. By implication, Piketty sets out to deliver an analysis of capitalism relevant to the 21st century as an improvement on Marx.
So here are the questions.

Piketty’s definition of capital is different from that of Marx.  Is Piketty’s better, more realistic and appropriate or is Marx’s?  Does it matter?

Piketty presents “two fundamental laws of capitalism”.  Piketty’s laws are different from Marx’s laws of motion of capitalism.  Are they realistic and more compelling in explaining capitalism in the 21st century?

Piketty’s main thesis is that inequality of wealth will grow as the share of income in an economy going to capital rises faster than national income increases.  This will happen if the net rate of return on capital (r) rises faster than the nominal rate of national income growth (g).  Is he right?

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What is this r, how do we measure it and is it a realistic category?  I challenge the reader to search for Piketty’s r and the data behind it.

Piketty says r and g are independently determined and exogenous to his model of capitalism.  Is it realistic to assume that the rate of return on capital is not affected by the rate of growth in an economy, or vice versa?

Piketty says that, over centuries, r is pretty much steady at about 4-5%.  How does Piketty reach this conclusion?  Does he explain? Marx would not agree that the rate of profitability in capitalist economies has not moved much?  Is Marx wrong and Piketty right?

Piketty says, as r is steady, the only swing factor is g and he forecasts that the growth of national income will fall below r during the 21st century and thus inequality will rise further.  Is he right about g slowing down while r stays steady?

Piketty uses the neoclassical aggregate production function model to make forecasts about future growth in an economy?  Is this robust and realistic?

Rising inequality is the issue for 21st century capitalism for Piketty.  But what about booms and slumps and the recurrent breakdowns in capital accumulation?  What does Piketty have to say about those in relation to his ‘fundamental laws’?

Piketty suggests policy solutions to the rising inequality of wealth.  Are they appropriate and realistic?

My review will try to answer these questions.