Introduction Piketty My Biased Opinion

Wealth Inequality

ChangHwan Kim

SOC 760

Introduction Piketty My Biased Opinion

Wealth Inequality: International Comparison

The US is the most unequal country in the world in terms ofincome distribution.

However, the US is NOT the most unequal country in theworld in terms of the wealth distribution.

Introduction Piketty My Biased Opinion

Income Inequality: International Comparison, Gini Index

Introduction Piketty My Biased Opinion

Wealth Inequality: International Comparison, Share of Top10%

Introduction Piketty My Biased Opinion

Wealth Gini vs. Income Gini

Country Income Gini Wealth Gini

US .48 .84UK .34 .66Sweden .26 .89Denmark .25 .81

Source: James Davies (2008) & OECD

Introduction Piketty My Biased Opinion

Wealth Inequality: International Comparison, Share of Top1%

Introduction Piketty My Biased Opinion

Wealth Inequality: US

Saez and Zucman (2016)

Introduction Piketty My Biased Opinion

Piketty’s Capital in the 21st Century

Thomas Piketty

Published in 2013 in French and translated inEnglish in 2014 (and in Korean in 2015)

NYT bestseller. Sold more than 2 million copies.

Bringing “capital” back in discussion.

Introduction Piketty My Biased Opinion

Some background

1 Many belived that the problem in inequality is a problem ofincome inequality.

2 Wealth is relatively unimportant compared to income. (Lookat Sweden and Denmark. They are highly unequal in terms ofwealth, but not so in terms of income.)

3 Then, Piketty argued that wealth inequality is a big problem,because...

Introduction Piketty My Biased Opinion

Key historical arguments1 In the 18th and 19th centuries western European society was

highly unequal. Private wealth dwarfed national income andwas concentrated in the hands of the rich families who satatop a relatively rigid class structure. This system persistedeven as industrialisation slowly contributed to rising wages forworkers.

2 Only the chaos of the first and second world wars and theDepression disrupted this pattern. High taxes, inflation,bankruptcies, and the growth of sprawling welfare statescaused wealth to shrink dramatically, and ushered in a periodin which both income and wealth were distributed in relativelyegalitarian fashion.

3 But the shocks of the early 20th century have faded andwealth is now reasserting itself. On many measures, MrPiketty reckons, the importance of wealth in moderneconomies is approaching levels last seen before the first worldwar.

Introduction Piketty My Biased Opinion

Three Laws

1 Inequality: r > gr , the average annual rate of return on capital is higher thang , the economic growth rate. r is for capitalists and g is forthe general population (assuming a more or less equaldistribution of the economic growth).

2 1st fundamental law of capitalism: α = r × βThe capital’s share in national income (α) is a production ofthe average annual rate of return on capital (r) and the sizeof capital stock compared to the annual national income (β).Conversely, β = α/r

3 2nd fundamental law of capitalism: β = s/gIn the long run, the capital/income ratio (β) is related in asimple and transparent way to the savings rate (s) and thegrowth rate (g).

Introduction Piketty My Biased Opinion

r > g

Introduction Piketty My Biased Opinion

1st fundamental law of capitalism: α = r × β

1 For example, the capital stock in the US is $40.93 tillion.GDP in a year in the US is $16.77 trillion. Thus,β = 40.93/16.77 = 2.44.

2 r = .05, then .05 * 2.44 = 12.2%.

Introduction Piketty My Biased Opinion

2nd fundamental law of capitalism: β = s/g

Introduction Piketty My Biased Opinion

2nd fundamental law of capitalism: β = s/g

Introduction Piketty My Biased Opinion

2nd fundamental law of capitalism: β = s/g

1 Piketty predicted that in the future β will be 6 because theglobal savings rates will stabilize at 10% while the growth ratewill be slowed down to 1.5%. 10/1.5 = 6.7

Introduction Piketty My Biased Opinion

Ratio of Total HH Wealth to National Income

Introduction Piketty My Biased Opinion

Why is the concentration of wealth problematic?

Other things being equal, faster economic growth willdiminish the importance of wealth in a society, whereas slowergrowth will increase it (and demographic change that slowsglobal growth will make capital more dominant).

But there are no natural forces pushing against the steadyconcentration of wealth. Only a burst of rapid growth (fromtechnological progress or rising population) or governmentintervention can be counted on to keep economies from thewealth inequality.

If so, capitalism will return to “patrimonial capitalism” thatworried Karl Marx because the return to capital is a constant(round 4-5% a year) while income does not rise. Yourchildrent won’t rich unless you’re rich.

Solution? Worldwide wealth tax.

Introduction Piketty My Biased Opinion

Capital as a Demography Book

The economic growth rate, g , can be decomposed to thepopulation growth rate and the growth of per capital output.(Check Table 2.1)

Inheritance depends on the number of children. As fertilitydeclines, the concentration of capital is facilitated.

by = µ×m × βthe annual economic flow of inheritance and gifts(by ) is aproduction of the ratio of average wealth at time of death toaverage wealth of living individual (µ), mortality rate (m), andcapital/income ratio (β).

Value of land capital:the large capital gains on real estate is linked to theconcentration of population in particular areas.

Introduction Piketty My Biased Opinion

World Growth: Population vs Output

Introduction Piketty My Biased Opinion

Population Growth Rate

Introduction Piketty My Biased Opinion

I am still optimistic.

Why?

Our political system is still democratic. People value it.

“everything (=the relation between r and β) depends on therange of technologies available to combine capital and laborto produce the various types of goods and services thatsociety wants to consume.” (p.216)

the elasticity of substitution between labor and capitalmatters. It is hard to imagine capital(=robots) cancompletely substitute labor. As long as they arecomplementary, the portion goes to labor can rise.

That is, r can be lower.

Introduction Piketty My Biased Opinion

Again I am still optimistic.

IT might be a general technology like electricity; internalcombustion engine, and indoor plumbing.

Tractor substituted more than 90% of work force in the early20 century, but we are still working. The long-run elasticity ofsubstitution of capital for labor may not be fixed to 1+.

Steam engine was invented in the late 18th century, but therapid economic development started only from the mid 19thcentury. We experienced the rapidest economic growth in the20th century.

That is, g can be higher in the future.

Introduction Piketty My Biased Opinion

Piketty’s Utopia

“an ideal society in which all other tasks are almost totallyautomated and each individual has a much freedom aspossible to pursue the goods of education, culture, and healthfor the benefit of herself and others. Everyone would be byturns teacher or student, writer or reader, actor or spectator,doctor or patient.” (p.308)

Introduction Piketty My Biased Opinion

Piketty’s Utopia

“we are some extent already on this path: a characteristicfeature of modern growth is the considerable share of bothoutput and employment devoted to education, culture, andmedicine.” (p.308)

Piketty discussed his ideal society in a chapter subtitled “TheRole of Institutions.”

I argue that capital is not only an accounting entity, but aninstitution which practices its power in firms, school, politics,law and etc. r is at least partially determined by politics.

I believe sociologists can contribute in revealing theinstitutional aspect of capital. Piketty’s Capital is still a workof neoclassical economics, and not political economic enough.