027: Review of Thomas Piketty’s CAPITAL IN THE 21ST CENTURY, Part 1: Summary

In this part one of our review of Thomas Piketty’s Capital in the 21st Century, we cover the book in detail and summarize its arguments and conclusions. In the next part, to be released next week, we will look at Piketty’s ideas from the point of view of speculation and futurism, and consider some of the criticisms of the book. But this part will cover the book’s basic ideas about how to measure and talk about inequality, its data sets, the illusion of meritocracy, “Vautrin’s lesson” from Balzac’s Pere Goiriot, and will explain the relationships Picketty theorizes among the capital-income ratio, the rate of return on capital, and the growth rate of the economy, as well as the savings rate.

Some of the formulas mentioned in the podcast might be easier to see spelled out:

First Fundamental Law of Capitalism

α = r x ß

Capital’s share of income equals the rate of return on capital times the capital/income ratio. For example, if ß = 600% and r=5% then α = 30%

Second Fundamental Law of Capitalism

ß = s/g

Over time (asymptotically) the capital/income ratio tends toward the savings rate over the growth rate. In low growth, the past eats the future.

Finally it’s key to mention the inequality:

r > g

Which Piketty says is not a law of nature but an observed constant throughout history. Despite drastic changes in the form and uses of capital r seems always to be higher than g.