Saturday, May 3, 2014

Wisdom Of The Week

After 1980, ongoing capital accumulation, slower technological progress, and rising inequality heralded a regression to something akin to the conditions of the nineteenth century. But few notice the resemblance between now and then, especially in one crucial respect: the role of inherited wealth. So many nineteenth-century novelists were obsessed with estates and inheritance -- think of Jane Austen, George Eliot, or Charles Dickens -- precisely because receiving wealth from one’s parents was such a common way of prospering during that era. In nineteenth-century France, the flow of inheritances represented about 20–25 percent of national income during a typical year. According to Piketty’s calculations, the Western world is headed toward a roughly comparable situation. The relatively thrifty and wealthy baby boomers will soon begin to die off in greater numbers, and inheritance as a source of income disproportionately benefits the families of the very wealthy.

At the core of Piketty’s story are the tragic consequences of capitalism’s success: peace and a declining population bring notable gains, but they also create a society dominated by wealth and by income from capital. In essence, Piketty presents a novel and somewhat disconcerting way of thinking about how hard it is to avoid growing inequality.

Yet there are flaws in this tale. Although r > g is an elegant and compelling explanation for the persistence and growth of inequality, Piketty is not completely clear on what he means by the rate of return on capital. As Piketty readily admits, there is no single rate of return that everyone enjoys. Sitting on short-term U.S. Treasury bills does not yield much: a bit over one percent historically in inflation-adjusted terms and, at the moment, negative real returns. Equity investments such as stocks, on the other hand, have a historical rate of return of about seven percent. In other words, it is risk taking -- a concept mostly missing from this book -- that pays off.

- Tyler Cowen review of the book Capital in the Twenty-First Century by Thomas Piketty and Arthur Goldhammer (Translator)

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