1. finance
2. investing
3. venture capital

Piketty and the search for r
Michael Roberts
ASSA 2015 (URPE), Boston 4 January
The Piketty phenomenon
• “Piketty put inequality on the map but we
have got carried way by the comprehensive
nature of his explanation”
Paul Krugman, Columbia Law School Panel
discussion, December 2014
Data matter
• “All social scientists and all citizens must take
a serious interest in money, its measurement
the facts surrounding it and its history. Those
who have a lot of it never fail to defend their
interest. Refusing to deal with numbers rarely
serves the interest of the least well-off”
Piketty p557
The evidence
Capital vs wealth
• “Capital is defined as the sum total of
nonhuman assets that can be owned and
exchanged on some market. Capital includes
all forms of real property (including residential
real estate) as well as financial and
professional capital (plants, infrastructure,
machinery, patents and so on) used by firms
and government agencies.” Piketty p46
The circuit of capital
• For Marx, the circuit of capital is M-C…P…C1 to M1,
namely capitalists have money capital (M) which is
invested in commodities (C), means of production and
raw materials, which are used by labour in production
(P) to produce commodities (C1) for sale on the market
for more money (M1). Capital (M) expands value to
accumulate more capital (M1). But only labour created
that new value.
• For Piketty, the capital process is M…M1. Money
accumulates more money (or wealth). It does not
matter how and so there is no need to define capital as
different from wealth.
R is steady… but also variable (?)
• r “is pretty much steady around 4-5% but
varies over time and between asset classes”
Piketty p55
Marginal productivity or rent-seeking?
• “There is every reason to believe that r will be
much greater than g in the decades ahead
because of “oligarchic divergence”. This
divergence is even greater because rich hide
their wealth in tax havens.” Piketty, p463
r>g
The U-shaped capital share
Figure I.2. The capital/income ratio in Europe, 1870-2010
800%
Germany
Market value of private capital (% national income)
700%
France
600%
United Kingdom
500%
400%
300%
200%
100%
1870
1890
1910
1930
1950
1970
1990
Aggregate private wealth was worth about 6-7 years of national income in Europe in 1910, between 2 and 3 years in
1950, and between 4 and 6 years in 2010. Sources and series: see piketty.pse.ens.fr/capital21c.
2010
-1
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
R is steady???
Global real long-term bond yields (%)
7
6
5
4
3
2
1
0
Financial assets
Real estate
• “Using Piketty and Zucman (2013)’s data, I find that a
single component of the capital stock—housing—
accounts for nearly 100% of the long-term increase in
the capital/ income ratio, and more than 100% of the
long-term increase in the net capital share of income…
when housing is removed, there is a small increase in
the capital/income ratio and a small decrease in the
net capital share of income. The dominant role of
housing in Piketty’s data reflects the influence of real
price changes, particularly for land. “
• A note on Piketty and diminishing returns to capital,
Matthew Rognlie, June 15, 2014
Never read Capital
• “I never managed really to read it. I mean I
don’t know if you’ve tried to read it. Have you
tried?... The Communist Manifesto of 1848 is a
short and strong piece. Das Kapital, I think, is
very difficult to read and for me it was not
very influential…. The big difference is that my
book is a book about the history of capital. In
the books of Marx there’s no data.”
Interview in New Republic
r does not fall
• “the rate of return on capital is a central
concept in many economic theories. In
particular, Marxist analysis emphasises the
falling rate of profit – a historical prediction
that has turned out to be quite wrong,
although it does contain an interesting
intuition.” Piketty p52
More pessimistic than Marx
• “Karl Marx thought that the falling rate of
profit would inevitably bring about the fall of
the capitalist system. In a sense, I am more
pessimistic than Marx, because even given a
stable rate of return on capital, say around 5
percent on average, and steady growth,
wealth would continue to concentrate, and the
rate of accumulation of inherited wealth
would go on increasing.” Piketty interview in
The Baffler
Zero productivity
• “like his predecessors Marx totally neglected the
possibility of durable technological progress and
steadily increasing productivity, which is a force
that can to some extent serve as a counterweight
to the process of accumulation and concentration
of capital” Piketty p10
• “Marx’s theory implicitly relies on a strict
assumption of zero productivity growth over the
long run”. Piketty p27
Infinite accumulation
• Piketty argues that Marx’s r falls because in his
model of capitalism, there is “an infinite
accumulation of capital” and “as ever more
increasing quantities of capital lead inexorably
to a falling rate of profit (i.e. return on capital)
and eventually to their own downfall, while
growth in net income (g) falls to zero.”
Piketty p228
Marx’s r: the evidence
Piketty versus Marx
Net rate of return on capital in Germany from 1951 to 2011 (%)
29.0%
15.0%
27.0%
14.0%
25.0%
13.0%
23.0%
12.0%
21.0%
11.0%
19.0%
10.0%
17.0%
9.0%
15.0%
8.0%
13.0%
7.0%
11.0%
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
16.0%
Piketty
Maito - RHS
Wealth not capital
• “Among large developed economies, the
remarkably consistent trend toward rising
capital values and income is undeniable. This
trend is a story of rising capital prices and the
ever greater cost of housing—not the secular
accumulation emphasized in Capital—but it
has distributional consequences all the same”.
Matthew Rognlie op cit
Capital is good
• “The fact remains that capital is useful in itself. The
inequalities associated with it are problematic, but not
capital per se. And there is much more capital today
than formerly.”
• “when the growth rate is 1 percent, or even negative,
as in some European countries today, … this is not a
problem from a strictly economic point of view, but it
certainly is in social terms, because it brings about
great concentrations of wealth. In response to which,
progressive wealth and inheritance taxes are of great
utility.” Piketty interview, op cit
Which is the right r?
• The central unanswered question for Piketty’s thesis is this.
Is rising inequality the central contradiction of capitalism
and thus its grave digger?
• Is it a tendency for a rising net return on capital (Piketty) or
is it the tendency for a falling rate of profit (Marx) that is
the key contradiction of capitalism in the 21st century?
• If it is the former, then all we need to do is to introduce a
progressive tax system. We don’t need to bury capitalism,
as we can save it.
• But if it is the latter, then the main contradiction in the
capitalist mode of production would not be resolved. The
solution then is one of replacing the capitalist mode of
production.