A great fresco on political economy and the world economy: book review of Thomas Piketty, Capital in the Twenty-First Century.

AuthorValli, Vittorio
PositionBook review

Piketty's book is an important book, not only for its huge success and the lively and engaging style of its author, but for its powerful and controversial contents. It is no wonder that it has raised the interest of other famous economists such as Krugman, Stiglitz and Milanovic (2), but also the attention of the media and the general public.

The book begins with the statement of the goal of putting distribution again at the centre of the economic agenda. This is followed by a brief, but well written, introduction on classical authors such as Malthus, Ricardo and Marx, and also more modern classics such as Simon Kuznets, as well as the author's critique of Kuznets's famous income distribution curve.

The first part of the book presents the main concepts used in Piketty's analysis. There are the definitions of income, product and capital. The latter is defined in a very broad sense, comprising both real and financial capital, and it is actually more akin to the concept of wealth than to the concept of capital used in standard macro-economic theory. National capital is a stock value, and it is the sum of private and public capital or of domestic and net external capital.

Another fundamental concept is, for Piketty, the capital/income ratio, that he calls [beta]. The author shows that this ratio has been historically rather high (about 6-7) in the United Kingdom, France, and Germany during the 1870-1910 period. The ratio has declined to 2-3 in 1950 and then recovered to 4-6 in 2010. A beautiful chart shows for these three countries a sort of U shaped curve. In the United States, which was a much younger country than the European powers in the 19th Century, this level was a somewhat lower than in Europe. There the capital income ratio rose from 4 in 1870 to 5 in the great depression, then it went down to 3.8 in 1950 and finally rose up to 4.3 in 2010.

At this point Piketty introduces his first fundamental law: [alpha] = r x [beta], where a is the share of income that goes to capital, r is the rate of return on capital and [beta] is, as before, the capital/income ratio. It must be pointed out that rather than a real economic law, this is an accounting equality, as the author himself admits.

Piketty then introduces his second fundamental law: [beta] = s/g, where s is the saving rate and g is the rate of growth of the economy.

It should be noticed that this law is not particularly new. It is simply another way of stating the main Harrod- Domar...

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