Which of Piketty’s “Rich Get Richer” Theories Issues Extra?
– by Steve Roth
Wealth Economics
For to each one who has will extra be given, and he may have abundance; however from him who has not, even what he has can be taken away. —Matthew 25:29, Revised Commonplace Model
Steve Randy Waldman jogged my memory just lately of this nice 2014 Matt Bruenig put up from Demos. (The put up is lacking on the Demos website; the hyperlink right here is from archive.org.) It unpacks some pretty abstruse reasoning in Piketty’s Capital briefly, clear, easy kind.
Piketty really has two theories for The Matthew Impact: why the wealthy get richer. Since Piketty makes use of “capital” and “wealth” as synonyms,1 I exploit wealth right here (or extra exactly, property) as the important thing time period. The 2 theories:
- Wealth grows sooner than GPD/GDI. Since wealth holdings ship “property” revenue to the wealth holders, over time the share of share of nationwide revenue captured by asset-holders in return for proudly owning stuff will increase, vs. the revenue captured by employees in earned labor compensation, for working.
- Wealth (property) focus into fewer palms. So, the unearned property revenue obtained by asset holders is extra concentrated as nicely, in a self-perpetuating cycle the place more-concentrated wealth delivers more-concentrated (property) revenue and vice versa.
One or each of those could be very clearly at play within the U.S., and over a really lengthy interval:
The crimson line is the standard-issue measure; the denominator (family revenue) is the NIPAs’ radically balance-sheet-incomplete measure of family revenue.² The blue line divides labor revenue by households’ whole revenue together with whole return on property, which essentially contains the “capital” or “holding” beneficial properties accrued and collected by individuals, households, households, and dynasties over years, a long time, generations, and…dynasties.
However which of the 2 theories most powerfully explains the massive labor-share decline, and therefore the runup within the property-income share? For the second I’ll simply share two fast graphs. (This matter deserves deeper drill-down; if readers have an interest I’ll discover extra.)
First, the wealth:revenue ratio: Piketty’s β(eta).³
Subsequent, a big consultant measure of wealth focus.4
Eyeball-analyzing, wealth focus (idea #2) seems to be a a lot stronger driver of The Matthew Impact than the expansion of nationwide wealth relative to nationwide revenue.
As all the time, feedback, ideas, and particularly critiques are very welcome from my light readers.
1 “I use the words ‘capital’ and ‘wealth’ interchangeably.” Capital, p. 47 Full kudos to him for stating this assumption explicitly; it’s baked into many financial theories and their implementations — notably Solow-style development fashions — however it’s ~universally left unspoken, silent, and hidden.
2 For comparability, The BLS “labor share of nonfarm business output” measure averages 59% over the interval. The Penn World Tables’ U.S. labor share of GDP averages 60%.
3 This graph and the labor share graph at high are made doable by the Whole Family Revenue Accounts, or THIAs.
4 This graph is tailored from Saez and Zucman’s gabriel-zucman.eu/information/SaezZucman2020JEPData.xlsx (due to Gabriel for his assist). It’s up to date by 2023 utilizing information from their realtimeinequality.org website.
