Is Piketty's 'Second Law of Capitalism' Really a Law?

Thomas Piketty at King's College in London on April 30 Photograph by Leon Neal/AFP via Getty Images

Thomas Piketty, author of Capital in the Twenty-First Century, has been accused of many things: being French (guilty as charged), getting “his sums wrong” (unproven), and even being the economist equivalent of a teen heart-throb. Now a pair of economists from the U.S. and Sweden is attacking his argument at its very roots in an article titled “Is Piketty’s ‘Second Law of Capitalism’ fundamental?”

Tony Smith, a Yale University economist, and Per Krusell of Stockholm University’s Institute for International Economic Studies, say that the “central aspect” of Piketty’s book is the prediction of a dramatic increase in inequality in this century. They write: “We simply do not at all agree with the macroeconomic reasoning that undergirds his forecast.”

Piketty’s second law regards the relationship between capital (e.g., machines, software, buildings) and national income. Piketty argues that the owners of capital will capture a growing share of national income at the expense of labor. He says that will happen because savings and investment will continue to grow, even as population growth and technological progress slow, along with overall economic growth.

“This assumption may sound standard but actually it is not,” write Smith and Krusell. They say Robert Solow, a Nobel prize-winning economist, was closer to the truth in 1956, when he said that as the economy’s growth rate slows toward zero, so will the national savings rate. “Postwar U.S. data, moreover, [are] consistent with this theory in that decades with low growth have typically been associated with low (or even negative) net savings rates,” they write.

The two economists agree with Piketty that wealth inequality has grown, but they say the causes include “educational institutions, skill-biased technical change, globalization, and changes in the structure of capital markets.”

Update, June 6: In an email Piketty wrote that he didn’t understand the professors’ case. He said his book argues that savings rates have been falling more slowly than growth rates, not that the process will go on forever. Or, as he put it:

We’ve never written that the capital income ratio beta=s/g should go to infinity if g goes to zero: presumably people would stop saving (i.e. s would go to zero) much before that! We’re just saying that the simplest way to explain the rise in capital-income ratios that we observe in the data in recent decades is that saving rates did not fall as much as growth rates, so that mechanically the capital-income ratio tends to rise to relatively high levels, just like in the 19th century. I don’t think they are disputing this. Also note that the rise of capital-income ratio is certainly not bad per se, and does not necessarily imply high inequality. Tell me if I missed something!

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