Economics Dictionary of ArgumentsHome
| |||
|
| |||
| Piketty Formula: The Piketty Formula refers to r > g, where the return on capital (r) exceeds economic growth (g). This inequality drives wealth accumulation for capital owners, increasing inequality over time. Piketty’s formula underpins his argument that without intervention, capitalism naturally leads to rising wealth concentration, necessitating progressive taxation and redistribution policies. See also Thomas Piketty, Piketty hypothesis, Piketty’s Laws, Taxation, Capital Gains Tax._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
| Author | Concept | Summary/Quotes | Sources |
|---|---|---|---|
|
Hans-Werner Sinn on Piketty Formula - Dictionary of Arguments
Piketty formula/SinnVsPiketty/Sinn(1): Piketty’s formula states that interest in the form of the average return on capital, r, is persistently higher than the growth rate of the economy, g. The consequence, according to Piketty, is that the wealth of an economy accumulates faster than the growth in economic output. Neoclassics: In fact, the formula has been known for quite a long time now; it denotes a fundamental implication of the neoclassical theory of economic growth. Indeed, over the long run, the rate of return to capital usually lies above the growth rate of the economy, as Piketty asserts. If that were not the case, land prices would be infinite, there would be excessive consumption, and growth would eventually end. >Neoclassical Economics. Interest rates/Piketty formula/Sinn: But the formula does not imply that wealth grows faster than economic output. Such a conclusion would only be warranted if the savings of an economy could be set equal to the economy’s capital income, so that the rate of economic growth is the same as the interest rate. But that is not the case. >Interest rates. Savings: Rather, savings are consistently smaller than the sum of all capital income. The wealthy consume substantial parts of their income, and the savings from labor income usually is small. Thus, the growth rate of wealth lies significantly below the interest rate; the fact that the interest rate exceeds the rate of economic growth in no way implies that wealth grows faster than the economy. >Saving, >Savings rate. Economic growth/growth theories: Indeed, a central finding of economic growth theory states that the interest rate of an economy, dependent on the savings rate, settles over the long term at a level in which the growth of capital equals the growth rate of output. The consequence is the longterm persistence of the ratio of wealth to economic output. The long-term constancy of the ratio is a basic ingredient of all growth theories. Behind the long-term persistence of this ratio stands a simple mathematical law. Savings/national income: If an economy saves a given portion of its income, the wealth resulting from the accumulation of those savings will increase in the long run at the same rate at which national income grows. >Growth, >Growth theory. Ratio of wealth to income: Thus, the ratio of wealth to income cannot increase permanently. The law is based on the fact that every increasing quantity can grow over the long run only at the rate at which its accretion grows. Example: An example is the heaping of earth into a mound. Assume that in every period, a further spade of earth is added, and that the size of the spade itself grows at a given rate from one period to the next. The growth rate of the amount of earth in the mound converges toward tire growth rate of the spade size. If we substitute the current savings of an economy for the amount of earth in the spade and wealth for the size of the mound, we obtain the long-run constancy of the ratio of wealth to income when a fixed share of income is saved. H.-W. Sinn per Piketty: It must be stressed that this law applies over the long run, over several decades. Wealth can well grow faster than the economy at given times. Piketty could then have a point. Distribution/SinnVsPiketty: But even when such is the case, there is hardly any reason for apprehension. When it comes to distributional issues, the important element is less the ratio of wealth to national income than the ratio of capital income to wage income, that is, the proportion of capital and wages in national income. The distributional shares of national income, as first observed by the left-leaning economist Joan Robinson in her 1942 book(2), An Essay on Marxian Economics, have remained fairly stable over time and follow no discernible trend. >Distribution theory. Wages/capital income: Much more important than Piketty’s theory of everything is the question of how many people share in the wage and capital income. If the number of wage earners increases faster than the number of wealth owners, a less desirable distributional pattern could emerge despite the constancy of the ratio of capital to wage income. That could be the case in the United States, with its large number of immigrants, and could be the reason for the current dissatisfaction among the populace. But there is no evidence to support this as a general law. >Piketty’s Laws, >Wages, >Income. Solution/Sinn: And if the risk should indeed exist that the number of people sharing the capital income grows too slowly compared with the number of people sharing the labor income, the best medicine is to improve the chances of upward mobility. The more people share the wealth and capital income, the smaller the distributional problem. It helps for this reason if the rich have more children than the poor, since their wealth will eventually become spread among their heirs, solving the distributional problem at a stroke. Policy measures: A family income splitting system such as France’s is one of the policy measures that a society might consider if it fears an undesirable concentration of wealth. Regardless, a progressive taxation system is needed to check the growth in net income among the upper income echelons. Inequality: Even in the absence of a fundamental trend toward greater inequality owing to the theory formulated by Piketty, inequality within the wealthy group can increase because some dynasties accumulate ever more wealth at the expense of other dynasties. Taxation: Whether action is needed in this regard in Europe is open to debate, since progressive taxation is already present it will be hard to make the case for even more of it. My conclusion is that Piketty, like Marx, caters to a longing, simmering among the people, but that he tries to underpin his policy proposals with a theory that does not substantiate what he asserts.(1) >Taxation. Some basics for Piketty: >Cambridge Capital Controversy, >Geoffrey C. Harcourt, >Capital reversing, >Capital/Joan Robinson, >Exploitation/Robinson, >Reswitching/Robinson, >Reswitching/Sraffa, >Reswitching/Economic Theories, >Neo-Keynesianism, >Neo-Neoclassical Theories. Hans-Werner Sinn. 2017. Piketty’s World Formula. https://www.hanswernersinn.de/en/AP_22062017 (30.01.2025) 2. Joan Robinson. 1942. An Essay on Marxian Economics. London. Macmillan._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Sinn I Hans-Werner Sinn The Green Paradox: A Supply-Side Approach to Global Warming (Mit Press) Cambridge, MA 2012 |
||
> Counter arguments against Sinn
> Counter arguments in relation to Piketty Formula
Authors A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Concepts A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
