Inequality has become one of the major talking points amongst economists since the advent of Thomas Piketty’s book Capital in the Twenty-First Century. Piketty argues in the book that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values. He calls for political action and policy intervention. Joseph Stiglitz (Columbia University), Paul Krugman (Princeton University), Duncan Foley, and Branko Milanovic recently conducted a presentation at the Columbia Law School, where they discussed the issue in greater detail.
The major contribution of Piketty is, in my opinion, a generalised theory of laws of motion of capitalism which combines theories of growth, factoral income distribution and personal income distribution. Theories of growth and factoral income distribution were always related, but the explicit connection from factoral to personal income distribution, substantiated with a huge amount of empirical evidence, gives to Piketty’s work a new, and unique, value.
Are there shortcomings in the work? Well, for one thing, Piketty tends to use wealth and capital interchangeably and as Joe Stiglitz points out, the distinction is fairly important because many contend that it is capital which causes the imbalance in wealth. Consider the example of an asset such as land. Suppose that land (valuable real estate) is owned mostly by the rich. Suppose also that most of it does not enter the production function. Let then this land be suddenly demanded by other rich, say the rich living outside the country with whose income distribution we are concerned. Clearly, as the real estate becomes more valuable, the average wealth of the country increases, and also becomes more unequally distributed. This happens because the asset, predominantly held by the rich, has gone up in price and made the distribution of wealth more skewed.
Moreover, more unequal wealth distribution spills into a more unequal income distribution because income includes (as per Piketty but also as per common sense used in all empirical studies of income distribution) higher imputed rent for the real estate owners whose housing has gone up in price and who have not sold it. (Just to be clear: if I own an apartment in New York whose price has doubled because Chinese oligarchs have bought scores of similar apartments in New York, both my income and wealth are up.)
The increase in wealth being observed does not correspond to a rise in Productive Capital, which does put paid to the notion that a rising tide lifts all ships, as the apologists for not changing the status quo tend to argue. Stiglitz, Milanovic, Krugman and Foley all discuss these issues in the presentation above.
