Wealth inequality and asset prices: a critique of Piketty

Thomas Piketty is undoubtedly a famous economist, thanks to his bestselling book on inequality. Despite his data showing that inequality is on the rise in many countries, there is at least one flaw in his argument that deserves a mention.

He equates capital and wealth and defines them to include both real and financial assets, or everything from machines in factories to housing and shares in companies. He then claims that the return on wealth has in recent decades been higher than the rate of economic growth, leading to rising inequalities of income and wealth. But the economists Robert Rowthorn of Cambridge University and Michael Roberts, a Marxist working in the City of London, have both shown that it is important to distinguish different types of capital and to consider changes in the valuation of financial assets.

The value of financial assets in industrial countries since the 1970s, particularly that of housing, has increased dramatically, despite substantial intermittent fluctuations. If this appreciation is stripped out, the capital-output ratio is shown to have stayed roughly constant in much of Europe and to have fallen in the US. This suggests that there has been too little real investment in a number of rich countries, and this is part of the reason for relatively sluggish growth compared with the 1950s and 60s. Increases in asset prices have contributed to an increasing concentration of wealth at the top of the scale, while low growth due to inadequate investment has slowed the growth of incomes, especially wages, for the majority.

The wealthiest have been able to sustain or increase their consumption as the value of their assets has increased, while those lower down the scale have, relatively speaking, fallen behind. The analysis of Rowthorn and Roberts exposes a significant flaw in Piketty’s work.


2 thoughts on “Wealth inequality and asset prices: a critique of Piketty

  1. Or does it? Isn’t home ownership at the top of the list of investments in the developed world? If we look at home-ownership rates versus the purchase of stocks, I think Piketty’s point stands.

  2. Thanks for your comment. I think you are right about home ownership in the developed world. But the point of Rowthorn was that if the huge rises in house prices (in the UK for example) and other assets such as stocks are accounted for, the investment in new capital goods by companies has apparently either been stable or fallen as a proportion of output (the capital-output ratio or K/Y). So the kind of investment that embodies new technology and contributes to productivity and wage growth has the potential to be greater than it currently is with the right policies. Of course, falling capital goods prices could be part of the explanation, so there are certainly doubts here.

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