Capital in the 21st Century: Chapter 2

In the second chapter of his Capital, Piketty analyzes two distinct, though by no means unrelated conceptions of growth–population growth and productive output growth. Both of which, Piketty suggests, have been greatly misunderstood by economists, who have been biased toward the period since the industrial revolution, or even more specificially, the twietieth century. Rather then understand these periods as normative and the present “stagnation” as divergent, Piketty suggests precisely the opposite, the present stagnation (at least in the West), is, on the long scale, a return to normalcy.

This discussion of growth will be pivotal in Piketty’s argument, as it is precisely the establishment of the “natural” rate of output growth closer to 1%, rather than the often sought 3-4%, which will feed the assymetry of his central formulation: r>g. As he writes, “the central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality” (77).

The first target of analysis is population growth. Clearly, any discussion of population growth from an economic standpoint cannot help but stand in the shadow of Malthus’ infamous population pessimism. Yet, it is precisely such a pessimism that Piketty challenges. By examining population growth over the long term, Piketty suggests that the rate of growth in population should be understood, as neither static, nor increasing, but instead as a bell curve. Piketty notes that the dramatic increases in growth, particularly during the early years of the twentieth century (nearly 2%), have already begun to dramatically decline (presently approx .9%) and based upon his projections, will continue to decline throughout the ensuing century (bottoming out a little below .2%). Of course, Piketty is careful to note that his furture predictions of highly tentative. As Niels Bohr famously quipped, ” it is difficult to make predictions, especially about the future.” Nonetheless, a central point can be abstracted from his analysis. As he notes, “other things being equal, strong demographic growth tends to play an equalizing role because it decreases the importance of inherited wealth: every generation in some sense constructs itself” (83). This notion can be seen quite easily with an (overly simplistic) example. If a wealthy capitalist owns, say, 10 million dollars in capital at the time of their death and has a single child, that child will inherit 10 million dollars. Yet, if that same capitalist has 5 children (setting aside privelege for older children etc.), each child will now merely inherit 2 million dollars; 10 children, 1 million, so on and so forth. By this same principal, as larger communities increase, wealth tends to disperse more thoroughly and wealth inequality tends to decrease.

Thus, he contends, the greatest inequality of the preceeding few centuries was (at least partially) held in check by a rapidly increasing poulation. But, as this population growth reduces, perhaps not to stagnation or decrease, but certainly below the rate of output growth (.2% pop. growth, as opposed to 1% output growth), then we should see an increase in inequality over the next century.

Turning to output growth, and as I have already mentioned above, Piketty believes that the traditional neo-liberal narrative of 3-4% natural growth is wholly misguided. Quite to the contrary, Piketty contends, the rate of output gowth since the industrial revolution has been a (surprise surprise) bell curve. Much as population, though with a peak centered a generation or two later, the rate in output growth remained relatively stagnant from 0-1700, increased through the industrial revolution, and shot through the roof during post-WWII reconstruction, but has since largely settled back down to pre-war levels. In Piketty’s analysis, this fantastic growth 3-4% was a bizarre anachronism, pushed forward by the need to recover from the destruction of the war (hence, for example, the rate of growth during that period was considerably higher in continental Europe than the United States). “Past growth,” Piketty contends:

“as spectacular as it was, almost always occurred at relatively slow annual rates, generally no more than 1-1.5 percent per year. the only historical examples of noticeably more rapid growth–3-4 percent or more–occurred in countries that were experiencing accelerated catch-up with other countries” (93).

This annual growth rate of 1-1.5% Piketty thus argues, is the standard growth rate of a country on the edge of industrial and technological expansion. “The key point is that there is no historical example of a country at the world technological frontier whose growth is per capita output exceeded 1.5 percent over a lengthy period of time” (93).  Nonetheless, he is also not one to belittle such growth rates. As he notes, “over a period of thirty years [one generation], a growth rate of 1 percent per year corresponds to cumulative growth of more than 35 percent. A growth rate of 1.5 percent per year coresponds to cululative growth of more than 50 percent” (95). Thus, as he cleverly puts it, even at the so-called “near-stagnant” rate of growth of 1% per year, more than a third of businesses, capital, and production will be new for each generation.

The section ends with a brief look at inflation, which as he notes, is largely a 20th century phenomenon. Drawing upon nineteenth century novels, e.g. Jane Austen and Balzac, Piketty notes that income was often used as a status indicator. This literary feature would later disappear from 20th century fiction, not because they become more “polite,” but because the income of one generation would be completely meaningless in a generation or less. One need only examine yearly income, or house prices from their parent’s or grandparent’s generation to see how meaningless such figures became under inflation. It is unclear as of yet precisely what role this analysis of inflation will play in the forgoing analyses. Certainly, inflation is central to his output growth statistics, which are themselves adjusted for inflation, but whether this disucssion merely seeks to underly his existing numbers, or whether it will reemerge in the later portions of the book is of yet unclear.

Having now moved through Part 1 “Income and Capital,” the next post will begin Section 2 “The Dynamics of the Capital/Income Ratio,” and its first chapter “The Metamorphoses of Capital.”

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About jleavittpearl

Philosopher and Theologian out of Pittsburgh PA.

Posted on June 6, 2014, in Thoughts and tagged , , , , , , . Bookmark the permalink. Leave a comment.

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