Capital in the 21st Century: Chapter 5
The fifth chapter of Piketty’s Capital, is centered around his second “law of capitalism”–rendered as β=s/g. That is to say, over the long run, “the capital/income ratio β is related in a simple and transparent way to the savings rate s and the growth rate g” (166). This is law simply says that a country which saves a lot and grows slowly will accumulate a tremendous capital stock (and thus a high β), whereas a country which saves little and/or grows at a significant rate (i.e. the post-War Western world) will maintain a relatively small capital stock (and thus a low β). Certain important considerations are important to note regarding this law. First, this “law” presents a more interesting reality than the first “law” for the simple reason that the first law is itself completely tautological. The first law merely illustrates an accounting identity. The second law, on the contrary, presents general trends which, becuase they are not a mere accounting identity, are generally less precise than the first law. It is for this reason that Piketty emphasizes that this law is only valid over a long scale. “This is an asymptotic law, meaning that it is valid only in the long run: if a country saves a propotion s of its income indefinitely, and it the rate of growth of its nation income is g permanently, then its capital/income ratio will tend closer and closer to β=s/g and stabilize at that level” (168), and “the law β=s/g does not explain the short-term shocks to which the capital/income ratio is subject, any more than it explains the existence of world wars or the crisis of 1929–events that can be taken as examples of extreme shocks” (170).
Second, growth here not only accounts for economic growth (growth in output), but also demographic growth. “Countries with similar growth rates of income per capita can end up with very different capital/income ratios simply because their demographic growth rates are not the same” (167).
Third, this law only applies to human-produced capital; i.e. societies in which naturally occuring capital (e.g. land, mineral resources, etc.) play a significant role will maintain a considerable higher capital stock (β). The fact that this law is able to map the capital/income ratio with a certain degree of accuracy, Piketty suggests, may be an indication “that pure land constitutes only a small part of national capital” (196). Of course, this is not to say that natural resources don’t play a considerable role in national income and capital, but merely that this value is mediated through human productive expenditures (e.g. irrigation, mining, etc.).
The consequences of this law can be seen with particular clarity in the Neoliberal revolution of the Western world. Since 1970, Piketty shows, private capital has seen a strong consistent comeback in the West (and Japan). Of course, this regularity is periodically interrupted by bubbles, but even when these bubbles are taken into account, the trend of the capital/income ratio is decisively positive; “or, to put it another way, [we are witnessing] the emergence of a new patrimonial capitalism” (173). In fact, not only are these nations’ capital/income ratios growing together, they are growing at an almost identical rate (viz. 1.6-2.0%, “and more often than not remained between 1.7 and 1.9 percent” ).
Noteworthy in this account, is its centralization on private wealth. Not only has public wealth failed to grow in concert with private capital, but in fact, has seen a significant decrease. Simply put, “the revival of private wealth is partly due to the privatisation of national wealth” (184). Of course, this role cannot be overstated . As private weealths growth has been considerably faster than the respective decline in public wealth. Nonetheless, as Piketty notes, “the decreaes in public wealth represented between one-fifth and one-quarter of the increase in private wealth–a nonnegligible share” (185). This effect may even find itself exasperated by an “undervaluing” of public assets in 1970, a fact which, if correct, would increase public wealth’s rate of decline during the last 45 years.
An additional factor in the growth of β in the second half of the 20th century was that “catchup” of asset prices. From 1910-1950 asset prices were strongly surpressed, and corporations and other assets found themesleves valued at historically low levels. This rebound, Picketty suggests, may account for as much as 1/4 to 1/3 of the increase in the capital/income ratio between 1970 and 2010 (191). While Piketty consistently cautions against overly optimistic or certain prediction, he does suggest that the global capital/income 21st century will likely converge on 700% percent of yearly global income (based upon an estimated growth rate of 1.5% [down from current 3%], and a savings rate of approx. 10%) (195).