Capital in the Twenty-First Century is really two books, maybe three. The first is a book of economic history. The second one advances a theory to explain that history. The third offers a policy proposals keyed to the economics, as well as a tacit political philosophy of meritocratic egalitarianism: from and to each according to his abilities. As I’m coming to the final part of the book I can see that the theory plays an important role. It provides the “laws of capitalism,” and these “laws” allow Piketty to describe a future: If unchecked, capitalism will lead to greater and greater concentrations of wealth. This specter is haunting the global economy—if I may be permitted an updating of the Communist Manifesto. It foretells the end of democracy. It’s also what gives Piketty’s book urgency. But I misspoke. It’s not the “laws of capitalism” that lead to his dire prognosis. Instead, it’s the “laws of capitalism” plus the crucial assumption r>g (the rate of return on capital is greater than the overall growth of the economy). But what about this assumption? I’m told that economists are by no means agreed that r>g. That’s not surprising. Common sense suggests that the rate of return on capital can’t be greater than the rate of growth. That’s because returns on capital are simply claims on national (or increasingly global) income. And over the long haul those returns be paid in real terms unless the national or global income increases, which is to say g increases. If an economy could pay 4 or 5 percent on capital while growing at 1 or 2 percent per annum, then we’d be in the surreal situation in which return on capital over time produces more wealth than does economic growth. In fact, because SOME collective wealth has to be spent on something other than paying returns on capital, it seems tautological that r

History suggests as much. Ben Franklin was fascinated by the power of compound interest. Even at modest rates of return, over long periods of time small sums of money become enormous. With this in mind, in his will Franklin specified that 2000 pound sterling be set aside in two trusts, one for Boston and the other for Philadelphia. These trusts were designed to return 5 percent per annum for 200 years. In so doing, Franklin saw himself making a massive financial contribution to both cities. With an initial investment of a bit less than $5000 per city, he envisioned a final pay out of more than $36 million, an absolutely fabulous sum of money in those days. The results weren’t so exalted. When the 200 years were up in 1990, the value of the two trust funds was $6 million. Even that sounds decent, given the starting value of $10,000. But if we adjust for inflation, the starting value is closer to $1 million. In other words, the rate of return on Franklin’s capital was microscopic—and far, far less than the rate of growth of the American economy over the same 200 years. Anecdote does not a law of economics make—or break, as the case may be. But Franklin’s trusts for Philadelphia and Boston are very likely typical of capital over the long haul: In the modern era it seems g has had ways of overwhelming r.

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