Capital in the 21st Century - Growth Illusions and Realities

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In his second chapter Pikkety reiterates his view of the perpetuated myth that economies tend to converge over time as demonstrated by the Kuzent's curve in the introduction, whose conclusions were drawn from data on a historically unique period; the world wars resulted in significant capital losses, which was then followed by the post-WWII boom in output and population. Pikkety ascertains that inequality is actually the norm rather than the exception. In this chapter he extends this analysis to growth, both in population and productivity.

Over the past 300 years, economic growth has been roughly half attributable to growth in population and half attributable to growth in productivity, which is important today as population growth rates are now falling, while per capita income also appears to be near what is likely to be a peak. The increase in global per capita growth has largely been due to what Pikkety refers to as convergence, whereby developing/emerging markets have been catching up with their wealthier counterparts. However, Pikkety sees this rate of growth as unsustainable and will decelerate towards 1% in the latter stages of the current century. This particular argument is distinctly important due to what Pikkety calls cumulative growth.

The law of cumulative growth stipulates that a low annual growth rate over a very long period of time (say, over a 30-year period) gives rise to considerable progress. This applies to all 3 of capital, population and economic growth. Take the case of capital - an relatively low annual rate of return of a few percent, compounded over several decades, results in a very large increase of the initial capital (provided returns are constantly reinvested).

This is important because, fundamental to Pikkety's analysis of inequality, low economic growth or stagnation means that the rate of return on capital will be substantially higher than the growth rate, becoming the main contributing factor leading to substantial inequality in the distribution of wealth; low-growth means that inherited wealth comes to play a more significant role in the dynamic of capital accumulation and the structure of inequality. This can, in the long run, have powerful and destabilizing effects on the structure and dynamics of social inequality.

Expanding further on these growth dynamics, Pikkety looks at capital and growth in the long-run; how past economic and societal gains reinforce the now-diminished benefits reaped. Growth governs the length of the shadow cast by the past on the present. As growth rates fall, that shadow will lengthen, strengthening the economic and social importance of past wealth and status.

What does that say as we head towards the end of the first-quarter of the twenty-first century, with population and output growth rates falling?

Global Population Growth


Pikkety also introduces the powers of population growth, which, Pikkety presents, can play an equalising role in the structure of inequality; when increasing, it can reduce the importance of inherited wealth and, in reverse, the influence of accumulated capital from previous generations is increased during periods of stagnant or decreasing population growth.

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Tumbling rates of population growth are pushing wealth concentrations back toward Victorian levels.

Global Productivity Growth

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Pikkety explains the post-war spike in Western European output as a consequence of falling behind the US during the 1914-1945 period, and subsequently caught up following the war. Once both continents "stood at the global technological frontier" they converged towards similar growth rates.

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If the convergence process goes on, growth rate of per capita output will surpass 2,5% from 2012 to 2050, and then will drop below 1,5%. Pikkety states that, while the richest countries will grow at a rate of 1.2% between 2012 and 2100, the poorer countries will continue to catch up, growing at 5% per year between 2012 adn 2030.

If Pikkety's predictions pan out, per-capita output in China, Eastern Europe and the Middle East (among others) will match that of the richest countries by 2050.

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The growth rate of world output exceeded 4% between 1950 and 1990. If the convergence process continues as predicted, it will drop below 2% by 2050.


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Inflation in rich countries was very low during 18th and 19th centuries and is currently about 2% per year since 1990. Note the huge spike during the early-to-mid 20th century, as governments had to pay for soldiers, sophisticated weapons and, in doing so, took on extraordinary amounts of debt. As discussed, wealth inequality fell substantially during this time period, which is largely explained by this period of high inflation that many countries experienced.

Pikkety concludes the chapter with a brief paragraph on the loss of monetary bearings in the twentieth century, noting how the post-World War II system was ‘barely more robust’ than the gold standard of the inter-war period. The monetary regimes of today differ significantly from those of a century ago. To highlight this difference he uses the example of France and Germany, who utilised inflationary policy during this 1913-1950 period, but now reside within the Eurozone, the combatance of inflation being one of its core principles.

Inflation certainly plays a role in the dynamics of wealth distribution and the accumulation and distribution of inherited wealth over different time periods, something Pikkety will dissect in later chapters.

Charts adapted from the originals in Thomas Piketty’s “Capital in the Twenty-first Century."

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