Tuesday, July 28, 2015

Thomas Piketty and Capital in the 21st Century

Recently, I read a book explaining the opinion of Thomas Piketty.

Thomas Piketty is a famous economist who published "Capital in the 21st Century" recently. This book attracted public attention all over the world. To be honest, the content of this book seemed too difficult for me to entirely understand. So, I read just a commentary book written by a Japanese economist.

Amazon.com: Capital in the Twenty-First Century

The main concept of his hypothesis is quite simple, as "R>G." Thus, the rate of return on capital is greater than the rate of economic growth over the long term. It means that wealthy people can multiply their capital more quickly than poor people gain their own money. As a result, inequality will expand endlessly.

It is noteworthy that Piketty has not proven this hypothesis mathematically, but he gave rich evidence suggesting this phenomenon.

Piketty criticized Simon Kuznets, a Nobel prize winner. Kuznets claimed that the discrepancy of income will shrink in a developed country following the economic growth. According to Piketty, Kuznets referred only limited area of data, led to the false conclusion. Indeed, inequality was diminished during wartime, because the government settled an aggressive taxation. After all, external regulation is necessary to modify the inequality, according to Piketty.

He recommends global collaboration to introducing progressive taxation for people with high income. Currently, there are some tax havens, in which people have to pay smaller income tax. For this reason, wealthy people with freedom of moving are advantageous to avoid tax.

His idea was accepted by many people, especially left-winged group. Politicians who emphasize the importance of social security frequently mention Piketty. By contrast, libertarians and neo-conservative people are skeptical about his opinion. Aside from the correctness of his idea, it seems too idealistic to be feasible. It is unlikely that all nations are collaborative to raise the income tax.

Surprisingly, Piketty also kept an eye on Abenomics, and his attitude was supportive. He never denies the necessity of economic growth. He admitted the inflation as an effective way to reduce the national debt.

I think the substantial weakness of Piketty's thought is the lack of theoretical validity. Indeed, R>G has been right. But how is it in the future? Western countries achieved today's prosperity through the industrial revolution. On the other hand, IT revolution enabled us to do business with extremely low cost. It is possible a few genius people born in a developing country will make changes in the world. We never know whether "History repeats itself" is always true until the day has come.

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