Help me out here. I haven’t read the book yet, but I gather a really important insight is that we currently live in a world where r > g, meaning the real return on capital exceeds the real growth rate of the economy. Everyone takes this to imply that the 1% (or the 0.01%, if someone awkwardly points out that Krugman is in the 1%) will gain a larger and larger fraction of society’s wealth, and therefore we must act now to stop them before it’s too late.
I have two questions:
1) So far as I understand it, the argument isn’t that the 1% have access to investment products / strategies unavailable to everyone else. So if The Elite right now own (say) 95% of the assets, while The Masses own only 5%, and everybody earns the same return r on those assets… In 200 years, won’t The Elite still own 95% of the total assets, while The Masses will still own 5%? The only way to get around that, that I can see, is if you assume The Masses reproduce faster and so have more great-grandchildren, thus diluting their 5% of assets over more descendants than The Elite. But then, that’s an argument about inheritance and population growth, not about r or g.
2) I gather that part of the concern is that the real interest income (or dividends or profits or whatever you want to call it) must constitute a growing share of total real output over time, because by stipulation r > g. Thus, as the years progress, the share of real output going to “capital” increases at the expense of the share going to “labor.” But what happens at the point when K*r > F(K,L), in other words when the total capital stock times the real rate of return exceeds the total output of the economy? That’s impossible, the way people are discussing Piketty’s book, right? So doesn’t that mean that automatic forces must set in, which eventually make r < g?
Note, I’m not saying there’s something internally contradictory with the Solow growth model, or with Piketty’s math. But I’m saying something doesn’t sound right to me, in the way people are translating these results from a simplified model into conclusions about the real world.