…but he still thinks Piketty should get a Nobel Prize. The gory details are at Mises Canada. An excerpt:
Piketty wants to scare his readers into believing that the percentage of income each period going to the capitalists will increase over time, meaning that “the workers” will earn a lower portion of total output in, say, 2100 than they do right now. So he needs to argue that the parameters on his assumed production function are such that an increase in the capital stock of x% will lower the return to capital “r” by less than x%. In the jargon of economists, Piketty needs to argue that empirically, the “elasticity of substitution” is greater than 1.
Piketty does indeed try to show this, by pointing to some of the high-end estimates in the literature putting the elasticity at 1.25. Yet as Rognlie the MIT grad student points out, this is confusing gross with net returns. If you are a capitalist who owns a bunch of machines, your *net* income each year is equal to
==> your gross rental income from your machines
==> minus the drop in the market value of your machines, either due to a change in prices or physical depreciation.
So as Rognlie and now Larry Summers confirm, there are no empirical estimates of an elasticity in substitution being so much above 1 that the share of *net* income (after accounting for physical depreciation) going to capitalists would be expected to indefinitely increase over the coming decades, as the capital stock accumulates.