Piketty’s monetary mysticism

Check out Robert Solow’s TNR book review, ‘Thomas Piketty Is Right Everything you need to know about ‘Capital in the Twenty-First Century’. This part intrigued me.

“Since comparisons over vast stretches of time and space are the essence, there is a problem about finding comparable units in which to measure total wealth or capital in, say, France in 1850 as well as in the United States in 1950. Piketty solves this problem by dividing wealth measured in local currency of the time by national income, also measured in local currency of the time. The wealth-income ratio then has the dimension “years.” The comparison just mentioned says in fact that total wealth in France in 1850 amounted to about seven years worth of income, but only about four years for the United States in 1950. This visualization of national wealth or capital as relative to national income is basic to the whole enterprise. Reference to the capital-output or capital-income ratio is commonplace in economics. Get used to it… he predicts, without much confidence and without kidding himself, that the world capital-income ratio will rise from just under 4.5 in 2010 to just over 6.5 by the end of this century. “

Two questions (actual, not rhetorical) for anyone who’s read the book: 1. by “national wealth or capital” does Piketty mean physical capital alone or financial capital as well? 2. to slice “national wealth or capital” another way, does he mean private capital only or does he include govt capital?

I’m trying to plug his numbers into Gunnar Berglund’s grand ratios model and his (Piketty’s) definition of capital has me confused. I think he means private wealth– physical and financial– and that his capital to income ratio is the inverse of Berglund’s private wealth to spending turnover rate (so Piketty’s predicted higher ratio would mean a lower turnover rate). If I have this wrong, let me know. If I do have that right, a consequence of Piketty’s thesis is the need for greater and greater deficit spending to fill the demand gap left by inadequate effective demand. Anyway to quote the linked Berglund paper, “Equality and Enterprise: Can Functional Finance Offer a New Historical Compromise?” (pdf p. 18):

“As shown in figure 1, the debt-to-GDP ratio θ is an asymptotically declining function of
the private wealth-to-spending turnover rate u. This means that the more prone the
private sector is to spend – to turn over its net wealth into effective demand – the less
need there is for the accumulation of government debt. Those who regard public debt as a
problem should therefore seek remedies in augmenting the turnover rate u, i.e. to
encourage the households and firms to ‘let the good times roll’ and become more
spendthrift. But if government debt is viewed as a blessing rather than a curse, the
opposite conclusion follows. The more parsimonious the private sector is (the lower the
turnover rate u that is), the bigger the scope, not to say the need, for government debt


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29 Comments on "Piketty’s monetary mysticism"

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Thanks for the comments, lot to chew over. I’m dubious of Piketty’s assumption that population and productivity combined will grow at half the historic 3% rate.

Fed Up

Along with JKH saying:

“Piketty suggests that global growth of output will slow in the coming century from 3 percent to 1.5 percent annually. (This is the sum of the growth rates of population and productivity, both of which he expects to diminish.) ”

It looks to me Piketty is assuming real AD is unlimited so real GDP will be whatever real AS is. What if real AD is not unlimited?


I have not read the book or even much in the way of the numerous reviews of it.

Solow’s review/essay seems quite brilliant and very interesting in its own right.

I think your two questions are very good ones.

Somewhere else in reviews I’ve seen them phrased more generally as uncertainty about what Picketty’s working definition of capital is – in the sense of his actual numerical calculations and comparisons.

I don’t have answers.

But I do have a guess.

My guess is that Picketty in no way allows for government debt to be interpreted as capital in these calculations.

Not knowing anything about his statistical methods, its possible the answer to this could be found in how he treats the measurement of US capital in recent years after allowing for the international investment position – because if my first guess is correct, my second guess is that there would be a required statistical adjustment to back out the effect of government debt held by foreigners in order to arrive at an adjusted netting effect for the international investment piece.

I hope somebody who has read the book has a better answer for you.

Conversely, a definitive answer could prove that somebody has even read the book.


Beo, I’m also guessing you noticed these two paragraphs in the Solow review: “Imagine an economy with a national income of 100, growing at 2 percent a year (perhaps with occasional hiccups, to be ignored). Suppose it regularly saves and invests (that is, adds to its capital) 10 percent of national income. So, in the year in which its income reaches 100 it adds 10 to its stock of capital. We want to know if the capital-income ratio can stay unchanged for next year, that is to say, can stabilize for the long run. For that to happen, the numerator of the capital-income ratio must grow at the same 2 percent rate as the denominator. We have already said that it grows by 10; for that to be 2 percent of capital, capital must have been 500, no more, no less. We have found a consistent story: this year national income is 100, capital is 500, and the ratio is 5. Next year national income is 102, capital is 510, the ratio is still 5, and this process can repeat itself automatically as long as the growth rate stays at 2 percent a year and the saving / investment rate is 10 percent of national income. Something more dramatic is true: if capital and labor combine to produce national output according to the good old law of diminishing returns, then wherever this economy starts, it will be driven by its own internal logic to this unique self-reproducing capital-income ratio. Careful attention to this example will show that it amounts to a general statement: if the economy is growing at g percent per year, and if it saves s percent of its national income each year, the self-reproducing capital-income ratio is s / g (10 / 2 in the example). Piketty suggests that global growth of output… Read more »
Michael Sankowski

yes, this is very Godleyesque. These are really basic relationships which are stock/flow driven and *can’t* be faked in the traditional economics sense. They come from very basic algebra and are not relationship of change which are so popular in modern econ.

In Godleys unsustainable processes paper, he goes through a few of these, and they are all over Monetary Economics.

Even if Piketty is a non-believer in who won the CCC, this type of thinking and analysis is superior economics to what we’ve seen for the last several decades.

Note, this could have been and should have been done long ago. Nobody needed to gather decades of information on capital ratios, or on inequality. r and g were something anyone can do with some basic algebra.