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