The discussion surrounding French economist Thomas Piketty’s new release is invigorating, and I am eager to join in. Let me begin by noting that I am not an economist, and I am not even an interested amateur – I have next to no formal education in the field. Let me next admit that I have only skimmed the book at this point, but I have read the key parts and I think my general understanding of the argument is clear, at least as confirmed by reading some of the more comprehensive reviews.
Piketty’s chief claim is that the rate of return on capital (r) is greater than the overall growth of the economy (g), and when this ratio gets out of balance, it necessarily creates great inequality. As he puts it himself:
If, moreover, the rate of return on capital remains significantly above the growth rate for an extended period of time (which is more likely when the growth rate is low, though not automatic), then the risk of divergence in the distribution of wealth is very high…
I added the bolding, because it seems to me that these are key restrictions on the argument.
r > g is elegant and alluring . . . but instead let’s say that Inequality (I) = r/g
I = r/g
The key element, then, is not the numerator r but rather the denominator, g. any serious policy objective has to be focused in increasing g. Piketty assumes a that g has become, and will remain, very low and nearly constant. This is a symptom of our age, which is terribly pessimistic. His wealth tax solution is focused on the numerator where one could predict it will have a marginal impact on I; indeed, a too strong application could reduce g even further and make I even higher!
Better to focus on g, and that means first of all questioning Piketty’s key assumption that g is destined to remain low for the foreseeable future. But often the phrase “foreseeable future” is an oxymoron, no?
As a student of long cycle theory, I see the regular cyclic phases of roughly a century, but in practice anywhere from 70 to 125 years. Each of these cycles is triggered, in part if not in all, by by some innovation that changes the economic order. The fruits of that innovation are bountiful at first but necessarily wear out over time. We are in the end phase of one such cycle right now, hence the apparent stagnation and resultant pessimism. But if the past is any guide – and it usually is – then the world will experience a new and unforeseen burst from a new innovation, sometime within the next few decades.
As a researcher focues on energy I am biased, of course, but I think that innovation is going to come from the energy sector, and I think it is going to come sooner rather than later. The economic growth of the world has been powered for the last two cycles by fossil fuels, and the general pessimism about future growth is in large part fueled by a widespread belief that fossil fuels are either running out, poisoning us, destroying the climate, or any combination of the three. This is the weltanschaung of our age – the energy which has made us richer as a species than ever before is now in many ways our enemy.
I do not share this pessimism. I am a technological positivist, and I see signs and portents from all over the world that we are on the cusp of an energy revolution. This may mean the discovery and/or perfection of a new energy source, or simply a cleaner and more efficient way of utilizing the still abundant supplies of fossil fuels. But there are going to be breakthroughs – hydrogen, storage capacities for wind and solar, safe thorium nuclear power, hybrid gas-nuclear reactors, the methanol economy – that change the energy equation and open a new century of growth and prosperity. When that happens, when g is annually 3% or greater instead of the 1 to 1.5 assumed by Piketty, his “Capital in the 21st Century,” if it is remembered at all, is going to have to be retitled “Capital For a Brief Moment in the First and Second Decades of the 21st Century.”