Piketty: Misremembrance of Things Past

May 21, 2014 2:04 PM
By Milton Ezrati

The French author cherry-picks certain periods of economic history to make his point—and totally ignores the prospective impact of current demographic trends.

Professor Thomas Piketty’s new book, Capital in the Twenty-First Century, certainly has caused a stir—with a vivid description of income inequality over a long past and across several economies and with extreme recommendations on how to remedy the presumed injustice. There is, however, a serious problem with the picture he paints and, consequently, his policy prescriptions. Because his conclusions reflect only a particular historical period, they say nothing about the nature of capitalism, as he suggests they do, and little about a future in which aging demographics will create very different trends than he has found in the past.

The signal feature of the long period he has analyzed was a surge in the world’s workforce. It emerged initially from tremendous growth in the broad population. The trend has accelerated during the last 30 years, not so much from general population growth but from the integration into the global system of former communist countries and what during the Cold War were called nonaligned nations, India most prominent of the group. By some estimates, these more recent events increased the global workforce by as much as a third, even after considering differences in training and productivity. It was an overwhelming and perhaps unique development, and it colors all of his conclusions. The surge in the supply of labor could not help but hold back wages relatively. Economics makes nothing so clear than that the lowest returns accrue to the basic economic resource—land, labor, or capital—in greatest relative abundance. It is also hardly surprising that capital, in this historical context, would do comparatively well. It increased, but not nearly so fast as the supply of labor.

That period, however, is past. For the future, decades of low birth rates, especially in the developed world, have slowed the flow of young workers into the labor force just as the retirement of baby boomers will remove a large percentage of the population from active production. By 2030, the United States will have barely three people of working age for each retiree, according to the Census Bureau. Japan will have barely two. Europe will fall in between. Labor likely will become a scarce resource. Labor’s relative returns cannot help but rise, especially compared to capital, which over this long past of superior gains has become comparatively abundant. Whether these new trends will return the income and wealth gaps to some golden idealremains an open question. But the trends definitely are turning. Now is most certainly not a time to implement radical policies to correct a problem that increasingly will lie in the past.

We’ve written much on the role of demographic changes in the future economy in our series, The Future in Focus. What’s your view? Let us know in the Comment section.

Milton Ezrati is Partner, Senior Economist and Market Strategist for Lord Abbett.

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