Has a 26-year-old graduate student written the most robust response to "Capital" yet?by George Magnus / March 29, 2015 / Leave a comment
Capital in the 21st Century, the zeitgeist book by Thomas Piketty, the winner of Prospect‘s 2015 World Thinkers poll, has become a totem for the ubiquitous interest in income inequality, regardless of whether people have read or understood the book, or agree with its conclusions. It is fitting then that we should ask Matthew Rognlie to take a bow.
Matthew who, you ask? Rognlie is a graduate student at the Massachusetts Institute of Technology, and at the tender age of 26, he has just published probably the most robust riposte to Piketty yet. Starting off as a blog, Rognlie’s work has morphed into a 50-page academic paper, published at the Brookings Papers on Economic Activity. Entitled modestly, “Deciphering the fall and rise in the net capital share,” Rognlie’s paper is not easily accessible and is dense with algebra. Yet, this apprentice says some important things that sometimes contradict Piketty, while offering conclusions that are by no means incompatible with those of his sorcerer.
Piketty’s central theme, by way of reminders, is that because the rate of return on capital normally exceeds the rate of economic growth, capital accumulates, the rich who own capital get richer and pass it to their progeny, and income inequality intensifies. Observing these trends over long swathes of history and the shift in income composition from labour to capital, Piketty asserts that the future is pre-ordained, and that we can only address the problem by globally co-ordinated wealth taxation.
Rognlie isn’t totally comfortable with all of Piketty’s insights. He disputes that the rate of return on capital is high and reasonably stable over time. He thinks it is prone to decline from time to time as diminishing returns to the accumulation of capital set in. We might think, for example, of the speedy obsolescence of new products and processes, courtesy of rapid changes in technology. This means that owners of capital have to keep writing off and re-investing their returns instead of living off them.
He thinks the recent behaviour of income shares is misunderstood. He concurs with Piketty that the capital share of income fell sharply in the first half of the 20th century, but says that instead of recovering…