Capital in the twenty‐first century: a critique

I set out and explain P iketty's model of the dynamics of capitalism based on two equations and the r  >  g inequality (his central contradiction of capitalism). I then take issue with P iketty's analysis of the rebuilding of inequality from the 1970s to the present on three grounds: First, his model is based on the (neo‐classical) assumption that companies are essentially passive actors who invest the amount savers choose to accumulate at equilibrium output – leading to the counterintuitive result that companies respond to the secular fall in growth (and hence their product markets) from the 1970s on by increasing their investment relative to output; this does indeed imply increased inequality on P iketty's β measure, the ratio of capital to output. I suggest a more realistic model in which businesses determine investment growth based on their expectations of output growth, with monetary policy bringing savings into line with business‐determined investment; the implication of this model is that β does not change at all. And in fact as other recent empirical work which I reference has noted, β has not changed significantly over these recent decades. Hence P iketty's central analysis of the growth of contemporary inequality requires rethinking. Second, despite many references to the need for political economic analysis, P iketty's analysis of the growth of inequality in the period from the 1970s to the present is almost devoid of it, his explanatory framework being purely mathematical. I sketch what a political economic framework might look like during a period when politics was central to inequality. Third, inequality in fact rose on a variety of dimensions apart from β (including poverty which P iketty virtually makes no reference to in this period), but it is unclear what might explain why inequality rose in these other dimensions.