Thomas Piety Capital In The Twenty First Century Analysis

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The explanation for income inequality has been a controversial topic for economist. In effort to explain this Thomas Piketty wrote his New York Times best seller “Capital in the Twenty-First Century”. In the nearly seven hundred-page book he analyses the past events in the Europe and United States Economies and using that data to create new methods for explaining current economic events. With this he concluded that if rate of return on capital were greater than real economic growth there would be significant income inequality (Holcombe 2015). However, there is some controversy on his evaluation and interpretation of the information. This essay will discuss how Piketty came to this conclusion, the arguments against his interpretations, and…show more content…
Wealth inequality is following similar trends. According to figure 10.5 the top 10% and top 1% share of wealth peaked before WWI, fell drastically during the world wars and are now back on the rise (Kirkby Part 2). In 2010 the top 10% share of wealth surpassed 70%, only 10% shy of the historical peak. Finding the reasoning behind this significant level inequality was one of Piketty’s goals in his book “Capital in the Twenty-First Century”. To do so he pulled economic and historic information so that he could get a fuller picture of the situation rather than a purely economic explanation. Piketty based his arguments on the marginal product theory of wages one that was relatively new (compared to other popular theories) but controversial. Marginal productivity theory of wage is based on the concept of marginal product, which is the idea that by increasing one unit of an input, holding others constant creating additional output, the marginal product (Moseley 2015). This theory viewed the relationship between capital and labor as complements unlike the application in the 19th century that viewed the two elements as substitutes (Holcombe 2015). By using this theory…show more content…
His use of historical economic events to explain the current economic situation still provides credible information. For instance, Piketty believes that the world capital/income ratio which represents the share of income from capital in National Income (Doody, 2015) will increase to 600% GDP in less than 50 years (S.H. 2014). This is because he through his research he saw that these ratios have been increasing and for Piketty what happened in the past is set to soon repeat itself therefore call for the ratios to continue to do so. He came to this conclusion due to two major findings; capital/income ratio fell drastically after the world wars and that income growth rate is decreasing (Kirkby, Part 1). Specifically Piketty estimates that capital/income ratios will grow to 600% in less than 50 years, which is based upon his assumptions that global growth will fall to 1.5% and the global savings rate will settle around 10% (S.H. 2014). Below figure 3 shows ratios from 2010 being compared to the ratios Piketty believes will make up the capital/income ratio 15 years from then with his second fundamental law of capitalism used to predict GDP. Capitalist in preparation of their future financial plans can use this information so they can be best situated for the future economy. Others have used Piketty’s data to find similar solutions to these economic
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