Question

What has happened to the capital-income ratio between 1975 and 2010 in the wealthy

developed countries? How important is Piketty’s “second law of capitalism” in

explaining this evolution, and does this explanation fit the data for all countries? What

other factors does Piketty put forward to explain the evolution of the capital income

ratio over this period?

Answer 1

Thomas Piketty's work on capital in the twenty-first century based on the income-wealth inequality of developed countries in the world. Based on his investigation, he concluded that long-run historical data, the wealth-income ration rose in the current decade after falling because of two world wars and the great depression — not only the wealth-income ratio but also the capital income ratio and income concentration also risen after the 1970's. In his argument, the rise in inequality because of return on capital is higher than that of the growth rate of the economy. The following have affected from 1970 to 2010 in capital income ratio.

1. Capital-labour ration is stable at a constant level in the eighteenth and nineteenth century but falls at the beginning of the twentieth century and again rise in the twenty-first century.

2. The capital share of income moves in the same direction of the capital-output ratio. Then decline in the middle of the 20^th century then modest at the beginning of the twenty-first century.

3. The return on capital is less constant in 18^th and 19^th century further decline in the twenty-first century.

Piketty’s work on the second law of capitalism states that the ratio of saving rate to the economy’s growth is the ultimate force of capital to income ratio over the long run. The ratio of saving income ratio and wealth income ratio is not independent across countries because of the effect of common shocks like the business cycle, technology and also the globalization.