Question

2. (This question is about your reading of Piketty’s (2014) Introduction of Capital in the Twenty First Century.)
2.1. Explain the theory of the “Kuznets Curve”.   
2.2. According to Piketty, income and wealth inequalities can be attributed to what he calls the “fundamental inequality”. Explain this fundamental inequality and how it helps to explain rising income and wealth inequalities.

Answer 1

Q1. Kuznets curve is used to demonstrate the hypothesis that economic growth and development initially leads to greater inequality followed by the reduction of inequality in the later period. The idea was first proposed by American economist Simon Kuznets. As economic growth is a result of the creation of better products, it usually improves the income of workers and producers who participate in the first wave of innovation. The industrialization of an agriculture-based economy is a general example. This inequality, however, tends to be of a short run nature as workers and producers who were not benefitted by the first wave of reforms catch up the wave in later periods, improving their income levels.

Q2. In his study of inequality and a historical overview of the dynamics of wealth distribution, the author examines income, wealth distribution and income distribution inequality in the light of wealth and income interconnectedness. Accordingly, the process of the accumulation and concentration of wealth is seen as a significant force of divergence, which, in the conditions where return on equity is high and economic growth poor, poses the main threat to the long-term dynamics of wealth distribution. It is emphasized that in circumstances where, over a long period of time, the rate of return on capital significantly exceeds the rate of economic growth, there is a risk of divergence in the distribution of wealth, which Piketty identifies as fundamental inequality. If a growing trend of return on capital (between 4% and 5%) significantly exceeds the growth rate for a long period of time, the share of capital income in the total income will grow faster, which is why there will be a greater concentration of wealth in the hands of a small number of individuals, which T. Piketty illustrates on the example of increasing the share of the first top 10%, only to be followed by the top 1%, and eventually 0.1% of the population in the total wealth. At the same time, this fundamental inequality is not affiliated with any of market imperfections.