Piketty in the light of Pasinetti and Foley: Income distribution, economic growth and financial fragility

Marwil J Dávila-Fernández,José Luis Oreiro

doi:10.1590/0101-31572015v36n04a01

Abstract

ABSTRACT The paper discusses the hypothesis that the functional distribution of income is not necessary stable along the growth path of a capitalist economy. We reviewed Pasinetti and Foley models showing that if we use the traditional definition of capital, i.e., capital as the value of productive resources (i) r > g is a necessary condition for the existence of balanced growth, and it will not lead to an explosive process of income concentration and (ii) r > i is a necessary condition for a financially robust growth path. Thus we conclude that from a post-Keynesian perspective, Piketty's argument that the root of the increase of inequality in capitalism is that the capital return rate is higher than the growth rate of the economy is wrong.

Highlights

How is income divided between capital and labour? What determines the share of output going to wages and profits? Thomas Piketty in his much celebrated book Capital in the Twenty-First Century maintains that the root of the increase in inequality in capitalism lies in r > g, meaning that the rate of return on capital is greater that the growth rate of real output
The repercussion that Capital in the Twenty-first Century achieve inside and outside the academy shows that questions related to growth and income distribution are far from being solved
Piketty argues that the root of the increase in capitalism inequality is that the capital’s profit rate has showed to be historically superior to the output’s growth rate

Summary

Introduction

How is income divided between capital and labour? What determines the share of output going to wages and profits? Thomas Piketty in his much celebrated book Capital in the Twenty-First Century maintains that the root of the increase in inequality in capitalism lies in r > g, meaning that the rate of return on capital is greater that the growth rate of real output. In a very simple way, the warranted output growth rate in steady-state is unstable and any shock generates an explosive growth path or its collapse to zero (Fazzari et al, 2013) Since those predictions are not verified during the period of the Golden Age, Post-Keynesian authors like Nicholas Kaldor and Luigi Pasinetti developed long run growth models with full employment. This condition does not depend on the existence of different social classes and instead is related with the nature of entrepreneur’s income (Oreiro, 2005) This happens because firms have a higher incentive to save since (i) there is a need of continuous expansion of productivity capacity that would make be possible if part of the funding comes from retaining profits and (ii) the existence of increasing returns make firms competitive position dependent of its market share.

YKr g Sw and once more the condition

Foley and Financial Instability

Hedge Especulative

Findings

Conclusion