Krusell and smith correctly point out that even with more realistic depreciation rates below pikettys assumption of positive net saving rates implies that the gross savings rate will increase sharply when the gdp growth rate declines. Capital in the twentyfirst century predicts a rise in capitals share of income and the gap r g between capital returns and growth. Although, piketty 2014 denotes by g the long run rate of growth of national income, which combines both increases in the labor force and in technology, krusell and smith 2015 seems to abstract from population growth and, in their analysis of optimal savings, g stands for the rate of growth of laboraugmenting technology, see their. Capital controls in the 21st century barry eichengreen, andrew k rose, 5 june 2014 since the global financial crisis of 20082009, opposition to the use of capital controls has weakened, and some economists. And their analysis appears to devastate both pikettys. May 28, 2014 per krusell and tony smith have a new paper on piketty pdf, which i take to be reflecting a crystallization of opinion on the theory side. Per krusell and tony smith have a new paper on piketty pdf, which i take to be reflecting a crystallization of opinion on the theory side.
The relationship between saving and growth the economist. It is krusell and smith 2014 that suffers from mathinesspeople not in control of their models deploying algebra untethered to the real world in a manner that approaches gibberish. Testing pikettys hypothesis on the drivers of income. A quantitativetheoretic investigation joachim hubmer, per krusell, and anthony a. Pdf a note on piketty and diminishing returns to capital. Per krusell, and institute for international economic studies, university of gothenburg, centre for economic policy research, and national bureau of economic research. Sep 12, 2014 thomas pikettys capital in the twentyfirst century1 is a treatise on how wealth inequality evolves in capitalistic economies. The conclusions are robust to alternative estimates of r gand to the exclusion or inclusion of tax rates in the calculation of the real return on capital. The wealth distribution in bewley models with investment risk. Krusell and smith 2015 show, however, that under more standard assumptions about capitalist saving. The solow model and krusell and smith 2015 10 marks. This paper tests pikettys predictions that in the long run i the capitalincome ratio, ky, is driven by the ratio between the rates of saving and income growth, s and g. The macroeconomics of top income and wealth inequalityis describing the link between the empirical facts and macroeconomic theory. Over at equitable growth paul romer inquired why i did not endorse his following krusell and smith 2014 in characterizing piketty and piketty and zucman as a canonical example of what romer calls.
Piketty assumes that the et saving rate stays constant as growth falls. Piketty and future inequality the relationship between saving and growth. See kuznets 1955, benabou 2002 or piketty 2014 for important contributions to this large literature. Graduate school of industrial administration, carnegie mellon university we derive assetpricing and portfoliochoice implications of a dynamic. I have not read thomas pikettys book on capital in the twentyfirst century, and therefore cannot possibly have given it a fair reading. Thus, in this note i want to lay out the differences using the super simple solow model that tyler and i developed in. Whats wrong with capital in the twentyfirst centurys model. Find an expression for the steadystate capital stock per worker, k, in the piketty version of the solow model. Introductionthe textbook modelpikettys modelcomparisonsdata ispikettyssecondlawofcapitalism fundamental. Though we could solve the full model for the simple krusell smith case, this ability to reduce away irrelevant part will be essential for bigger problems.
This assumption requires that the gross saving rate tends to one as g goes to zero, which seems quite implausible. Some fundamental problems with thomas pikettys capital in. Per krusell and tony smith is pikettys second law of. The solow model and krusell and smith 2015 10 marks consider the solow model, where we let y t denote total gross output, k t the total capital. As noted in krusell and smith 2014, this result is sensitive to the unusual assumptions made, particularly to the behavioral assumption about constant net savings as a function of net output. Per krusell institute for international economic studies, university of gothenburg, centre for economic policy research, and national bureau of economic research anthony a. Furthermore, piketty assumes that the net saving rate stays constant as growth falls. The apparently increasing income and wealth inequality is an important and difcult problem. Pdf piketty argues that there are longrun fundamental laws in capitalism that will. Knowing if pikettys hypothesis is correct is of crucial importance.
In this column we would like to present one perspective on the book that does not seem to have attracted sufficient attention in the public discussions. Jun 02, 2014 krusell and smith lay out the solow and piketty growth models very nicely but perhaps not in a way that is immediately transparent if you are not already familiar with growth models. This assumption requires that the gross saving rate tends to one as ggoes to zero, which seems quite implausible. Why does portfolio choice correlate across generations, research discussion papers. Assessing pikettys laws of capitalism monash university. Bequests, imperfections in factor markets, and longrun inequality. Messrs krusell and smith plot the net savings rate over time and show that it has fallen gradually toward zero. Since the early 2000s, research by thomas piketty and emmanuel saez and their coauthors. Laws of pikettys capitalism munich personal repec archive. Tony smith and per krusell wrote a recent paper providing a thorough discussion of pikettys highly questionable treatment of saving. Discussion other sources of randomness in wealth growth pikettyzucman section 5.
We develop these arguments in detail in a separate document krusell and smith 2014. May 18, 2015 paul romer inquired why i did not endorse his following krusell and smith 2014 in characterizing piketty and piketty and zucman as a canonical example of what romer calls mathiness. Krusell 2014 already showed that you avoid this behavior if you use, as usual. It is time for us to put down pikettys book and resume studying. Piketty assumes that the \net saving rate stays constant as growth falls. This is the magic of krylov subspace based reduction in action. Krusell smith algorithm davidrpughpyeconomics wiki github. There are no errors in the formula piketty uses, and it is actually consistent with the very earliest formulations of the neoclassical growth model, but.
Yale university and national bureau of economic research i. Understanding thomas piketty and his critics the heritage. Our goal is to shed light on this assertion using fairly standard macroeconomic tools. Per krusell, 2019 previously circulated as nber working paper 23011 under the title the. Per krusell and tony smith is pikettys second law of capitalism fundamental. Krusell and smith 2015 criticize the second fundamental law because it implies savings behavior that is not empirically grounded. May 28, 2014 1 introduction thomas pikettys recent book capital in the twentyfirst century is a timely and important. Is piketty s \second law of capitalism fundamental. It is the most talkedabout and most critiqued economics book of. Discussion other sources of randomness in wealth growth piketty zucman section 5. On other hand, krusell and smith 2014 note that pikettys assumption of a. I do, however, trust per krusell and tony smith to have given it a fair reading, because krusell and smith have long track records as diligent and thoughtful scholars.
Capital controls in the 21st century vox create account. According to economists per krusell and anthony smith jr. Smith, is pikettys second law of capitalism fundamental. However, these theories then typically assume that this capital is owned by a representa. In this note, i argue that neither outcome is likely given realistically diminishing returns to capital accumulation. Insteadall else equalmore capital will erode the economywide return on capital. Pdf per krusell, institute for international economic studies, cepr, and nber, and tony smith, yale university and nber ht tyler cowen at marginal revolution. Institute for international economic studies, university of gothenburg, centre for economic policy research, and national bureau of economic research. Assessing pikettys second law of capitalism oxford. Piketty on growth and distribution piketty on growth and distribution. Paul romer inquired why i did not endorse his following krusell and smith 2014 in characterizing piketty and piketty and zucman as a canonical example of what romer calls mathiness. The book capital in the twentyfirst century by the french economist piketty about the inequality of income and wealth distribution is already quite a while in the spotlights. The historical evolution of the wealth distribution.
In krusell and smith 1998, we in fact studied, as a second leading example, a model. Krusell and smith 2015 criticize the second fundamental law because it implies savings behaviour that is not supported empirically. Though we could solve the full model for the simple krusellsmith case, this ability to reduce away irrelevant part will be essential for bigger problems. Thomas pikettys capital in the twentyfirst century puts forth a logically consistent. The wealth distribution in bewley models with investment risk jess benhabib new york university alberto bisin new york university and nber. Note how the errors decreases only for the parts that we required to be observable while the irrelevant parts were reduced away. Piketty could have avoided such a basic mistake if he had worked with gross instead of net variables. In fact, we show that such compositional e ects are small both relative to the data and to the changes in capital ownership generated by our model. The piketty transition federal reserve bank of cleveland. Pikettys capital in the twentyfirst century is the latest contribution in this line of work, especially.
Smith 2015 criticize the second fundamental law because it implies savings behavior that is not empirically grounded. Piketty takes us on a historical and geographical tour of inequalities in income and wealth. Income and wealth heterogeneity, portfolio choice, and equilibrium asset returns per krusell university of rochester anthony a. Krusell and smith lay out the solow and piketty growth models very nicely but perhaps not in a way that is immediately transparent if you are not already familiar with growth models. Thomas pikettys capital in the twentyfirst century1 is a treatise on how wealth inequality evolves in capitalistic economies. Capital and ideology is thomas pikettys third major work, after les hauts revenus en france au xxe siecle piketty, 2001 and capital in the 21st century piketty, 2014. Smith 2015, who say piketty relies on awed theory of savings. Assessing pikettys laws of capitalism semantic scholar. Jason furman 2014, global lessons for inclusive growth overall, the 9 percentage point increase the share of income piketty and saez find going to the top 1 percent from 1970 to 2010 is accounted for by.
This is pikettys second fundamental law of capitalism. Testing pikettys hypothesis on the drivers of income inequality. On piketty and capital at steven landsburg the big. Krusell, smith piketty lof, malinen coyle campos, coricelli, moretti atkinson, morelli most read this monthall time pikettys second law of capitalism vs. Krusell and smith 2014, piketty arrives at the conclusion that inequality will increase explosively as growth falls to zero.
Per krusell institute for international economic studies, cepr, and nber tony smith yale university and nber june 6, 2014 rst version. Thomas pikettys new book has been widely praised for its empirical. May 28, 2014 1 introduction thomas piketty s recent book capital in the twentyfirst century is a timely and important. May 19, 2015 over at equitable growth paul romer inquired why i did not endorse his following krusell and smith 2014 in characterizing piketty and piketty and zucman as a canonical example of what romer calls. August 9, 2017 abstract this paper employs the benchmark heterogeneousagent macroeconomic model to examine drivers of the rise in wealth inequality in the u. Indeed, i think that, instead, it is krusell and smith 2014 that suffers from mathinesspeople not in control of their models deploying algebra untethered to. Access to the online full text or pdf requires a subscription.
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