Minelli, Ε. (2014) “Understanding Piketty: Merit and rent in a growing economy“, VoxEU Organisation, 19 December.
Growth and inequality are back at the centre of the economic debate. This column presents a framework for interpreting Thomas Piketty’s data based on Paul Romer’s model of endogenous growth. Two balanced growth regimes are possible in this framework: one (‘merit’) with a low capital–output ratio, a high interest rate, and high growth; and another (‘rent’) with a higher capital–output ratio, a somewhat lower interest rate, and much lower growth. An increase in the returns to physical capital accumulation compared to innovation could explain a shift from ‘merit’ to ‘rent’.
The publication of Capital in the 21st Century (Piketty 2014) has put the issue of growth and redistribution back at the centre of the economic debate, both in academic and in policy-oriented discussion.
Almost every commentator has praised Piketty and his coauthors for the painstaking work of data collection on the long-run evolution of income and wealth. Their interpretation of the data, and even more so their predictions of further trends have, understandably, given rise to interesting debates.
The discussion has been framed, explicitly or implicitly, in the language of the standard neoclassical growth model, either with fixed saving behaviour, like in the original Solow (1956) model, or with optimising infinite-lived agents.
In this column I would like to argue that Piketty’s data could also be interpreted in a richer framework, based on Romer’s (1990) model of endogenous technical change.
Relevant posts:
- Interview with Thomas Piketty: “The myth of national sovereignty helps big corporations screw us over”, The European Magazine, 12 December.
- World Economics Association (WEA) Real-World Economics Review, Issue no. 69, 07 October 2014, Special Issue on Piketty’s Capital.
- Krusell, P. & Smith, T. (2014) “Is Piketty’s ‘Second Law of Capitalism’ fundamental?“, VoxEU Organisation, 01 June.