Capital in the twenty-first century (personal notes) - Thomas Piketty
Part I: Income and Capital
Chapter 1: Income and Output
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Division of labor and capital from income is the heart of conflicts from traditional to modern societies.
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Ideal division between capitalists and workers is something that no one could answer. If all income go to wages, the company would generate no profit and investors would not be interested to invest in. But low wage over the company income could trigger strikes from workers.
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Capital/Income ratio marked as $\beta$ is a number represent the ratio between capital and a flow of income. In most of developed countries, $\beta$ is equal to 6 or 600 percent. This number could be lower in developing countries. For example, average income of a person could be 30,000 euros per year while the private per capita wealth is 180,000 euros. The capital could be in different forms of saving, stocks, real estate and other investments.
- First fuldamental law of capita: \(\alpha = r \times \beta\)
With:
- $r$: rate of return on capital
- $\beta$: capital/income ratio
- $\alpha$: capital’s share in income
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In wealthy countries in 2010, income from capital (profits, interests, dividends, rents, etc.) generally hovers around 30% of national income. With a capital/income ratio in the order of 600 percent, this means that the rate of return on capital was around 5 percent.
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The return on real estate is usually around 4-5 percent, sometimes a little less. The investment in business is at a greater risk. Thus, the return is usually higher, at 6-8 percent.
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In theory, when rich countries invests some of their spare capital to poorer countries which can give them better returns. Poorer countries could increase their productivity and eventually close the gap with the rich. That could potentially lead to a global convergence. However, as rich countries continue to own a substaintial proportion of the capital that the poorer generates, the gap would have never been closed (as the case of some African countries has been done for decades).
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If we looks at the case of some successful Asian countries (Japan, Korea, Taiwan or more recently China), none of them turns to developed countries by just being benefitted of large foreign investments. In essence, these countries themselves financed the necessary investments in physical captital, and even more, in human capital, which the latest research holds to be the key to long-term growth.
- Knowledge disfussion is the key for the poor to catch up with the rich internationally and domestically. The knowledge disfussion depends on a country’s ability to mobilize financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on.
Chapter 2: Growth: Illusions and Realities
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Demographic growth of a country is affected by many factors: economic, political, cultural, and psychological factors.
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Demographic growth can contribute to the reduction of inequality. Increasing population decreases the influence of capital accumulated in previous generations. This will affect the dynamics of capital accumulation and the structure of inequality.
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Western Europe experienced a golden age of growth between 1950 and 1970. France enjoyed the three postwar decade where their economy growth rate is pretty high (what they called Trente Glourieuses). Between 50s and 80s, the gap betwene English-speaking countries and the countries that lost in the world war (German, Japan) closed rapidly.
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Inflation is largely a twentieth-century phenomenon. Before WWI, inflation is zero or close to it. One of the reason is that the currency usually contains its own value. For example, 1 franc was supposed to contain exact 4.5 gram of fine silver.
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