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A Post-Keynesian response to Piketty's 'fundamental contradiction of capitalism'

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  • Felix Lopez Martinez
  • Engelbert Stockhammer

Abstract

In Capital in the Twenty-First Century, the French economist Thomas Piketty develops a new and rich set of data that deals with income and wealth distribution, output-wealth dynamics and rates of return, and has proposed as well some “laws of capitalism”. At the core of his theoretical argument lies the “fundamental inequality of capitalism”, an empirical regularity that states that the rate of return on wealth is higher than the growth rate of the economy. This simple construct allows him to conclude that increasing wealth (and income) inequality is an inevitable outcome of capitalism. While we share some of his conclusions, we will highlight some shortcomings of his approach based on a Cambridge post-Keynesian growth-and-distribution model. We argue, first, that r > g (i.e. that the rate of return on wealth is greater than the growth rate of the economy) is not necessarily associated with increasing inequality in functional distribution; second, Piketty commits a fallacy-of-composition argument when he says that the necessary condition for r > g is that capitalists have to save a large share of their capital income; third, post-Keynesian economists can learn from Piketty’s insights about personal income distribution and incorporate them into their models; and, fourth, we reiterate the post-Keynesian argument that a well-behaved aggregate production function does not exist and it therefore cannot explain the distribution of income.

Suggested Citation

  • Felix Lopez Martinez & Engelbert Stockhammer, 2014. "A Post-Keynesian response to Piketty's 'fundamental contradiction of capitalism'," Working Papers PKWP1411, Post Keynesian Economics Society (PKES).
  • Handle: RePEc:pke:wpaper:pkwp1411
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    References listed on IDEAS

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    Cited by:

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    2. Joan R. Rovira, 2017. "Secular stagnation and concentration of corporate power," Working Papers PKWP1704, Post Keynesian Economics Society (PKES).
    3. Kotz, David M. & McDonough, Terrence & McMahon, Can, 2019. "Reading Capital in the Twenty-First Century: Thomas Piketty and political economy [Lire Le Capital au xxie siècle : Thomas Piketty et l’économie politique]," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 26.

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    Keywords

    Rate of return; income distribution; post-Keynesian growth and distribution models; Cambridge equation; Pasinetti's theorem;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B50 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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