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The Role of Capital in Inequality

Thomas Piketty’s “Capital in the 21st Century”, published in 2014, played an important role in directing attention to the issue of inequality in the developed economies of the 21st century. The book was both praised and criticised from many parts of the political and economic spectrum. Least controversial was his laying out of the evidence that inequality of both income and wealth has increased markedly since the 1970s, particularly in the US and the UK. A little more controversial is the suggestion that this increasing inequality is harmful to the societies of those countries. Most controversial, and more technical, was Piketty’s espousal of a ‘fundamental law of capitalism’ that when the return on capital (r) exceeds the rate of economic growth (g) inequality will increase.

The chart below shows the change in the fraction of total income going to the top 10% of the distribution for 1900 – 2010.

The Top Decile Income Share, Europ and the US, 1900 - 2010
Source: Thomas Piketty, Capital in the 21st Century

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