Skip to content

The Moral Dimensions of Capital: Matthew Kim provides an economist’s perspective


Editor’s Note: Today’s entry in our forum on Thomas Piketty’s Capital in the Twenty-First Century is by Matthew Kim, Professor of Economics at the University of St. Thomas. Kim’s remarks were written for a discussion on economic justice that took place on February 5 at the Terrence J. Murphy Institute for Catholic Thought, Law, and Public Policy. Panelists were asked to respond to Piketty’s book from from their specific disciplinary concerns—in this case, Kim’s perspective as an economist—rather than to respond more broadly.

Please do not cite these remarks without the explicit permission of their author.

This is the sixth post in our forum, which kicked off with an introductory post, where you’ll find an index of all the posts in the forum.

For the benefit of those who may not have found time to read all 700 pages of the book, let me provide a very brief overview of some of Piketty’s argument, which I will follow with an even briefer summary of a few praises and critiques of Piketty’s work from my perspective as an academic economist.


Piketty is concerned about many things in his book, but arguably, chief among them is the evolution of “capital” within a nation’s economy and how the capital evolution can explain income inequality both across nations and over time. (Piketty uses the terms “capital” and “wealth” interchangeably.)

Piketty identifies what he calls the “Fundamental Force for Divergence,” the mechanism that generates a concentration of wealth (and, in turn, income) among the economic elite in society. That mechanism is characterized by the mathematical inequality r > g, where r denotes the average annual rate of return on capital (including profits, dividends, interest, and other income, that flows from capital) and g denotes the rate of growth of the economy (that is, the annual increase in national income or output).

With respect to the logic of r > g, Piketty explains,

When the rate of return on capital [r] significantly exceeds the growth rate of the economy [g] . . . then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels… What is more, this basic force for divergence can be reinforced by other mechanisms. For instance, the savings rate may increase sharply with wealth. Or, even more important, the average effective rate of return on capital may be higher when the individual’s initial capital endowment is higher. [In other words, the divergent force may be even stronger at higher levels of wealth.] (26)

In summary, Piketty’s central thesis is that periods of increasing inequality occurred when r > g, whereas periods of decreasing inequality occurred when r < g. He argues that r > g is the historical norm for most of antiquity to the present; for a relatively brief period of decreasing inequality (during the middle of the 20th century), r < g. Piketty argues that moving into the 21st century, we should fully expect r > g again—and, if his thesis is correct, a corresponding return to increasing inequality of income and wealth.

One of Piketty’s boldest proclamations is his prescription for how a society could avoid the deleterious effects of r > g . . . and that is basically to impose a global progressive tax on capital, which would effectively reduce the magnitude of r.


First, Piketty’s book is very well written. Comparing Piketty’s writing to that of the typical economist is like comparing a Shakespearean sonnet to a refrigerator owner’s manual.

Second, Piketty rightly encourages economics, as a discipline, to migrate back toward questions of social importance. To be clear, there are plenty of economists that have already migrated (or never left in the first place), but there is also a non-negligible number of economists that still need to get the memo.

Third, Piketty undertakes a monumental and laudable task of compiling and analyzing reams of historical data to carefully document the evolution of income and wealth distributions spanning both time and space.

Fourth, Piketty is a great theorist in his own right—yet his book contains little to no formal theory. That Piketty is able to exposit the formal theory but chooses not to is a testament both to his ability to extract the merest essential components from complex ideas and to his ability to communicate those complex ideas using non-technical language. (However, the lack of formal theory, in some instances, could be construed as a liability, which I will briefly discuss shortly.)


First, virtually all economists (including Piketty) believe in a regularity called the “law of diminishing returns”: that is, as the quantity of some resource increases, the incremental return on an additional unit of the resource is expected to decrease.

For example, suppose my wife and I want to shovel snow off our driveway. The return on obtaining our first snow shovel is relatively high, as is the return on obtaining a second shovel. However, at some point, obtaining an additional shovel will generate a smaller return than the previous shovel—in this case, it would probably occur with the third shovel. Even though this may be an extreme example, the same logic applies to most, if not all, resources.

Therefore, as capital accumulates in society, the return on capital (r) is expected to decrease, which would create a natural counter-pressure to the divergent force of inequality implied by the r > g logic. Piketty acknowledges the law of diminishing returns, but claims that as capital accumulates, r will decrease so slowly that capital will continue to accumulate and concentrate among the wealthy. Piketty devotes a fair amount of non-technical prose to discuss his assertion; however, in technical parlance, the assertion’s validity wholly depends upon the value of the elasticity of substitution between capital and labor. A reader who is interested in evaluating Piketty’s claim regarding the elasticity of substitution is referred to an endnote that, in turn, simply refers the reader to an online appendix (see page 37 and following). Without getting technical, the evidence Piketty’s cites to support his claim is arguably tenuous.

However, the validity of his technical argument is not my concern here. Rather, given 1) the centrality of the law of diminishing returns in economic reasoning, and 2) that Piketty’s central thesis rests upon the “slowness” of the diminishing returns to capital, I would have expected Piketty to anticipate a large amount of push-back on this part of his logic. Thus, regardless of whether Piketty’s technical argument is correct, his choice to relegate such an important argument to an online appendix and provide (arguably) questionable evidence left himself exposed to substantial criticism that presumably could have been avoided.

Second, regarding Piketty’s policy prescription of taxing wealth: he calls his proposal “utopian” in its political viability. This is not my chief concern. Rather, my concern is that, on one hand, Piketty affirms that r and g are not static parameters, but rather are dynamic outcomes of a complex system of choices, institutions, chance events, etc.; yet, on the other hand, Piketty offers no explanation for how r and g might be related in an economy. (This is one instance that a formal theory of wealth inequality would be helpful.)

The concern is that if a national government (or a supranational government) attempts to artificially depress the value of r, say through a global progressive tax on capital, could it generate unintended consequences? For instance, could a tax on capital actually widen the gap between r and g? I am not claiming that this would necessarily happen; rather, I simply emphasize that economists are often concerned with attempting to understand the mechanisms for relationships among economic variables—so the absence of any discussion of how r and g could be related is, to me, a notable omission.

1 Comment

Leave a Comment

You can use these HTML tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>