However, Piketty shows mathematically in one of his papers that as long as capital can be accumulated for any period of time, and as long as there is some source of wealth inequality in the economy, wealth inequality must be increasing as the difference r – g grows. In practice, of course, capitalists face risk, split their fortunes among descendants, and consume at least some fraction of their wealth. In theory, if a capital owner invested one unit of capital, got a riskless return r on it every year, and reinvested this return completely (without consuming any of the capital or giving it away to her heirs), while a worker started out with a wage equal to one unit, which she consumed entirely but which grew at g percent per year, the ratio of the capitalist’s wealth to the worker’s wage would grow at the rate r – g. (In fact, the converse, r g may be a strong amplification mechanism for inequality within the economy. The formula r > g is a standard property of efficient capital markets in most modern macroeconomic models. This is not a new concept for economists. This formula states that the net rate of return to capital ( r) exceeds the growth rate of output ( g). The main argument in Capital for why wealth inequality is set to rise comes from a simple relation: r > g. My analysis starts with Piketty’s most famous formula, r > g. In this series, I will describe the arguments that Piketty makes to conclude that wealth inequality will rise and that global capital taxation is needed to stop it, and present a critical discussion of these arguments. Piketty proposes that governments worldwide intervene to prevent this rise in inequality, most importantly by levying a global tax on capital. He supports this argument with voluminous evidence on the history of the capital stock and of inequality in developed countries, which he argues have been moving in ways consistent with his theory. In Capital, Piketty argues that wealth inequality is set to rise from its relatively low levels in the 1950s through the 1970s to the very high levels it once occupied at the dawn of the Industrial Revolution-the time of the heroes of Jane Austen and Honoré de Balzac. It made the New York Times bestseller list, generated myriad reviews and responses from economists at top institutions, and was the subject of a standing-room-only session at the recent American Economic Association annual meeting. Thomas Piketty’s 2014 book Capital in the Twenty-First Century may have been a greater sensation upon publication than Karl Marx’s nineteenth-century Das Kapital.
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