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Piketty’s claims about inequality not supported by the evidence

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It’s fair to say that French economist Thomas Piketty’s book, Capital in the Twenty-First Century, has succeeded in reigniting the inequality debate in many parts of the world. One of the book’s core arguments is that capitalist economies inherently lead to greater inequality—the so-called “central contradiction of capitalism.” It turns out, however, that a new study, along with a series of others, raises serious questions about the validity of the book’s core argument.

According to Piketty, changes in economic inequality can be explained by changes in the gap between the return on capital (including rental income from owned properties, interest income earned on savings, and income generated from investments) and the rate of economic growth. If the overall return on capital exceeds the rate of economic growth, then income from capital will represent a larger share of total national income. This affects inequality because capital income is less equally distributed than other sources of income such as labour income, meaning a larger share of income will go to upper income earners. Put simply, as the gap between the return on capital and economic growth grows, inequality is said to increase.

Yet a number of problems have been uncovered with both the theory and data in Piketty’s book. Most recently, a study published last month by the International Monetary Fund (IMF) analyzed data for 19 countries (including Canada) from 1980 to 2012 found “no empirical evidence that the dynamics move in the way Piketty suggests.”

In fact, the IMF study points out that the evidence contradicts Piketty’s conjecture that a larger gap between the return on capital and economic growth leads to higher inequality. In at least 75 per cent of the 19 countries examined, larger gaps between the return on capital and economic growth actually led to less inequality. This finding is consistent with an earlier study by MIT professor Daron Acemoglu and University of Chicago professor James A. Robinson which found the gap is negatively correlated with inequality.

Although Piketty’s book has had mainstream success and has shone a light on an important issue, its core argument does not withstand empirical scrutiny.

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