| Description |
In his influential book Capital in 21st Century, Thomas Piketty gathered historical data to understand inequality between the top income group and the rest of the society across countries. This paper analyzes Piketty's fundamental laws of capitalism, and his conclusions about different forces driving inequality. First, the paper traces the theoretical foundation of Piketty by summarizing the ideas of Malthus, Ricardo, Marx and Kuznets, analyzing their influence on Piketty, and Piketty's responses on their main arguments. Next, the paper dissects and assesses Piketty's fundamental formula of capital share α=r×β and long-run capital/income ratio β=s/g by conducting tests using available data. With regard to β, the capital/income ratio, the paper tests its correlation with the capitalistic intensity level of a subject country. In terms of r, the capital return, the paper uses independently collected empirical data to experiment on the capital return in the form of rent and the corporate returns on capital. Furthermore, the paper tests on the main conclusion of Piketty's work, which claims the return on capital exceeding the growth rate (also stated as r>g) is the main force of divergence that perpetuates historical inequality. In the end, the paper also uses qualitative data to analyze the effect of the diffusion of knowledge as a major force of convergence in the development of inequality. |
