Saturday, April 26, 2014

Pikkety and The Pareto Distribution of Wealth

Paul Krugman has developed an important insight from Pikkety's book.  He explains how Pikkety's notion of the patrimonial economy or society flows from a basic concept in his book.  Piketty's key concept is that the difference between the after tax return on capital (r) and the rate of economic growth (g) determines the distribution of wealth and income.  Krugman argues that the value of r-g determines the Pareto distribution of wealth and income.

Along the way, Krugman also pokes a large hole in one of David Brook's criticisms of the book that he probably has not read.  Yes, some of the super- rich like Bill Gates and Warren Buffet donate a large share of their wealth to charities.  And Yes, some family heirs will make bad decisions and lose much of their inherited wealth.  That still leads to a Pareto distribution of wealth and income that is determined by the value of r-g.  Krugman has done his homework and he is impressed by Piketty's awareness of the problems in his theory and the arguments that he has used to overcome the problems.

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