A note on Piketty and diminishing returns to capital Matthew Rognlie⇤ June 15, 2014 Abstract Capital in the Twenty-First Century predicts a rise in capital’s share of income and the gap r g between capital returns and growth. In this note, I argue that...
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A note on Piketty and diminishing returns to capital Matthew Rognlie⇤ June 15, 2014 Abstract Capital in the Twenty-First Century predicts a rise in capital’s share of income and the gap r g between capital returns and growth. In this note, I argue that neither outcome is likely given realistically diminishing returns to capital accumulation. Instead—all else equal—more capital will erode the economywide return on capital. When converted from gross to net terms, standard empirical estimates of the elasticity of substitution between capital and labor are well below those assumed in Capital. Piketty (2014)’s inference of a high elasticity from time series is unsound, assuming a constant real price of capital despite the dominant role of rising prices in pushing up the capital/income ratio. Recent trends in both capital wealth and income are driven almost entirely by housing, with underlying mechanisms quite different from those emphasized in Capital. 1 Introduction Capital in the Twenty-F
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