Capital in the Twenty-First Century: Reinterpreting the fundamental contradiction of capitalism

ABSTRACT

At a theoretical level this article discusses Piketty’s hypothesis that the distribution of income and wealth tends to become more concentrated over time when the rate of return on capital is greater than the growth rate of real output. We develop a post Keynesian model of growth and distribution showing that once capital is differentiated from wealth, the increase in income and wealth concentration actually occurs when the rate of valorization of financial and real estate assets is greater than the growth rate of real output, and that this situation may be triggered by financial liberalization.

KEYWORDS:

• Capital
• growth
• income distribution
• Thomas Piketty

JEL CLASSIFICATIONS:

• E11
• E12
• E25

Notes

1. Wealth is the total sum of assets minus the total outstanding debt. In English, Portuguese, and Italian alike, we say that this net total is the capital of a person or an institution. But in economics, capital has a different meaning, that is, of a production factor. As such, it is a fundamental input of the production process in the form of machinery, equipment, and buildings. It is therefore distinct from “wealth.” Assets like objects of art, which are components of personal wealth, are not recorded as capital because they are not directly employed in production. Of greater magnitude, values in capital markets and the financial part of productive corporations can fluctuate significantly, much more than national income.

2. For a complete description of the positive correlation between uncertainty level and the rigidity of a behavioral rule, see Sordi and Vercelli (2012).

3. We note that since $$0<\frac{\mathrm{\partial }{f}^{\ast }}{\mathrm{\partial }\overline{f}}<1$$, financial liberalization produces a reduction in equilibrium capacity utilization due to the reduction of the difference between $$f^{\ast }$$ and $$\overline{f}$$. This in turn amplifies its negative effect on growth. However this result holds only when the Keynesian stability condition holds, that is, ρ₁ − sΓ < 0. If this is not the case the effect over capital accumulation is ambiguous because $$\frac{\mathrm{\partial }{f}^{\ast }}{\mathrm{\partial }\overline{f}}$$ might become greater than one or negative. In the first case, we observe an increase in equilibrium capacity utilization that might counterbalance the negative effect of $$f^{\ast }$$ on growth. In the second case, it is quite obvious that financial liberalization becomes desirable at least in terms of growth rates.

4. Minsky (1982; 1993) identifies three possible financial regimes for a firm. In the first, called hedge, revenues are sufficient to cover total investment and servicing of debt. An agent has a hedge or secure posture when his expected income allows him to meet all his financial commitments in a finite time horizon. In this case “(the hedge firm) covers its debt service and investment, so that it is in a position to reduce its net indebtedness” (Foley, 2003, p. 159). In the second regime, the firm can meet the debt service with its own revenues, but cannot do it with the principal. If for some periods the financial commitments are higher than expected income, then the agent has a speculative posture. The debtor and creditor speculate about whether the debtor will be able to refinance its debt in the future. In this the firm has to increase its debt in order to complete its expansion program: “The speculative firm can cover its current debt service out of its net revenues but borrows in order to finance some part of investment” (Foley, 2003, p. 159). Finally in the Ponzi regime, the firm’s revenues are not even sufficient to service its debt and it has to sell assets or borrow in order to pay the interest on its debt. In both cases, the firm’s net worth declines in time since its liabilities are increasing, which means a heavier burden on future revenues (Minsky, 1993). Then the firm is in a highly vulnerable position. For another formalization of the Minskyan economy, see Keen (1995, 2013).

Additional information

Notes on contributors

M. J. Dávila-Fernández

Marwil J. Dávila-Fernández is a PhD Candidate in Economics at the Department of Economics and Statistics, University of Siena.

J. L. Oreiro

José Luis Oreiro is a Professor at Department of Economics, University of Brasília (UnB) and a Researcher at National Scientific Council (CNPq).

L. F. Punzo

Lionello F. Punzo is a Professor at Department of Economics and Statistics, University of Siena.

S. Bimonte

Salvatore Bimonte is a Professor at Department of Economics and Statistics, University of Siena.