Piketty’s almost canonical thesis that r>g (where r is return to capital and g the growth rate of output) has some brilliant anti-thesis coming from the same quarters, economists from both sides of the center, as is evident in the recent book, After Piketty.
What I can draw as inference will be from the world of business, from the usual balance sheets of large and successful corporations, where r can be replaced with return in net worth and g remaing the growth in output. Return from the already accumulated net worth of most corporations has been growing at a faster pace from the growth in output for sure. In some extreme cases output growth is stagnant whereas return on net worth is still growing at a high pace.
So Piketty’s hypothesis has one more evidence from the annals of corporate balance sheets. But the economists have spent precious arguments, both for and against this thesis questioning how could the string of returns from accumulated wealth keep the higher pace than the general output growth, after all marginal product of capital has some limits, given the diminishing marginal return on capital theory.
This actually also boils down to the simple question, how can profit keep growing at a faster pace than the general output, only under this condition the original hypothesis would hold good.
This is however never so difficult to see as profit stems from constant investments in wealth generating projects, within or outside the business, both adding to the stream of return that the original business was churning. This could be in innovation in the existing business, innovation in related businesses, in divestments of less profitable businesses that could be traded off with better opportunities on the anvil. Mergers and acquisitions, at least the successful ones, add to this thesis.
Take the S&P 500 and you will see this in more ways than one. When the allocable surplus cannot be put to better productive use in the existing business, the surplus is invested in other wealth generating projects; buying back shares could be one such project that has yielded higher returns than investing in the core business beyond a point.
But going back to the core question, understanding wealth is more difficult than understanding output.
Wealth is the claim on all future incomes and returns on existing and future investments; this time dimension of wealth needs greater scrutiny. While income from certain current economic activities could end, the future income from existing wealth could be endlessly adding to future wealth. The financial markets provide further ammunitions to this thesis.
But then this leads us to the question of savings as wealth can only happen if savings exceeds consumption and this is where we will find economists stumbling on the question of why consumption should take an inverse relationship to wealth creation.
No wonder the marginal consumption of the rich tends to be zero whereas the poor through their consumption struggle to create marginal wealth.
But the problems of our world also rotate along these familiar lines, if the rich do not consume the growth rates remain subdued and that is where r>g becomes a sullen reminder that if distributional questions are completely ignored we could end up having a world where subdued economic activities would continue to create wealth.
The new book, After Piketty, keeps the debate alive and ticking as the hypothesis is still not falsifiable. Human capital on the other hand as reintroduced, leaves more questions than answers as human capital remains more an enigma than a solution to the puzzle.
My take on human capital is simple, if you want to create personal wealth, you can only do that if you have invested enough on your ability to harness human capital and use it as productively as possible. Human capital has its useful life but it could be passed on and that is where the agency question should be dealt with in relation to stakeholders and their intent.
The purpose of business therefore has to go beyond the question of profit, then and only then the business becomes self serving and sustainable, sublime in all respects.