Thomas Piketty

In what one critic called “an extraordinary about-face,” French economist Thomas Piketty has downplayed the central thesis of his best-selling book “Capital in the Twenty-First Century.”

Piketty rocketed to fame with the theory he summarized as r>g: return on capital (r) outpaces the growth rate of the economy (g) over time, tending to increase wealth inequality. More than 1.5 million copies of the book in its English translation have been sold, and Nobel Prize-winning economist Paul Krugman hailed it as perhaps the most important economics book of the past decade.

But in an article slated for publication in the American Economic Review, Piketty argues that political shocks, institutional changes, and economic development played a major role in inequality in the past and will likely do so in the future.

“I do not view r>g as the only or even the primary tool for considering changes in income and wealth in the 20th century,” he writes, “or for forecasting the path of inequality in the 21st century.”

Piketty also said in the article titled “About Capital in the 21st Century” that he does not “believe that r>g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, e.g. supply and demand of skills and education.”

Economist and financier Robert Rosenkranz, writing in The Wall Street Journal, said Piketty had consigned his formula to “irrelevance” and disappointed progressives who had seized on it to press their claims for higher taxes on the wealthy.

“In an extraordinary about-face, Mr. Piketty has backtracked, undermining the policy prescriptions many have based on his conclusions,” Rosenkrantz said.

Other critics have argued that Piketty’s policy recommendations were more ideologically than economically driven and could do more harm than good.

In his article for the American Economic Review, he repeated his support for a tax on the accumulation of wealth, saying the optimal inheritance tax rate “might be as high as 50 to 60 percent, or even higher for top bequests.”

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