Capital in the 21st Century Review: Chapter 1 (part 1 of 3)

In case you missed it, here are all reviews of the book done to date.


Capital in the 21st Century Review:  Chapter 1 “Income and Output”


Chapter 1 consists of three parts.

pile of moneyPart 1 outlines the conflict between “capital and labor” and defines capital and wealth.
Part 2 defines the “First Fundamental Law of Capitalism:

α = r × β and briefly explores its implications.


Part 3 Focuses on national income, including how it is measured, and inequality among (as opposed to within) nations


I’ll be reviewing each section at a rate of 1/day, starting today.


Part 1 starts with a tragedy that happened in 2012 in South Africa, reminiscent of events in the United States 100 years ago, in which 34 miners striking for higher wages were killed by police shooting live ammunition. Thomas Piketty cites other 19th Century events in the United States and France as similar.  He then asks whether conflict between labor and capital is inevitable, or a historical artifact.

Continuing on, he points out that the real issue is inequality rather than labor vs. capital per se:

In any case, the Marikana miners were striking not only against what they took to be (The company) Lonmin’s excessive profits but also against the apparently fabulous salary awarded to the mine’s managers and the differences between his compesation and theirs.  Indeed, if capital ownership were equally distributed and each worker received an equal share of profits in addition to his or her wages, virtually no one would be interested in the division of earnings between profits and wages.  If the capital-labor split gives rise to so many conflicts, it is due first and foremost to the extreme concentration of the ownership of capital.  Inequality of wealth—and the consequent income from capital—is in fact always much greater than inequality of income from labor.  (Page 40)

Historically economists believed that capital accounted for a stable share of income:  about 1/3, with the other 2/3 going to labor.  However Thomas Piketty refutes this, pointing out that the ratio was very volatile over the course of the 19th and 20th Centuries.  During the mid-20th Century, the share of income going to capital had crashed to a historic low (or, put another way, labor was getting its historically largest share of income.  “By 2010…capital was prospering as it had not done since 1913.”

Finally come some definitions:

Net National Output =  GDP – depreciation.  In other words, total production minus what is needed to replace capital that has worn out.  (replacing equipment, rebuilding bridges, etc.)

National Income = Net National Output + Net Income from Abroad (Which happens when people in country own foreign businesses.  Net income from abroad was a lot larger (as a % of output) 100 years ago, but these days is a few percent at most.  The one exception being Africa, where income is about 10% below output because so much is foreign-owned.)

Capital = the sum total of nonhuman assets that can be owned and exchanged on some market.  So for example, “human capital” (knowledge and skills) is not capital, while a building or a piece of intellectual property is.

Wealth = Capital  (Some people treat them as different, but Thomas Piketty spends a while justifying why they should be considered one and the same, in a few pages only an economist on a desert island could love.)

National wealth = private wealth + public wealth.  (In most countries, including those of Europe & North America, private wealth is many, many times as large as public wealth.)

National Capital = Domestic Capital + Net Foreign Capital (foreign stuff owned by citizens – domestic stuff owned by foreigners)  This equation mirrors the “National Income” equation above.


Not as much commentary here as elsewhere.  Either it’s fairly straightforward assertions that I agree with, or simple definitions.  Certainly his point that wealth-vs.-poverty is a better axis to view conflict and contrast than capital vs. labor strikes me as self-evident.  Chapter 1 isn’t really at the heart of the book, more like some stuff the author feels needs to be covered before launching into the main thesis of the book.




I read Capital in the Twenty First Century in 2014-2015 and was extremely impressed by both the content and the presentation.  In my views, it’s easily in the running for most important economics book of the last few .  This year I am doing an in-depth, chapter-by-chapter review of the book.  One chapter will be reviewed and discussed every two weeks.

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