Does growth reduce inequality?

The people who support a zero-growth economy also tend to be deeply concerned about inequality. You might infer from this that growth is detrimental to equality. However, a new book by the French economist Thomas Piketty suggests the opposite: that growth erodes inequality.

As the Economist’s Free Exchange blog explains:

In Mr Piketty’s narrative, rapid growth—from large productivity gains or a growing population—is a force for economic convergence. Prior wealth casts less of an economic and political shadow over the new income generated each year. And population growth is a critical component of economic growth, accounting for about half of average global GDP growth between 1700 and 2012. America’s breakneck population and GDP growth in the 19th century eroded the power of old fortunes while throwing up a steady supply of new ones.

Tumbling rates of population growth are pushing wealth concentrations back toward Victorian levels, in Mr Piketty’s estimation. The ratio of wealth to income is highest among demographically challenged economies such as Italy and Japan (although both countries have managed to mitigate inequality through redistributive taxes and transfers). Interestingly, Mr Piketty reckons this world, in which the return to capital is persistently higher than growth, is the more “normal” state. In that case, wealth piles up faster than growth in output or incomes. The mid-20th century, when wealth compression combined with extraordinary growth to generate an egalitarian interregnum, was the exception.

Sustained rates of return above the rate of growth may sound unrealistic. The more capital there is, the lower the return should be: the millionth industrial robot adds less to production than the hundredth. Yet somewhat surprisingly, the rate of return on capital is remarkably constant over long periods (see chart, second panel). Technology is partly responsible. Innovation, and growth in output per person, creates investment opportunities even when shrinking populations reduce GDP growth to near zero.

New technology can also make it easier to substitute machines for human workers. That allows capital to gobble up a larger share of national income, raising its return. Amid a new burst of automation, wealth concentrations and inequality could reach unprecedented heights, putting a modern twist on a very 19th- century problem.

It’s clear that Monsieur Picketty does not think economic growth is enough in and of itself: he’s closely associated with the French Socialist Party. However, his work does suggest that ending growth would further strengthen the advantages of those who already have wealth.

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