Piketty's Elasticity of Substitution

August 9, 2014

This note reviews Piketty's argument, which relies on a non-standard definition of capital stock.

Thomas Piketty explains a rising profit share, the macroeconomic expression of rising income and wealth inequality, by claiming that it is technologically easy to substitute capital for labor in production, which amounts to a technical rather than social explanation of inequality. In light of the theory of land rent, it discusses why the non-standard capital definition is problematic for his explanation. An estimate of the substitutability, called elasticity of substitution, for Piketty's data also with a standard definition of capital casts doubt on Piketty's hypothesis of high substitutability and calls for other macroeconomic arguments.

Author: Gregor Semieniuk
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