By Alan Shipman
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Extra info for Capitalism without Capital: Accounting for the crash
Conventional economic theory (and a number of radical alternatives, including Marxian theories) assume that the return on capital r will fall as the quantity of capital K rises in relation to national income – an assumption that Piketty endorses (2014: 215–16). 38 Capitalism without Capital With elasticity of substitution of 1 (or below), any rise in β will be offset (or more than offset) by a fall in r, so that capital’s income share α stays unchanged (or declines). To arrive at the steady rise in α since the 1970s – which occurs across the high-income economies, according to Piketty’s calculations – it must be assumed that accumulation of capital K does not significantly reduce the return on capital r.
The word is subtly slipped in to GSG presentations (and the summary of them in this chapter), mainly when a country’s import of saving is described as ‘capital inflow’, creating a surplus on its ‘capital account’ which must (by accounting definition) match the deficit in its current account. For a savings glut to turn onto a capital glut, two further steps are necessary. Savings must turn into investment, and investment must result in net additions to the capital stock. Both of these mechanisms were for a long time central to economic thought, but have taken a battering in recent reassessments.
Savings must turn into investment, and investment must result in net additions to the capital stock. Both of these mechanisms were for a long time central to economic thought, but have taken a battering in recent reassessments. 2 A Still More Obvious Excess: Capital as Wealth Saving may not translate easily into the ‘real’ investment required to expand production, but it is the basis for personal investment aimed at securing some of the income from production. And whereas physical capital assets depreciate, requiring investment simply to maintain them, financial assets have the potential to appreciate, allowing fortunes to expand even if their income flows partly to consumption as well as reinvestment.