Piketty’s Capital in the Twenty-First Century under the Lens of a Simple Economic Model∗

Under what conditions can we expect Piketty’s main two tenets to be right, namely that r > g and that β is high and might rise further? What do these conditions imply for growth and the distribution of income between capital and labor? The first tenet r > g states that the real rate of return on physical capital exceeds the economy-wide growth rate of output. The second tenet holds that the capital-output ratio β = K/Q is now back at its historic peak level of between 6 and 7, and the upward trend may continue. I will consider some basic (mainstream growth) economics. Call the setup “neoclassical” if you wish because only the most basic microeconomics assumptions will be allowed.