Working Paper: NBER ID: w20766
Authors: Daron Acemoglu; James A. Robinson
Abstract: Thomas Piketty's (2014) book, Capital in the 21st Century, follows in the tradition of the great classical economists, like Marx and Ricardo, in formulating general laws of capitalism to diagnose and predict the dynamics of inequality. We argue that general economic laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society. We use regression evidence to show that the main economic force emphasized in Piketty's book, the gap between the interest rate and the growth rate, does not appear to explain historical patterns of inequality (especially, the share of income accruing to the upper tail of the distribution). We then use the histories of inequality of South Africa and Sweden to illustrate that inequality dynamics cannot be understood without embedding economic factors in the context of economic and political institutions, and also that the focus on the share of top incomes can give a misleading characterization of the true nature of inequality.
Keywords: Inequality; Capitalism; Political Institutions; Economic Institutions
JEL Codes: O20; P16; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| End of apartheid in South Africa (O17) | Inequality (D63) |
| Establishment of social democracy in Sweden (B14) | Inequality (D63) |
| Political and institutional transformations (P39) | Inequality (D63) |
| Interest rate (E43) | Growth rate (O42) |
| Growth rate (O42) | Inequality (top 1 percent income share) (D31) |