Sustainability, ZPG and Piketty’s equation

If environmentalists achieve their dream of a sustainable, steady state economy and zero population growth, and if nothing else changes, then wealth will become more and more concentrated in a tiny wealthy elite.

Source: Piketty, Capital in the 21st Century

That’s a logical conclusion from Thomas Piketty’s formula of r > g in his book, Capital in the Twenty-First Century.  His simple but powerful idea is that if the rate of return on investment is a higher percentage than the rate of economic growth, then an ever-higher percentage of income will go to investors and a ever-less percentage to workers.  At some point this wold level off, but it could be at high levels of inequality, just as in the past.

Now what is economic growth?  It is the product of the increase in output per person and the increase in the population.  Birth rates are falling in many parts of the world, including North America, Europe and China, and the rate of economic growth can be expected to fall to the extent that high growth in the past has been based on cheap coal, oil and natural gas.  If through all this the rate of return on investment remains at historic averages, then the rich will get richer at a faster rate than the economy grows (if it grows at all) and increasing amounts of wealth will be concentrated in the hands of a tiny elite.

Source: Piketty, Capital in the 21st Century

Now this could play out in a number of ways.  There could be a sudden collapse, wiping out investments in the fossil fuel industry and the industries dependent on it (such as the auto industry).  Another Great Depression would be a very bad thing, but, like the previous Great Depression, it would be an example of what the economist Joseph Schumpeter called “creative destruction”.  By wiping out capital invested in obsolete or declining industries, it would open the way for new industry.

Unfortunately the known sustainable energy technologies are capital intensive.  That is to say, it is relatively cheap, for example, to build an oil-fired or natural gas-fired electrical generating plant, but the fuel itself is expensive.  With hydroelectric generating plants, windmills or solar energy, the source of energy is virtually free, but it costs a lot to make the equipment, and this requires capital.

Then again, maybe high technology will not be feasible.  Maybe a sustainable economy will be based on earlier types of technology.  If so, this will not necessarily mean less inequality.  Inequality in ancient and medieval Europe was greater than it is now.

A bleak equation.  But there are answers.  I’ve mentioned some of them in a previous post.  A more radical solution would be a redistribution of property so that return on investment would benefit everyone and not just a few.  There might not be a role for limited-liability, for-profit corporations in a slow-growth or no-growth economy.  Credit unions, consumer-owned cooperatives, employee-owned corporations or other forms of organization might work better.  As the Bible says, new wine belongs in new bottles.

Environmentalists will have to face up to this one way or another.  If birth rates fall to a zero population growth rate, this will mean an increase in the elderly population relative to the working-age population.  This can only work if there is an increase in the productivity of the working-age population, and this would have to be accomplished without technologies that burn up fossil fuels at a faster rate.

I don’t pretend to know the future, and I don’t pretend to know what a sustainable economy would be like.  Maybe some miracle technology will be invented that will resolve this issues, and all these concerns will have been for naught.  I wouldn’t count on it

The writer James Howard Kunstler thinks Piketty’s concerns (and, I assume mine) are irrelevant to a society on the brink, as he sees it, of collapse.  Click on Piketty Diketty Riketty to see why.   I think he’s right that things can’t go on the way they are indefinitely.  But it is beyond my power to say what form the change will take and whether it will come so soon as to make everything else not matter.

Click on Inequality & Capitalism in the Long-Run for a Power Point presentation by Piketty.

Click on Why the rich will probably get richer for my synopsis of Piketty’s book

Tags: Capital in the Twenty-First Century, Distribution of Wealth, Population Growth, Sustainable Economy