Is Piketty’s “Second Law of Capitalism” Fundamental?

In Capital in the Twenty-First Century , Thomas Piketty uses what he calls “the second fundamental law of capitalism” to predict that wealth-to-income ratios are poised to increase dramatically as economies’ growth rates fall during the twenty-first century. This law states that in the long run the wealth-to-income ratio equals s/g, where s is the economy’s saving rate and g its growth rate. We argue that this law rests on a theory of saving that is hard to justify. First, it holds the net saving rate constant as growth falls, driving the gross savings rate to one as growth goes to zero. Second, it is inconsistent with both the textbook growth model and the theory of optimal saving: in both of these theories the net saving rate goes to zero as growth goes to zero. Third, both of these theories provide a reasonable fit to observed data on gross and net saving rates in the United States, whereas Piketty’s does not. Finally, contrary to Piketty’s second law, both of these theories predict that wealth-to-income ratios increase only modestly as growth falls.