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Do Sweden And South Africa Prove Piketty’s Theories Wrong?

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It’s been close to a year since Thomas Piketty’s Capital in the Twenty-First Century became a surprise bestseller, and whatever your opinion of the book it’s impossible to deny how much economic debate has been framed by it. In their recent paper The Rise and Decline of General Laws of Capitalism, Daron Acemoglu and James Robinson argue that Piketty’s attempt to find fundamental dynamics driving income inequality has blinded him to the more important political, technological, and institutional forces that can only be judged on a case-by-case basis.

“The quest for general laws of capitalism is misguided because it ignores the key forces shaping how an economy functions,” they write. “Despite his erudition, ambition, and creativity, Marx was led astray because of his disregard of these forces. The same is true of Piketty’s sweeping account of inequality in capitalist economies.”

Correlations don’t support Piketty’s thesis: Acemoglu and Robinson

Piketty’s organizing concept is that the ratio of r/g – the interest rate over the rate of growth in an economy – determines the level of income inequality since rents (in the broad sense) outpace other forms of income. But when Acemoglu and Robinson run a regression of the top 1% share of national wealth against multiple measures of r – g, they don’t find any statistically significant, positive correlations. By some measures, there is actually a statistically significant negative correlation, the exact opposite of what Piketty predicts.

“It is quite striking that such basic conditional correlations provide no support for the central emphasis of Capital in the 21st Century,” wrote Acemoglu and Robinson. “This is not to say that a higher r is not a force towards greater inequality in society. It probably is. It is just that there are many other forces promoting inequality and our regressions suggest that, at least in a correlational sense, these are quantitatively more important than r – g.”

Piketty – Contrasting Sweden and South Africa

That’s all very academic, so to make the point concrete, Acemoglu and Robinson compare inequality in Sweden and South Africa during the twentieth century. If you just look at the top 1% share of wealth, South Africa has a higher level of inequality in general, but both countries follow a similar path: inequality falls from roughly 1915 to 1990, and then starts to rise.

In Sweden, this change makes sense. Technological changes, better labor rights, and the beginning of the welfare state all contributed to decades of falling income inequality. But in South Africa, this graph would have you believe that inequality was falling during the period of apartheid, and then started growing just as Nelson Mandela became president.

But what was really happening is that black South Africans were barred from essentially all skilled professions, meaning that the skilled white workforce had much better bargaining power. If you only look at the top 1% of the country versus everyone else, you would miss the chasm between different ethnic groups that existed during apartheid.



For Acemoglu and Robinson, the inability of Piketty’s framework to identify the difference between South Africa and Sweden is a fatal flaw that should make us question how much we rely on it when examining less extreme scenarios.

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