Understanding Piketty: Merit and rent in a growing economy by Enrico Minelli published by VOXEU (12/2014).
Growth and inequality are back at the centre of the economic debate. This column presents a framework for interpreting Thomas Piketty’s data based on Paul Romer’s model of endogenous growth. Two balanced growth regimes are possible in this framework: one (‘merit’) with a low capital–output ratio, a high interest rate, and high growth; and another (‘rent’) with a higher capital–output ratio, a somewhat lower interest rate, and much lower growth. An increase in the returns to physical capital accumulation compared to innovation could explain a shift from ‘merit’ to ‘rent’.