Excerpts from my Editorial Commentary in Barron’s November 22, 2014
“In Capital in the Twenty-First Century, Thomas Piketty announced an audacious thesis that sets his opus apart … Capitalism inevitably increases inequality, Piketty claims, because the return on capital grows faster than the economy.
“[But] two broadly accepted features of a modern capitalist economy make it highly unlikely that Piketty has discovered a durable principle about investment returns.
“High economic growth—and returns to capital—after the Industrial Revolution has resulted from the commercial exploitation of new technologies. Investments in innovative enterprise create more wealth than investments in art or real estate that don’t develop or harness new technologies.
“Investors buy assets, such as stock in General Motors or equity in a high-tech start-up, at prices that reflect the expected returns that the asset will provide in the future. An investment in a highly profitable enterprise will provide poor returns if expectations of future profits are too high.
“Even while [a] company’s profits are growing faster than GDP, the wealth of its stockholders won’t unless the stock market underestimates profit growth.
…Centuries of progress and prosperity and a financial industry geared to sell hope make such consistent undervaluation unlikely. Optimism has in fact become our normal condition…Apart from the gloom that follows episodic crashes, modern capital markets are if anything prone to overoptimism.