Notes for income distribution: Ricardo Rosario Muñoz

Capital in the twenty-first century.

Chapter 1 of Piketty's work is deeply rooted in the question of inequality between capital and
labor-one of modern economics' core themes. This problem of inequality has its origin in the
division of national income: labor gets wages and salaries, while capital yields a profit,
dividends, and rents. Over time, the concentration of capital income among a few rich people
has increased inequality due to the accumulation of wealth through inheritance and higher
returns on capital as compared to labor income. To handle this imbalance, Piketty stresses
the need for policies promoting economic equity, which in turn would foster sustainable
growth.

The concept of national income-the total amount of income earned by residents of a country
within a year-provides the framework for this inequality. It includes labor income (wages,
salaries) and capital income (profits, rents, dividends, interest). Unlike GDP, which measures
the total economic output within a country's borders, national income accounts for income
flows across borders. It works the way that, if some country has a high GDP level because of
foreign-owned firms earning profits, its national income might come at considerably lower
levels after deducting earnings transferred abroad. In its counterpart, a country with sufficient
overseas investments may show national income higher due to overseas asset returns. This
distinction highlights the intricate relationship between domestic and international economic
activities and how wealth is distributed both within a nation and across borders.

Global income inequality is another critical issue discussed by Piketty. Despite the
increasingly equal distribution of economic output across nations, income remains highly
unequal. A small fraction of the global population, concentrated in wealthy countries such as
the U.S., Germany, and Japan, controls a disproportionate share of global income.
Meanwhile, large segments of the global population earn very little, even though their labor
contributes to the overall production. This growing gap between the wealth generated and
the income received by individuals and nations underlines the need for comprehensive
global policies on income inequality, such as progressive taxation, fair trade, and the
redistribution of wealth.

Economic growth, usually considered one of the major drivers of prosperity, also plays a role
in the persistence of inequality. According to Piketty, growth is neither perpetual nor
uniformly distributed. It is driven by two components: population growth and per capita
output growth. Growth was slow historically prior to the Industrial Revolution, since economic
activity was sparse and tied to the rate of population increase rather than improvements in
the standard of living. After the Industrial Revolution, the technological advances and
productivity increases caused acceleration, but modern economies still suffer from
demographic changes, environmental limitations, and inequity in the distribution of growth
benefits. All these factors highlight that growth itself cannot be a solution to income
inequality; rather, the distribution has to be engineered on a different plane of equity.

Piketty does a historical tracing of the roots of inequality, going all the way back to
pre-industrial societies where large accumulations of wealth were associated with land
ownership and inherited capital. This system, bolstered by feudal structures, maintained
economic power in the hands of the privileged few. However, this pattern was disrupted by
the two World Wars and the Great Depression. This destruction of capital during these global
upheavals, together with the diffusion of progressive taxation and welfare policies, did
reduce wealth inequality in the mid-20th century. Between 1914 and the 1970s, there was a
more equal distribution of income and wealth.

But the contrary has happened since the 1980s due to deregulation, globalization, and lower
taxes on capital, which have contributed to the renewed inequality that Piketty characterizes
as "patrimonial capitalism." In such an economy, inherited wealth contributes more
significantly to economic inequality in ways where the return on capital (r) is generally above
the growth rate of the economy (g).

Labor income inequality has also risen sharply in recent decades, especially in countries like
the United States. This can be blamed on factors such as globalization, technological
change, and the appearance of high-paid "supermanagers." While education is sometimes
regarded as a solution to inequality, Piketty says that unequal access to education
undermines its leveling effect.Those from wealthy backgrounds benefit disproportionately
from educational opportunities, as they have better access to resources that enable them to
succeed. The rise of a "skill premium," where highly skilled workers are rewarded
disproportionately, has further exacerbated inequality, leaving low-skilled workers behind
with stagnant wages

Wealth inequality, however, has become even more pronounced than labor income
inequality. According to Piketty, capital returns are always higher than economic growth,
which permits the rich to accumulate more and more capital at a faster rate than those who
depend on their labor. This disparity further widens the gap because those with inherited
wealth continue to accumulate more, while individuals without capital face significant barriers
to upward mobility. Patrimonial capitalism-a conception by Piketty-explains how these
inequalities sustain a system where inherited capital, as he shows in this book, grows ever
more rapidly than wages and output.

These patterns are also interconnected: concentrated wealth is self-sustaining and feeds
into labor income inequality. Those with capital enjoy better opportunities in education,
healthcare, and other fields, which in turn enable them to accumulate more capital, while
those without capital are doomed to low wages and limited opportunities. The self-reinforcing
cycle of feedback continues to drive the gulf between rich and poor. The forms of inequality
in Piketty's analysis do call for policy interventions: progressive taxation, expanded access to
education, and other social policies that could break such self-reinforcing cycles and give
way to a more egalitarian distribution of income and wealth.

In the end, Piketty's analysis underlines deeply rooted and growing inequality between
capital and labor, underlining that the concentration of wealth, driven by inherited capital and
unequal access to resources, exacerbates economic disparities. While the economy has
indeed grown globally, the fruits are divided very unevenly, with only a small elite holding
large portions of wealth and income. Such inequality necessitates comprehensive policy
solutions like progressive taxation and expanded access to education to ensure that
economic growth is more equitably shared. Without interventions, inequality will continue to
widen, threatening long-term social and economic stability.