Who is Thomas Piketty and why is his research important?

Thomas Piketty is a French economist whose 2013 book 'Capital in the Twenty-First Century' analyzed 300 years of data from 20+ countries. His research revealed that when return on capital (r) exceeds economic growth (g), wealth inequality naturally increases. This challenges the assumption that capitalism naturally leads to equal opportunity.

What counts as 'capital' in the r > g formula?

Capital includes income-producing assets: stocks, bonds, real estate, business ownership, intellectual property, and financial instruments. It doesn't include your primary residence (unless rented out) or personal possessions. The key is assets that generate returns without your active labor.

Is r > g always true?

Historically, r > g has been the norm except for the post-WWII period (1950-1980) when economic growth outpaced returns due to reconstruction and technological progress. Since 1980, we've returned to the historical pattern with r averaging 5-8% while g averages 1-3% in developed economies.

How does this affect someone starting with no capital?

It means relying solely on labor income puts you at a mathematical disadvantage. Someone with £100K in capital earning 8% (£8K annually) outpaces someone earning £30K salary with 2% raises (£600 increase). The gap compounds over time, making early capital accumulation crucial.

Can governments change the r > g dynamic?

Governments can influence but not eliminate it. Progressive taxation, wealth taxes, education investment, and policies promoting broad capital ownership can reduce inequality. However, global capital mobility limits national policy effectiveness. The fundamental mathematical relationship persists.

How should I adjust my investment strategy given r > g?

Prioritise building capital early, seek investments with returns exceeding economic growth, use tax-advantaged accounts (ISAs, pensions), and reinvest returns to compound. Consider income-producing assets over pure growth, and maintain diversification while targeting consistent 6-10% returns.

Does r > g mean capitalism is unfair?

Not necessarily - it describes a mathematical reality, not a moral judgment. Capital takes risk and enables economic growth, justifying higher returns. However, unequal capital access creates unequal opportunity. Understanding r > g helps design policies and personal strategies that promote broader prosperity.

How does inflation affect r > g?

Real returns (r) and growth (g) are both calculated after inflation. High inflation typically reduces real returns and economic growth, but capital owners can often protect purchasing power better than labor income through inflation-hedged assets. The r > g relationship generally persists in real terms.

Understanding r > g

The economic formula that shapes wealth distribution

r > g

r = Return on capital

g = Economic growth

When r exceeds g, wealth concentrates

The Mathematics of Inequality

When r > g

r = 8% (investment returns)

g = 2% (economic growth)

Wealth gap widens by 6% annually

When g > r

r = 3% (investment returns)

g = 5% (economic growth)

Wealth gap narrows by 2% annually

300 Years of Evidence

Piketty's Discovery

Analysis of 20+ countries over 300 years revealed:

r > g is the historical norm
Except post-WWII (1950-1980)

18th Century

r = 5%, g = 0.5%

1950-1980

r = 4%, g = 5%

Today

r = 6%, g = 2%

What This Means For You

The Wealth Effect

Without Capital

Income growth: 2% per year

Starting salary: £30,000

After 30 years: £54,340

With £100K Capital

Investment returns: 8% per year

Starting capital: £100,000

After 30 years: £1,006,266

The Reality

Those who own capital see their wealth grow exponentially faster than those who rely solely on income. This creates a self-reinforcing cycle of wealth concentration.

Your Strategic Response

1. Build Capital

Save aggressively to acquire income-producing assets

2. Invest Wisely

Seek returns that consistently exceed economic growth

3. Compound Growth

Let time and mathematics work in your favour

The Mathematical Reality

£10,000 invested at 8% → £100,900 in 30 years
Capital beats labor. Every time.

Ready to Build Your Capital?

Understanding r > g is just the beginning. Let Delphina help you build a strategy to benefit from these economic principles.

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