**1. Fundamental economic laws of capitalism.** To understand Piketty one has to go back to the classics of economics. Like Ricardo, Malthus and Marx, Piketty builds a simple “machine” which encapsulates the key features of a capitalist economy.  He then lets that machine run its course and it produces the results which illuminate Piketty’s discussion both of the past and the future. The “machine” or, in more modern parlance “the model”, consists of one definitional relationship,  two fundamental economic laws of capitalism (as they are called by Piketty), and one inequality.

Let’s start with the definition (Chapter 1) that links the stock of capital (K) to the flow of income (Y). The stock of capital includes all forms of explicit or implicit return-bearing assets: housing (which Piketty, unlike many authors, emphasizes as being an integral part of capital), land, machinery, financial capital in the form of cash, bonds and shares, intellectual property, and even human persons in the time of legalized slavery.<sup>3</sup> The relative importance of different types of assets has, of course, changed through history: landed property is much less important today than in the past. The importance also varies between rich and poor countries at a given point in time, and between different income groups. The rich generally hold much greater share of capital in the form of financial assets, the middle class holds most of its capital in housing, and the poor (and even in the rich countries they include half of the population) have hardly any net assets at all. This was all known before, from the papers such as Davies et al. (2010). But Piketty’s primary concern here is with the ratio between thus defined capital and the annual total income flow. He terms that ratio β. From historical studies of France, UK and the US (Chapter 3), Piketty establishes that β has, from around the French revolution to today, followed a U- shaped curve. It was high, reaching a value of about 7 in France and the UK before World War I (and around 5 in the contemporary United Stated), to be more than halved during the next 50 years in the continental Europe and the UK, and to be reduced to less than 4 in the United States.<sup>4</sup> In the past 30 3 Capital as defined by Piketty is more akin to what is often called wealth. He uses the two terms (“capital” and “patrimoine”=wealth) interchangeably (see Chapter 1, p. 84). Regarding land, he rejects the distinction between the “original and indestructible productive powers of the soil” and land improvements which alone for some should be “capital”. Similarly, he rejects the distinction between wealth used in “unproductive” and “productive” activities (where only the latter would be called capital). Any asset that enables its owner to receive a return, including the implicit return on housing, _is_ capital.

4 The pre-World War I United States is an interesting case. It was divided into the North with low values of β (around 3) and the South with an almost European-like capital-income ratio of 6. The gap was even greater before the Civil War when the value of slaves in the South, as estimated by Piketty, was about 150% of Southern national income (Chapter 4). It is in effect known that Southern colonists were “wealth-older” and accumulated more capital than the Northerners even if we exempt slaves. Per capita incomes in the South were also higher until early 19<sup>th</sup> century (see Lindert and Williamson, 2012).

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