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by William S. Comanor* and Takahiro Miyao°


I.  Since its inception as an independent discipline, economics has probed the major policy issues of the day. The questions that aroused its practitioners were those that presented society with critical choices.  So it is today with our recognition of the growing divide between rich and poor. For a generation, economists had primarily emphasized the goal of economic efficiency and paid far less attention to distributive outcomes.  To be sure, studies were published which addressed the latter concerns,[1] but they were widely ignored in discussions of advanced economies.[2]    More recently, however, as the extent of inequality became increasingly apparent, important volumes appeared, particularly those by Stiglitz, Frank and Piketty.[3]

For a generation, economists had primarily emphasized the goal of economic efficiency and paid far less attention to distributive outcomes.  To be sure, studies were published which addressed the latter concerns,[1] but they were widely ignored in discussions of advanced economies.[2]    More recently, however, as the extent of inequality became increasingly apparent, important volumes appeared, particularly those by Stiglitz, Frank and Piketty.[3] 

The most prominent of these volumes is that by Piketty, who called attention to the critical importance of non-labor income in leading to unequal outcomes.  Although widely disparate wages may promote inequality, he emphasized the returns to capital as the primary facotor.

Piketty’s “Fundamental Force for Divergence” is contained in his expression r > g, where r is the average rate of return on capital and g the economy’s growth rate.[4]  His explanation follows:

When the rate of return on capital exceeds the growth rate of the economy … , then it logically follows that inherited wealth grows faster than output and income,… [and] it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin.[5]

Piketty’s position is that when returns to capital exceed the economic growth rate, there are strong prospects that the distribution of wealth will become increasingly more unequal.

As anticipated, Piketty’s emphasis of a single mechanism brought on opposing views.  They appeared not only in the press[6] but also among economists where a prominent challenge was posed by Acemoglu and Robinson.[7]  Their essential critique is that both of his factors are themselves determined by underlying economic variables, of which the most important they suggest, are “institutions and politics.”[8]  Both r and g are themselves determined by so much else, these writers suggested, that Piketty’s broad parameters hide as much as they reveal.

Among the factors which underlie both the return on capital and the growth rate of the economy is the prevalence of monopoly, as one of us suggested many years ago.[9]  Not only does monopoly power lead to higher prices and greater returns to the capital invested in firms possessing this power, but also it can influence economic growth rates.  There is, however, little consensus on the direction of this second effect.  While higher monopoly returns can increase the resources available for economic innovation, they can also dim the incentives to do so since innovation itself can detract from current rewards.  What this suggests is that monopolistic factors more likely expand Piketty’s condition for wealth inequality than limit it.

II. A striking illustration of this effect is offered by the contrast between the Chinese and Taiwanese economies.  While Taiwan is well known for its largely egalitarian economy, due mainly to the widespread presence of small, family owned businesses, China is characterized by the economic dominance of state-owned enterprises (SOEs) under the control typically of members of the ruling political party.

At the end of 2011, there were over 144,000 SOEs whose gross profits of 2.6 trillion yuan represented 43% of total industrial and business profits.[10]  These firms include PetroChina and China Mobile which are both massive firms holding monopoly positions.  In many cases, SOEs are controlled by local governments whose officials are drawn from the same group of Communist Party officials as the enterprises themselves.[11]  Although in 1980, China adopted regulations that prohibited monopolistic activities by private companies, it specifically exempted SOEs.[12]

Not only are SOEs granted favored positions but also they have easier access to capital than do independent firms. Indeed, 85% of bank loans in 2009 were made to SOEs partly because, it is suggested, “banks themselves are state-owned, and are directed to let credit flow to other state-owned businesses.”  Interestingly, it is also reported that “SOE borrowing was a major source of non-performing loans in past crises.”[13]  Overall, state-owned firms earn high rates of return on their invested capital.

In contrast to China, private firms dominate most Taiwanese industries.[14]  The main exceptions include banking, where state-owned banks account for more than half of total system assets, and utilities such as electricity and water supply.  On this basis, the World Annual Report of 2012 ranked Taiwan as 13th in global competitiveness out of the 144 countries it studied.[15]  As expected in such circumstances, rates of return on invested capital are lower.

Overall data on industrial rates of return in the two countries are available.  Between 1972 and 1992, the Chinese aggregate rate of return on capital was roughly 25%, declining more recently to about 20%; where it has largely remained.[16]  In contrast, rates of return on capital invested in Taiwan’s industrial sector lay below 15% for the period from 1989 to 1994,[17] and were likely still lower more recently.

Turning to economic growth rates, the second part of Piketty’s expression, we consulted the GDP data provided in the Penn Tables.[18]  More specifically, we examined real values of GDP per capita expressed in 2005 prices between 1980 and 2010.

As explained in the data source, two versions of Chinese statistics are presented there; and for simplicity, we take the average values between them.  From 1980 to 2010, Chinese real GDP per capita increased 9.0 times for an average compound growth rate over these 30 years of 7.6%.  In contrast, Taiwanese real GDP per capita expanded more slowly: by 4.3 times for an average growth rate of 5.0%.  In both cases, reported returns on capital exceeded annual growth rates.

Although Piketty’s requirement holds for both countries, the gap between r and g is greater for China (well above 10%) than Taiwan (less than 10%), leading to greater inequality over time especially in China.  Indeed, China’s reported Gini coefficient of income inequality is substantially higher than that of Taiwan; as of 2011, it reached 0.477 as compared with 0.342 for Taiwan.[19]

Whether China’s higher returns on capital can be explained fully or even mainly by differences in monopoly power is difficult to determine.  What can be noted is that China’s higher reported returns on capital may well have resulted at least in part to the greater degrees of monopoly power found there.  Those differences are consistent with our earlier assertion that monopoly power may be an important factor leading to unequal outcomes.

III. The strength of Piketty’s analysis is its redirection of economic discussion towards distributional concerns.  Its weakness is its reliance on endogenous economic factors that rest on a myriad of other, more fundamental elements.  Among the latter is the presence and extent of monopoly power.  In this brief note, we focus on that issue.

Emphasizing this consideration, however, does not diminish his insights.  The presence of monopoly power, as evidenced by observed differences between China and Taiwan, has implications for distributional outcomes.  Not only do policies designed to promote competition lead to economic efficiency but also they can promote distributive equity.

* University of California, Santa Barbara and Los Angeles.

° University of Southern California, and University of California, Los Angeles.

We gratefully acknowledge the helpful comments and suggestions of Jeffrey Nugent on an earlier version.

[1]  See for example, William S. Comanor and Robert H. Smiley, “Monopoly and the Distribution of Wealth,” Quarterly Journal of Economics, Vol. 89, May 1975, pp. 177-194; Lester C. Thurow, Generating Inequality  Mechanisms of Distribution in the U.S. Economy, New York: Basic Books, 1975, and William S. Comanor, “ Monopoly: Who Gains – Who Loses?” Llad Phillips and Harold L. Votey, eds., Economic Analysis of Pressing Social Problems, Chicago: Rand McNally, 1977, pp. 106-117.         

[2] A focus on inequality issues remained prominent in the economic development literature.  See for example Robert J. Barro, “Inequality, Growth and Investment,” National Bureau of Economic Research Working Paper 7038, March 1999; and P. Aghion and J.G. Williamson, Growth, Inequality and Globalization, Cambridge: Cambridge University Press, 1998.

[3]  Joseph E. Stiglitz, the Price of Inequality How Today’s Divided Society Endangers our  Future, New York: W.W. Norton , 2013; Robert Frank, Falling Behind:  How Rising Inequality Harms the Middle Class, Berkeley, University of California Press, 2013; Thomas Piketty, Capital in the Twenty-First Century, Cambridge: Harvard University Press, 2014. .

[4]  Piketty, p. 25.

[5]  Piketty, p. 26.

[6]  Robert Rosenkranz, “Piketty Corrects the Inequality Crowd, “Wall Street Journal, March 8, 2015.

[7]  Daron Acemoglu and James A. Robinson, “The Rise and Decline of General Laws of Capitalism,” National Bureau of Economic Research, Working Paper 20766, December 2014.

[8]  Ibid., p. 10.

[9]  Comanor and Smiley, op. cit.

[10]  Reforming China’s State Owned Enterprises, June 2013, reforming-Chinas-state-owned-enterprises/.

[11]  Ibid.

[12]  Ronald U. Mendoza et al., “Balancing Industrial Concentration and Competition for Economic Development in Asia,” Journal of Reviews on Global Economics, 2013, Vol. 2, p. 255.

[13]  Reforming China’s State Owned Enterprises, June 2013.

[14]  Gustav Ranis, “Taiwan’s success and vulnerability,” in Robert Ash and J.M. Greene, eds., Aspects and Conditions of a Development Model, Routledge, 2007, p. 47.

[15]  Bertelsmann Stiftung, BTI 2014 – Taiwan Country Report, Gutersloh Bertelsmann Stiftung, 2014.

[16]  Chong-en Bai et al., “The Return to Capital in China,” Brookings Papers on Economic Activity, 2, 2006, p. 62.

[17]  Arnold C. Harberger, “Productivity Improvements, Investment and the Rate of Return as Forces Generating Economic Growth,” March 2002. p. 25.

[18]  Alan Heston, Robert Somers and Bettina Aten, Penn World Tables Version 7.1, Center for International Comparison of Production, Income and Prices at the University of Pennsylvania, July 2012.