Piketty’s Elasticity of Substitution: A Critique

This note examines Thomas Piketty’s (2014) explanation and prediction of simultaneously rising capital income ratio and profit share by an elasticity of substitution, σ, greater than one between labor and capital in an aggregate production function. Semieniuk reviews Piketty’s elasticity argument, which relies on a non-standard capital definition. In light of the theory of land rent, he discusses why the non-standard capital definition is problematic for estimating elasticities. For lack of existing results, Semieniuk makes a simple estimate of σ in the class of constant elasticity of substitution functions for Piketty’s data as well as for a subset of his capital measure that comes closer to the standard capital definition. The estimation results cast doubt on Piketty’s hypothesis of a σ greater than one.