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Studying for a test? Prepare with these 5 lessons on GDP: Measuring national income.
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Voiceover: Let's give ourselves a little bit more food for thought on this labor versus capital question. So like we had mentioned many many many times, in order to produce anything, you need a little bit of both. Or you maybe need a lot of both. You need labor and, and you need, and you need capital. And so the question is, as you produce that output, as you produce that output or I guess you could say as you produce this, this aggregate, this product. How do you decide how much of it goes to labor and how much of it goes to capital? Well one way to think about it is which resource has more leverage? If you go back to the Gilded Age, Gilded age, really the peak of the industrial revolution. The people who add most of the leverage were the owners of capital, the growth industries as we said before, these were railroads, these were manufacturing plants, these were people exploring and finding oil. And so capital had all of the leverage, that the labor, most of the labor that was involved was fairly unskilled and was viewed by the owners of capital as something of a commodity. And so more and more of the outcome or the income could go to the capital. Now Piketty, at least hints that "Hey maybe we're going into a second Gilded Age "because returns on capital are going to be "larger than growth and more and more wealth "is going to be going to that." But to do a thought experiment, once again this is to give you food for thought, and you come up with your own conclusions. Let's think about the world that we now live in. And I'll give Silicon Valley is an example because one could argue that Silicon Valley is maybe most indicative of what 21st Century, with the 21st Century economy is going to look like, and what 21st century industry is going to look like. So let's compare the Gilded Age to Silicon, Silicon Valley. Home of folks like Google and Facebook and Apple. When Silicon Valley, is it about capital or is it about labor? Well the industry in Silicon Valley, they are about creating technology, they are about creating software. Software in particular requires very very little capital. You don't need large, the billion dollar manufacturing plants. You don't need a ton of land. You literally can write software in your bedroom. You could do it in your closet, that's how I started. And so Silicon Valley is really much more about labor. Now it's not labor, when you think of labor in the Gilded Age Industrial Revolution, you're thinking about someone just working on a factory line or doing a repetitive job over and over again. While in Silicon Valley, it's much more about highly skilled labor. So I'm going to write that in that blue color. Highly, highly skilled. Highly skilled labor. And it's definitely the case in Silicon Valley that highly skilled labor is viewed as a much, a much stronger differentiator for an organization or an individual than capital. In fact, the dynamics that you are seeing more and more in Silicon Valley is lots and lots and lots of capital, which is often times perceive as a commodity pursuing a team of five people who have just put something together in the last few months and they are valuing it at 10 millions dollars or 50 million dollars. We see organizations like Facebook and WhatsApp getting multibillion dollar evaluations based on really the output of highly skilled labor. Capital, there's some capital necessary, you need office base, you need servers. But it's not like the Gilded Age. Most of the value and the part that's not considered a commodity office is a commodity, the servers are a commodity. So highly skilled labor is not a commodity. So the question to ask yourself is well, "Is this the case? And is this the case? "Will capital, will R be able to stay "larger than G? "And will more and more capital "or more income go to capital? "Or maybe does it go more and more "into highly skilled labor?" And then the other question you needed, or the other question that might be going in your mind is well hey, look, look, Silicon Valley isn't just about software, it's also about hardware, one of the most highly successful companies in Silicon Valley is Apple computers and they do write software but they are known for their hardware products. Their iPhone, the iPad, their computers. What about that industry? Isn't that capital intensive? Well let's just think about how, how you're iPhone or your iPad gets developed? It gets designed by Apple in Cupertino, California and that's what they write on their boxes, designed in California. And then, they send the designs over to a bunch of firms, this is just some of, some of Apple suppliers here. And these are incredibly capital intensive industries, but from Apples point of view, they view them more or less not all of them, some of them have differentiated products, they make a special type of material or whatever else. But many of them are viewed as commodity manufacturers. That "Hey, you don't give me the right price. "You're not giving me the right "few pennies for a component, "I'm going to go to the other person "who can produce that same entity." And then this folks put it all together, manufacture the pieces, send it back to Apple who will, who will package it and then market it. And so what is the high value aspect of this supply chain right over here. Well it's clearly the design in the market, and if you don't believe that, you should look at what portion of the output of the income generated by an iPhone, what portion of it goes to Apple versus what portion of it goes to the suppliers right over here. So one way to think about it, is this, these are kind of closer, closer to you know the large scale capital intensive manufacturing plants of the Gilded Age. Although even here RND plays a major component on a deed in a Gilded Age as well. And once again RND though is a labor, is a highly highly skilled labor. It is less about, there's capital definitely involved. But when you look at the real value created, it's really on the highly skilled labor part on the designing and the marketing side, the creative aspects of it. Now just this, if you believe it and you should come to your own judgments. This by itself doesn't say that we can't worry about an inequality because even this might say, look more and more income, maybe it's not going to go to capital, it's going to go to more and more highly skilled labor. And that's a small subset one could argue of the entire labor pool. You have this highly skilled labor here, and so you might have an inequality, not happening like it happened in the Gilded Age where it's going to owners of capital. But now it's going to the owners, I guess you could say of highly highly skilled labor. And so that could drive inequality. But this is where the force of convergence of Piketty talks about could play in, and he seems to a little bit skeptical of its ability to overweight the forces of capital accumulation. But if we can have more people participate in this, more highly skilled labor, then potentially this could be a force of convergence, it could balance, balance things off and keep us from going into some type of neo-Gilded Age.