- Capital by Thomas Piketty
- Difference between wealth and income
- What is capital?
- Piketty's two drivers of divergence
- Is rising inequality necessarily bad?
- Convergence on macro scale
- Education as a force of convergence
- Gilded Age versus Silicon Valley
- Inverse relationship between capital price and returns
- Connecting income to capital growth and potential inequality
- r greater than g but less inequality
- Return on capital and economic growth
- Critically looking at data on ROC and economic growth over millenia
- Simple model to understand r and g relationship
See how knowledge dissemination and education can affect income distribution between labor and capital. It compares the Gilded Age's capital-intensive industries to the Information Age's knowledge-based industries. The video suggests that improving education can help more people participate in high-value jobs, potentially reducing inequality. Created by Sal Khan.
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- Let me express myself differently: what if the whole world consisted of 7 billion Leonhard Eulers? Euler seemed to come up with a new valuable idea almost every day. Let's say that his 7 billion "clones" come up with their ideas in completely different order, but are basically limited by the structure of human brain and the existential conditions of the human being. So, given that the productive age of an Euler is some 70 years or 2 billion seconds, that means that whenever one of the 7 billion Eulers comes upon a new idea, there is a 3 in 1 chance that at least another one has struck upon that same idea in that same SECOND. A shoemaker who makes a pair of great new shoes does not care if someone else makes an identical pair somewhere that same second, but a producer of ideas does care. How does such a world not equal constant stress and the absolute need to protect your ideas from everyone else as soon as possible?(23 votes)
- That's an interesting speculation that as education becomes ubiquitous, more people are likely to converge on the same creative idea at about the same time. Your example is awfully contrived, though. We live in a world with 7 billion different people, whose ideas will spread out in radically different directions. Moreover, instead of exhausting some finite supply, one good idea tends to spawn several others.(36 votes)
- Hi Sal, First of all, thanks for your time and effort, I watched lots of your videos and get more knowledge than what I got on finance in the past 10 or 20 years! Thank you!
I have a question about the inverse pyramid you proposed in the "Education as a force of convergence" video. Although I'm all for a more educated society that would elevate the society as a whole, however, in the sense of inequality, if more and more people get educated in certain areas, say software development, will it eventually reach a level there are so many such people on the market and the labor with these skills become a commodity? In that case, the "highly educated" labors in current perspective would become general labors, that means the pyramid would still remain. People with some special skills at any given period of time would still be the minority and occupy the tip part of the pyramid. With these said, I hardly imagine the inequality in the pyramid can be upside down. The only chance I can see is the wealth distribution system can be adjusted to reduce the gap of inequality. Please give me some feedback on this.(13 votes)
- As with some of the previous comments, I think you must decide if there is a finite amount of ideas or knowledge and ultimately "potential". If there is a limit to thinking and creativity and possibilities then having a glut of "thinkers" could ultimately devalue that group. However, I think it is much more likely that new ideas/concepts/methods will lead to an ever expanding range of possibilities and rather than limit the future will only enhance it beyond what we can currently imagine.(2 votes)
- Sorry if I'm not understanding this, but I have a question about the concept of increasing knowledge-based education. I was sort of wondering that if more and more people become certified engineers, for example, wouldn't the skills acquired in this field become less and less valuable? Wouldn't the people from this field then in a similar situation as those in the unskilled labour?Or am I wrong? Thanks.(8 votes)
- Yes, I would become less valuable, but just in case the the technology frozen. As more and more talents and efforts are put into researching something, that thing will develop, so the demand for engineers who can adapt the new tech emerges and increases.(5 votes)
- Obviously in such a (slightly utopian) scenario, the key problem would be that knowledge would then also become capital - in the form of patents, etc. Since the number of ideas and useful new computer programs is not unlimited, it seems inevitable that in a market economy the first guy at an idea would patent it and demand payment for it, and for anyone else using that idea or expanding on it, it would become capital rather than labor - to create a new program, you would have to buy all the patents required to even start working. If this is not the case now (with open source and things like that) is that not exactly because software and knowledge creation is still on the periphery of the market? Once it becomes central, does not the structure of the capitalist economy determine that the notions of capital are automatically transferred to knowledge, especially since the basic instruments of making knowledge an asset are already in place (patent law, etc)?(3 votes)
- I agree with Janis. The way that Sal proposes the idea, and focuses on computer software and biotech, does raise the problem of patent bottlenecks.
Monopoly over a particular idea/software product/biotechnology innovation allows the creator to collect rents, blocks downstream innovation, and does always serve public interest.(4 votes)
- Iam surprisingly astonished why in your deductions there is not any allusion to effect of invasion of developed countries on third world countries to their economies and sanctions.These may be very important for victim countries and their people(2 votes)
- What invasion? Where would third world countries be without our vaccines, technology, medical science, etc, the thing that allows these countries to grow much more quickly than we did in the 1700's is that they have access to advanced knowledge and an abundance of our capital, in fact the problem with many countries (specifically Africa) is their lack of access to capital markets, look up Dambisa Moyo, an African economist who explains it better than I.(3 votes)
- From what I understood for our economy to prosper we have to rely on machines and automated software. This would mean that
if there is no more fuels on this planate to generate electricity or if there is a problem with electricity. The foundations of the
pyramid of economics would shatter. But how exactly would that happen.(2 votes)
- For starters since the banks create money by loaning out what is deposited if the internet was not accessible for even an hour (I have a hard time believing computer geniuses and engineers would allow the internet to be unreachable due to a lack of energy source if they could help it) the only purchases that could be made would have to be with cash because the majority of the money in the average workers account is not backed by 'real' money you can hold in your hand, meaning many businesses would lose customers from over seas or even a few towns over because there would be no online shopping or traveling far distances.
In the long run businesses would not be capable of mass producing because 1) their customers have been limited to who is around and willing to purchase, location wise and 2) almost everything would have to be made by a human, slowing down production efficiency.
There are so many factors to consider when thinking about life without fuel/electricity that I cannot think of absolutely everything.(2 votes)
- Could someone please explain the definition of the economical term: "white collar"?(2 votes)
- Historically, the term "blue collar" was used to describe jobs that required more physical labor/skills and were focused on jobs such as construction, carpentry, roofing, the manufacturing process, landscaping, etc. The term "white collar" was used to refer to jobs that were more focused on tasks that required more informational/service related skills such as management, information processing, sales, marketing, public relations, insurance, accounting, banking, etc.(2 votes)
- This got me thinking. I think the highly developed economies are heading in a very bad direction. More and more manufacturing jobs are being outsourced all the time, much of the food is now imported, and many service jobs are slowly being automated. Now the Information Age jobs are becoming hard to obtain, as again these are becoming more global, so many people are now attending university to clamor for a small number of jobs the cost of university education is rising all too often. What does this leave left in the future? Anyone any thoughts on this?(1 vote)
- You seem to be assuming that the goal is more jobs. That is not correct. The goal is to create as much stuff as possible, so that everyone gets what they want or need. Jobs are actually one of the costs that we have to pay to produce all of that stuff. Do not mistake the process for the goal.(4 votes)
- So when companies replace human labor with robots, are the robots put in the category of labor or capital?
I'm kind of thinking they would be placed in the capital category because the robots don't get paid, the company has to buy them. But then again the robots are doing the labor, and couldn't you think of the companies essentially buying the humans labor, you just don't pay outright up front like you could with buying the robot, but if you bought the robot with a monthly payment plan isn't it essentially the same thing as paying a humans wage. I hope I made my thoughts clear, and I hope someone can answer me because once I started really thinking about this I became deeply curious, as you can probably see, because I had never thought about this in this way and I kind of just typed most of my thoughts as I thought them... but I guess that's kind of interesting because you get to kind of see some of my thought process on this...(2 votes)
- It has been mentioned in a previous video that slaves were counted as capital rather than as labor. The word "robot" is derived from the Czech word "robota" which basically means slave. So, robots will be considered capital until and unless we give them equal rights someday.(1 vote)
- Can a good education really turn anyone into a "highly skilled" programmer? And suppose everyone were able to write software: would that ability still be considered "highly skilled"?(0 votes)
- I think what is meant by the video is that technology and the more efficient dissemination of information (through forces of globalization) are making unskilled labor more and more obsolete as time progresses. I believe that Sal used the example of a skilled programmer because that example really resonates with his sensibilities. It was just one of many skilled professions that we, as a people, should be more focused on orienting our collective education towards. The video entertains the thought of what would happen if we focus on educating and refining our workforce to allow them to be better equipped to engage in a more valuable profession (skilled labor of many different forms) in today's world.(4 votes)
- [Instructor] We talked about the dissemination of information being a force of convergence on the global scale. But what about on the individual scale? When we're talking about knowledge dissemination on an individual scale, we're really talking about education on some level. So once again, this is a topic very close to my heart. So let's just go through a few thought experiments here. So in general, you have income. Income, and that income, in order to produce it, you need capital. You need capital. And you need, you need labor. For example, if you're running a farm, you need land and you need animals and you need some equipment, but you also need people to run the equipment and manage the farm. If you're running a software company, you need a building, you need computers, you need servers. I guess that's computers as well. But you need people to program the computers and to sell the software and to develop it and whatever else. So these are the two things that you need in order to produce output, which you would recognize in terms of income. But then the question is how does that income get split? How much of it goes to the capital, and how much goes to labor? And the idea here is, is that if you have dissemination of knowledge and if knowledge work becomes more and more and more valuable, so if knowledge work, so let me put a little, little aura around this. So this is the aura of knowledge. If this is knowledge work and it's less and less of a commodity, then maybe labor has more leverage here. On the other hand, if you have these hugely capital-intensive industries where labor is kind of this monotonous, unskilled work, then maybe capital has more of the leverage. Now let's just think about, and Piketty tends to be a little dismissive of this happening on a large scale. He says it might be happening in pockets. It might be happening in pockets in terms of, you know, managers in finance or maybe in certain industries like the software industry. But in his mind, this isn't, this knowledge dissemination isn't going to make labor important enough in order to offset this whole, in more and more income going to capital, especially after generation and generation, potentially leading to dynastic wealth. But the one thought experiment, once again, my goal here isn't to give my point of view, it's really to just give you things to think about and for you to come to your own point of view, is to think about the comparison between the present day and the Gilded Age, which the book makes. If we look at the Gilded Age, so let me write this here. So the Gilded Age, so this is the end of the 19th century, the late 1800s. The Gilded Age, what were the forces of growth in the Gilded Age? Where was a lot of the income being generated from? Well, this was really the peak of the Industrial Revolution. You have things like railroads, railroads. You have oil, I guess you could say, you know, energy, oil. You have manufacturing, manufacturing. All of these industries are incredibly capital-intensive. Capital is very important. You can't even do these things without capital. And in all of these, labor is a bit of a commodity, that, hey, you just need people to kind of, you know, nail the railroad ties in and things like that. You need people to just, you know, work on the rig. You need people to work on the assembly line. And the Industrial Revolution was really a process of taking these crafts and turning them into more and more, you know, one-off, almost you could call it commodity labor. Now let's think about the present day, and we could probably, I think it's fair to call it the Information Age, Information Age. And what are the growth industries in the Information Age? Well, one that's close to my heart, I'm making this video in the middle of Silicon Valley, is software. Actually, that's probably the one that really stands out to me as a major growth area, but there's, you know, kind of biotech, biotech, we could go on and on and on. And what's common about all of these? Well, they're not necessarily as capital-intensive as what we see here. In particular, if we're talking about software, it's not very capital-intensive at all. You just need some computers and a place to program, and you can, in theory, do it inside someone's house. And this is really more about highly, highly, highly skilled labor. Same thing with biotech, it does need capital, but that capital isn't for railroads or isn't for, you know, hugely, I mean, there is some equipment, but it's mainly for people. It's mainly for researchers and people to run the clinical trials and for whatever else. And so we are, it seems like we are in an age where labor is going to become more and more invaluable, more valuable, but not just commodity labor, not just to someone to kind of, you know, work one shift at the factory, but highly, highly, highly skilled labor. Now, just because this is happening, this, or because this is happening, this could be a driver of more and more income going to labor. But that by itself wouldn't necessarily drive off inequality. For example, you might have a situation, and there's some date signs that maybe this is happening, where if you look at, if this is the pool of folks, that the people who are able to participate in this, these high-growth sectors where labor adds a significant amount of value, that that's actually a small percentage of this population. So a small percentage of the population is going to take advantage, could potentially take advantage of these, and if, of these dynamics. But if the rest of the population doesn't have the skills necessary, then they're going to essentially be left out of this growth, and so that could still drive inequality. It won't be driving inequality because of income going more and more to capital, because of R being greater than G, because returns of capital are greater than growth. It wouldn't be because of that. It would be because of this differentiation in labor where highly, highly skilled labor is getting a disproportionate share of the income relative to other labor. So the question is, is can we get more people to participate this? And once again, this is an issue of education. Can we get this pool, as a percentage of the population, to become a much larger pool of the population so more and more, so more and more of the world, more and more of the world can participate in that? So once again, this is just something to think about. I don't know the answer to this, but there are some dynamics in play. And we're definitely in a different type of world than we were in the Gilded Age. Another way that you could think about it, and this isn't from the book, but this is just a way that I sometimes think about it. If you think, in the Industrial Revolution, you have the world was kind of a, the world was kind of a pyramid, that down here you have your labor, then, and you needed a lot of folks there, but it was relatively unskilled. And then in the middle, you kind of have your white-collar jobs. You could, white-collar jobs, you know, this is the folks who are kind of manipulating information, filing papers, et cetera, et cetera, the office jobs. And then at the top of the pyramid during the Industrial Revolution and really going into the 20th century, you had, you could, I guess you could say your capital owners, your owners of capital. And then you had also a very small, you had a very small, I would say, creative class. So this is creative, creative, creative class. And so this would be folks like engineers and artists and people doing research. And so, this is essentially the dynamic you had. But now when we go into the Information Age, automation is making labor, is making labor less important in even white-collar jobs, information processing. And so there's two different realities that we could potentially go to. There's one where essentially you still have a relatively small class of people who own capital or own most of the capital or, and a creative class. And then you have a small, you have a, actually, let me just, so if I just take that triangle, that same triangle right over there, so you still have a small group of people who fall into the top of the triangle. And because automation is taking care of these middle two, you only need a small sliver of people who are participating in here. And so everyone else here is essentially going to be left out. So these folks are going to be left out, which isn't a good recipe for anyone. But there's another reality where, well, what if we could expand this top triangle where we can have a larger and larger creative class? And if these people can participate in the high-value labor jobs, I guess you can say, then they are going to be in a position to capture more and more of the income, and then they will also be in a position to have more and more capital. You see that happening in Silicon Valley. People who get a neat software job at Google or Facebook or Apple, not only, you know, they're getting that through their labor, but because that income is larger than their expenses, they're able to start to accumulate capital and also become capital owners. So there's a reality that, if we play our cards right in education, and once again, this is close to my heart, maybe instead of going to this world where we leave all of these people out, we can go to a world that looks more like this where we don't need a lot of labor because of automation, more kind of, I guess you could say commodity labor. We don't need a lot of kind of the traditional white-collar jobs in information processing. And then most people, if we can get education to be good enough, can now participate in these really high-value jobs where labor has a lot more leverage, where the returns to labor are larger than the returns to capital. And because the returns to labor are larger, you're going to have those people also, they're gonna get more share of income, and they're also going to be able to start to accumulate capital. So getting to this reality where you're having a larger and larger percentage of people who are essentially capital owners, capital owners and software engineers and artists and people doing R and D, in my mind, this is predicated on improving education. So to get from here to here and to avoid going to this top one, it really is about having a more talented labor pool, a more educated labor pool. And if we pull this off, then we get into what could be considered kind of a Star Trek reality. A Star Trek reality, people don't really view Star Trek from economic point of view, but in Star Trek, you might realize that there aren't a lot of people kind of tilling the fields here. There aren't a lot of people just kind of doing desk jobs at Star Trek. Everyone at Star Trek is either doing R and D, they are Explorers, or they are artists. So once again, just something to think about, that education, that knowledge dissemination could be a very, very powerful force of convergence and keep us from going into another Gilded Age.