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Connecting income to capital growth and potential inequality
Video transcript
Voiceover: We've already
talked quite a bit about the idea that, look... If you have a market capitalist economy, that this will lead, hopefully, to economic growth. But by definition, a market economy will have some folks who win more and some folks who don't do as well, and you're also going to have inequality. So, inequality is
essentially a fact of life of a market economy, and it's not necessarily
something that you just want to turn off,
because that might also hurt economic growth. And that might actually
make everyone better off because the economic growth
on a per-capita basis could also be benefiting people who aren't in the top percentile
or decile or quartile. Not always, but it could be. But with that thought in
the back of our minds, let's actually think a little bit more about inequality, and how it's measured, and how it can be tied to things like capital and growth of income to capital and returns on capital. So, this right over here... This is from Thomas Piketty's book and what's neat is that
he's made all the charts from his book available
online, right over there. And this shows income
inequality in the United States between 1910 and 2010. And what you see here - he measures it by the share of top decile in national income. So top decile is the top ten percent. So this point right here
tells us that in 1910, the top ten percent of
earners made a little over 40 percent of the national income. As we go into the late 20s, that approaches 50 percent. The top ten percent of earners, were making close to half
of the national income. And then as we go through
the great depression, and especially after World War II, this drops down into the low 30 percents, and then from the 1980s to the present, this has crept back up to
the high 40 percent range. So, the top decile, the
top ten percent of earners, are making close to half
of the national income. Now, let's just visualize
how this happens, just numerically. So, let's imagine this is
your economy in year one. Actually, let me copy and paste that, I think that will be useful. So, copy - alright. And let's say that this is the fraction, I'll do it in orange, that's going to the top decile. So, let's say it's roughly
a third in year one. So this is the fraction that
is going to the top decile, this is one-third right over here. So, the way that you have rising - so on this chart, this
would be kind of a 33.3, so it would be someplace around here. So, we could pretend we are some date in the 60s or 70s right over here. And now the way that you
have this chart moving up where you have the top
decile having a larger and larger share of national income, as if this orange section
grows faster than this green section. So, if, for example,
this grew by ten percent, while this grew by five percent, over time this orange
section is going to take a larger and larger chunk
of the green section. Now, as we saw in previous videos, even if this does happen, and this is by defition rising inequality, there could be a scenario
where the other 90% are still having a bigger pie, and on a per-capita
basis still might be able to be better off. But the focus of this video is not that. The focus of the video is
tying this idea to the idea of increasing returns on capital driving this phenomenon. Driving inequality. Income inequality. So, as we've seen
before, income and wealth are not the same thing, but wealth could be a proxy, the more wealth that you have, you will have more
income from that wealth, you will have return on that capital. So, another way to divide the economy is instead of thinking
of the top ten percent of earners and the other 90% of earners, you could think of how much of this income goes to the owners of capital and how much of it goes
to the people who provide the labor, so it's more of a labor capital split, versus the bottom 90%, top 10% split. So here we could think of
this section right over here, and I'll just make it a different, so let's say this is right over here. This is how much is going
to owners of capital. To capital, to owners of capital, the people who own the buildings, the real estate, the resources, and how much of national
income is going to labor, so this right over here. This right over here is going to labor. Now, a similar idea is look - if this blue section
grows consistently faster than the green pie, then the percentage of
income that goes to capital is going to grow more and more and more, and because in capitalist market economy, capital is also not evenly distributed, mainly because income is
not evenly distributed, because capital is not evenly distributed, that this would essentially lead. As more and more income goes to capital and that capital is
disproportionately owned by the upper decile of income or wealth, it's essentially going
to drive this phenomenon right over there. Now, I want to be very clear, this growth right over here - you'll hear the term "return on capital," in conjunction with Picketty's book where they compare the return on
capital to growth rates, this growth right over here
is not the return on capital. In order to know the return on capital, you have to know how much... you need to know the income
that the capital generated, but you also need to know
the value of that capital, and here in this diagram, all I know is the income that the
capital the income generated, but I don't know the
value of that capital, so I can't calculate
the return on capital. This growth, that I'm
showing right over here, maybe after a few years
this blue section grows to over here, while the green section - while the pie has grown
something like this. This growth right over here, you could view this as the
growth of income to capital, which isn't something
you hear a lot about. But this growth right over here, This growth, maybe this
is plus five percent for the total economy, this is the G that's often referred to, this is the total growth of the economy.