Connecting income to capital growth and potential inequality

we've already talked quite a bit about the idea that if look you if you have a market capitalist economy that some that this will lead hopefully to economic growth 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 it's going to you're also going to have inequality 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 actually might 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 and how its 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 that's what's neat is he's made all of the charts of 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 10% so this point right over here tells us that in 1910 the top 10% of earners made a little over 40% of the national income as we go into the late 20s that approaches 50 percent at the top that set the top 10% 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 2 this drops down into the low 30% and then from the 1980s to the present this has crept back up to the high 40% range so the top decile the top 10% of earners are making close to close to half of the national income and let's just visualize how this happens just numerically so let's imagine this is your economy in year one so this is your economy in year one and actually let me copy and paste that I think that'll be useful so copy all right and let's say that this is the fraction I'll do it in orange that is going to the top decile so let's say it's roughly 1/3 and year one so this is the fraction that's going to the top decile this is 1/3 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 like we're 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 is if this orange section grows faster than the screen section so for example this this grew by 10% while this grew by 5% by 5% 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 this is by definition 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 10% 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 90 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 is going to labor now the same a similar idea is look if this blue section if this blue section grows consistently grows faster than the green pie then 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 economies capital is also not evenly distributed mainly because income is not evenly distributed because capital is not evenly distributed that this would essentially lead this as more and more income goes to capital and that capital is disproportionately owned by the upper decile of income or wealth then you're going to 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 pick ADIZ book where they compare the return on capital to growth rates and this growth right over here is not the return on capital in order the return on capital you have to know how much you need to know the income that the capital generated but you also have to know the value of that capital and here in this diagram all I know is the income that the capital 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 growth of income to capital which isn't something you hear about but this growth right over here this growth maybe this is plus 5% for the total economy this is the G that's often referred to this is the total growth of the economy