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Connecting income to capital growth and potential inequality

Created by Sal Khan.

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  • orange juice squid orange style avatar for user Jos van Dam
    At , Sal says that the added green section is the growth of the economy. However the total green circle represents the income of the economy as a whole. So it is the growth of income right? and not the growth of the economy?
    (6 votes)
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    • leafers ultimate style avatar for user Andris
      Income and GDP are the same thing, thus income growth and GDP growth are also the same thing. There are three approaches how we can look at GDP: the income, the expenditure and the production apporach. This simply means that these three concepts can be matched: what income is for one person, it is expenditure for another, what is being produced by one person, it is going to be bought by someone else, so it is expenditure as well, etc...

      Try watching some of the earlier videos connected to GDP to get a clearer understanding of the subject.
      (6 votes)
  • blobby green style avatar for user nebttenneb
    In the beginning he says that ending inequality could halt or slow economic growth. That doesn't seem self-evident, and I'm not sure why it would be the case. Is that discussed in another video?
    (2 votes)
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  • piceratops ultimate style avatar for user Mina Soare
    At , the top decile having a smaller share of the economy? Would it be pertinent to discuss whether it was affected by the war or by the Glass-Steagall Act (which appears to correspond roughly to the same period)? Do you have an opinion as to whether it affected income inequality at that time?
    (2 votes)
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    • mr pants teal style avatar for user Wrath Of Academy
      This is a graph of one way of measuring income inequality - it's not the only way, but it's probably as good as any.

      The primary drivers of this graph are the health of the economy and the top marginal income tax rate in the US. During FDR's Depression, income tax rates were increased to over * 90% * for the top bracket. With rates that high, top income earners did everything possible to hide income in unrealized capital gains, which are not taxed as income. Therefore the apparent income level drops as more and more money is in unrealized capital gains. Then in the 1980s the top tax rates came down - as people slowly adjust to the new normal, they hide less and less income in unrealized capital gains, and so the apparent top income levels grow.

      Note, it's also neat how you can see the 2000 stock bubble and the 2007 stock bubble on the graph, though it's delayed slightly. (I assume the delay is because they're using income tax returns for the year, and during the bubble many people had realized capital gains that counted as income.)
      (6 votes)
  • duskpin ultimate style avatar for user tuannb1997
    Assume that the national economic growth is 5%, and the growth of income to capital is 10%, I want to know how this could be a force driving inequality between the top decile and the rest of the country, given the fact that capital is unevenly distributed among the top 10% earners and the other 90% ?
    (2 votes)
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  • blobby green style avatar for user k_katura
    I understand that capital concept of Piketty consists of production capital + family property capital. That's contrast with GDP (additional value), and the rise rate r's big is the cause of unequality, isn't it? The distribution with the taxation is necessary to settle "donation economy". I approve wealth taxation, but BASIC income is also indispensable.
    (2 votes)
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  • leaf blue style avatar for user kevindevlal
    Hey Sal, thanks for these amazing videos. I was wondering if there are any practice materials to help strengthen my understanding of the lessons learnt from each video?
    (2 votes)
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  • male robot hal style avatar for user Reddy, Jaiden
    How is he measuring national income? Is that GDP, or just that first component of GDP?
    (1 vote)
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  • blobby green style avatar for user sthayres32
    Does Piketty deal with the fact that the people who from 2008 through 2010 and probably beyond achieved more than 50% of the nationals income by stealing it with the collapse of the economy and having their golden umbrella's to protect them? We saw a huge jump of capital with CEO's becoming richer while labor dramatically declined. How do economists account for the fact that money is being unethically stolen or passed around creating a bigger inequality for the rest of the nation? I am referring to people like Enron, Lehman Brothers, etc. Maybe these people had a little jail time but in the end, are living higher on the hog and do the economic equations account for this when dealing with inequality?
    (1 vote)
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  • aqualine seed style avatar for user K B
    @ What does top decile means ? Should not it just mean 10% of the population? Whether top denotes top wealthiest person or persons having highest share of national income?
    (0 votes)
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  • mr pants teal style avatar for user LearningStuff
    So what are the forces that grow the economy to determine inequality? Does the increase in capital play a role in the strengthening of the economy? or is it the other way around?
    (1 vote)
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Video transcript

- [Sal] We've already talked quite a bit about the idea that if, look, 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 wanna 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 mind, 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 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's 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% of the top, 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 II, this drops down into the low 30%s, 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 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. So this is your economy in year one. 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 a third in 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 this green section. So for example, 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 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 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 the same, a similar idea is, look, if this blue section grows, consistently grows 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 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. 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 wanna be very clear. This growth right over here, you'll hear the term return on capital in conjunction with Piketty'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 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 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 5% for the total economy, this is the G that's often referred to. This is the total growth of the economy.