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Current time:0:00Total duration:9:08

Video transcript

one of the core ideas of capital in the twenty-first century is compactor tax return on capital return on your right a little bit neater return on capital and comparing that and comparing that to economic growth with the contention that if the return on capital if R is greater than G if R is greater than G then this is associated with that this right over here would be associated with rising income equality and that more and more income is going to go towards the owner of owners of capital versus labor and since capital tends to be concentrated wealth is you know you could view capital as wealth and since wealth tends to be concentrated that'll just make the concentration happen even further even more inequalities in wealth now before we get into that and whether that whether you believe that causality or not is let's just understand return on capital and how that might compare to economic growth and how that might create returns to return income to the owners of capital or income to labor and Link this through let's just think of a very very very simple economy let's say the whole economy is nothing but a gold mine so let's say this is year one right over here and the whole value of the economy all the wealth in the economy so the capital in the economy let's say that we just value it as a thousand gold pieces and obviously we could go into how you know how is that valued at cetera cetera now that actually does come into the conversation is you know we're thinking about the market value of things or we looking at some things on a more intrinsic basis but let's just go with this simple simple analogy right now just just start to get our hands around the idea our heads around the ideas of return on capital and economic growth and how they might relate to each other so the capital it's it's 1,000 gold pieces I'll just write GP for short 1,000 1,000 gold pieces and let's say that in that year the national income so it's a gold mine so it's just producing gold so let me do this in green so total so the national income and the whole nation is just a big gold mine national income let's say it had it that we have a national income of one hundred gold pieces one hundred gold pieces and let's say that that's divided between income to labour you needed people to work on the gold mine to actually mine things and then whatever else and so that this this one hundred gold pieces is going to be split between the owners of the capital the people who own the land and the tools and whatever else of the gold mine and the people doing the work the labor so let's say that fifty of this fifty gold pieces goes to labor so that's the part that goes to labor and let's say that fifty gold pieces goes to goes to the owners of capital so I'll just say it goes to capital and this is let's say maybe there's no taxes in this we're not going to go into taxes and complicate things just yet so this is the after-tax so we can now calculate the return on capital R and year one R is going to be equal to well the owners of capital got fifty gold pieces they got fifty gold pieces and the capital that they employed was a thousand gold pieces so 50 divided by a thousand this is going to be this is going to be five percent right over here now let's think about this in the context of economic growth let's say we go from year one to year two so now let's go to year to year two and we'll just say for the sake of argument that all of this capital that the owners of the capital got that they reinvested it back into the gold mine and so now the value of the gold mine so the capital now in year two is going to be one thousand and fifty gold pieces the thousand that we started with we earned another 50 we're reinvesting that back into the capital maybe we buy some more equipment some more land whatever it might be and so now it's 1,050 gold pieces and let's say the next year the national income grows so national income once again we're saying this is a super simplified economy overly simplified arguably that's nothing but one big goldmine and now let's say the national income the national income grew by let's say grew by 2% so the national income is 102 102 gold pieces now there's some ways there's there's a bunch of ways that we could split this but let's just say for the sake of argument so well let's just make it clear what we just said we just said that our growth right over here is 2% now the question that and this is one of the central questions of the book is just because R is greater than G in this situation is that going to lead to more of the national income going to the owners of capital or is it going to or or is it going to go the other way around or is it going or is the level of inequality going to stay neutral and I encourage you to pause this video right now and try to think about that on your own given all of these numbers come up with different breakdowns of say year twos national income breaking it down between how much goes to labor and how much goes to capital and think about in this situation where R is going to G is it always going to lead to more inequality well it actually depends how you break it down this year so you could definitely have a situation where you have potentially growing inequality so for example you could have a situation where still labor gets fifty gold pieces fifty gold pieces while capital is getting fifty to fifty two gold pieces now the return on capital is going to be 52 divided by ten 50 52 divided by ten fifty the amount of income to capital is 52 the value of the capital 1050 gold pieces and so we have return on capital of four point almost 5% but a little bit under 5% four point nine five percent so in this scenario the return on capital the return on capital is approximately four point nine five percent and you'ii see that once again R is greater than G and inequality de seems to be getting a little bit more with the owners of the capital R getting more of the income a larger percentage they're getting more than 50 percent than they saw before but you could have things go the other way around you could have things go the other way around maybe labor had a little bit more leverage this year and they were able to negotiate some wage increases and so you have fifty two gold pieces going to labor and fifty going to capital now what's the return on capital well in this situation the return on capital is going to be fifty so they're essentially getting the same income but over a larger investment over a larger capital base over ten fifty which is equal to so 50 divided by ten fifty gets us to four point four point seven six percent so approximately four point seven six percent approximately four point seven six percent so just in this very I guess you could say simplified analysis you could see that just looking superficially at R and comparing it superficially to G from one year to the next doesn't necessarily mean that you're going to have rising income equality now it could be a proxy for it it could be kind of a very high level way of looking at things but just in itself if someone told you in a year hey are the return on capital is greater than G you can't say for sure that that in that year that in that in that year that has gone by that there has been an increase in inequality now what we will do in the next few videos is to dig a little bit deeper in that question and use a little use some spreadsheets to look at some scenarios look at scenarios where maybe we hold our constant or RNG constant and see what happens to inequality or maybe we hold inequality constant and see what our has to trend to and we'll do that in the next video