If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:8:17

Video transcript

one of the core ideas of Thomas Piketty book is if the return on capital is greater than the growth in economy then that could drive inequality that could drive inequality inequality and inequality is a natural byproduct of a market capitalist economy and one could argue that hey look some inequalities is going to happen as you grow your economy and you let people be entrepreneurial and some people get lucky some people less lucky some people work harder some people work less hard some people are able to allocate capital well some people aren't so it all comes into it but in extreme forms maybe this is bad and in particular maybe this is bad for democracy so bad for democracy right over here maybe too much power starts to accrue in some ways and maybe that and in the worst case because that kind of starts to drive and in on itself it actually might even hurt economic growth if you don't have enough consumers or or people with enough purchasing power or discretionary income or whatever else but what I really want to focus on here is not so much whether these causalities are actually there how much we should worry about them once again my point isn't to to give an opinion on whether I agree or disagree with some or all of the book it's really just give you a framework because I think the book at least raises an interesting conversation and it gives us a lot of a lot of I would say fodder for interesting analysis and critical thinking and that's really what I want you to walk away with how do you think about these things and you just need to make your own judgment so what I want to do here is at least show a circumstance that this might be returns on capital being greater than economic growth can be a reasonable proxy for rising inequality and of course we you know this connection over here is that even kind of a harder thing to necessarily draw the connection but this even this one isn't always going to be isn't always going to be the case and to think about that let's just imagine a an economy where the whole economy just produces it just produces apples so let's say the whole economy right over here this is our whole our entire economy and let me copy and so copy and paste it I'm going to paste it to show the growth in the economy so let's say in year one so this is year one right over here year one it produced it produced one thousand a palapa 'ls and let's say in year two year two we have we have economic growth so let me draw that Soji going from year one to year two let's say that this is equal to two percent so two percent of a thousand would be twenty more apples so in year two the economy produces a thousand twenty a thousand twenty apples right over there now let's say that in year one in year one of the thousand apples that were produced let's say that five hundred of them ought to split in half let's say five hundred of them go to the owners of capital five hundred to the owners of capital now what's the owners of capital what are they owned and once again is a very simple economy that only has one industry right over here but the owners of capital are the people who would own the orchard who owned the trees who owned the machinery whatever they need to pick the cat the apples and let's say that the other 500 goes to labour five hundred to five hundred to labour and let's say that the value of the capital here so the value of capital in Apple's we're just assuming everything going on here's apples that I guess to buy this apple orchard the owner of it had to give let's say four thousand apples four thousand apples so given this what is the return on capital in year one well the return on capital I'll just write return on capital capital in year one is going to be well the return is five hundred apples five hundred apples divided by the cost or I guess we say the value of the capital so divided by four thousand four thousand apples so that's going to give us five five / that's the same thing as five divided by 40 which is 1/8 so that's going to be 12.5% 12.5% so return on capital least in year one is greater than is well let's go to year two so we can look at the return on capital in year two and compare it and compare it to the growth right over here and so let's just say that the value that over heat that the value of the capital that all of it was reinvested so now the value of the capital value of capital is now four thousand plus 500 more apples so 45 4500 apples they reinvested it in the business and they didn't necessarily use the apples as capital but they use those extra 500 apples to go buy some more machinery or buy some more land whatever it might be and let's say though that that the labor had a little bit of leverage this year so in this year because labor had leveraged only five hundred still goes to the owners of capital now this isn't necessarily going to be the case if the owners of the capital have leverage maybe they could negotiate the other way but let's say in this situation still five hundred goes to labor five hundred goes sorry five hundred goes to capital capital and here five twenty five twenty would go to labor 522 labor so now what's the return on capital the return on capital now is going to be still 500 apples 500 apples / / 4500 4500 apples which is going to be this is now going to be equal to 1/9 which is the same thing as was at 0.99 so let's see or actually 0.111 one let me just 1/9 you at this point 1 1 1 1 1 so it's going to be approximately 11% or LSA 11.1% approximately 11 point one percent now the whole reason why I wanted to show that I did this diagram is this this is a situation where R is greater than G our return on capital is 12.5% going to 11.1% both of these numbers are much larger than our growth of the entire economy but even though that's happening you actually don't have rising inequality over here in this situation of course I work the numbers to make this happen I could have worked them the other way but in this situation it's not necessarily the case that our being greater than G led to more inequality now in future videos I'll do some spreadsheets where you see if R stays constant at a constant value higher than G that will lead to inequality but the whole reason why I did this one is to show you that just in a given period of time our being greater than G doesn't necessarily mean more inequality in this case labor labor got more of a fraction of the total national income and once again the connection between capital and labor and and income inequality is that in general in general the income that goes to labor is more indicative of the income that might go to the lower quartiles of a population and the income that goes to capital is more indicative of of the income that might go to the top percentile or decile because capital tends to be concentrated in the top few sections