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## Macroeconomics

### Course: Macroeconomics > Unit 8

Lesson 2: National income and inequality- Capital by Thomas Piketty
- Difference between wealth and income
- What is capital?
- Piketty's two drivers of divergence
- Is rising inequality necessarily bad?
- Convergence on macro scale
- Education as a force of convergence
- Gilded Age versus Silicon Valley
- Inverse relationship between capital price and returns
- Connecting income to capital growth and potential inequality
- r greater than g but less inequality
- Return on capital and economic growth
- Critically looking at data on ROC and economic growth over millenia
- Simple model to understand r and g relationship

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# Critically looking at data on ROC and economic growth over millenia

The video discusses the idea that if the return on capital (r) is greater than the growth of an economy (g), it could lead to inequality. It shows a chart comparing r and g over time, but reminds us that future projections are uncertain. Created by Sal Khan.

## Want to join the conversation?

- What is ROC?(mentioned in the title)(4 votes)
- ROC stands for price rate of change.

Here is the link I found that out on-

https://www.investopedia.com/terms/p/pricerateofchange.asp(2 votes)

- In this graph g is greater than r precisely during our time where inequality has grown. I thought that he was saying that r being greater than g would drive inequality.(4 votes)
- There were really two periods, 1945-1980 where inequality was decreasing and 1980-2012, where inequality was increasing. The graph shows an average of both periods. It's also complicated as world inequality and inequality within rich Western nations are somewhat distinct in this period.(1 vote)

- It's possible that i don't get the idea but as i understand the r and g are interconnected, cause if economy growth, produces needs more capital so r is going up. Easy example if economy is growing the capital holder may invest in some stock index say SP 500, and get the profitability which is strongly correlated to growth. How then it's possible that r is less than g? Doesn't that mean that it's better for capital holder put all the money in SP500 portfolio and forget about everything?

As i see the situation it's possible for individual investor to get r lover than g, fo example in some depressed industry in economy (say coal in 80th in GB) but if overall economy is growing it means that another industries is growing faster to compensate slowdown in such depressed industry?

Is it right or not?

Can smb please enlight me?(2 votes)- Let's say I live in a country with only one company. The assets of the company are worth $20 million and it was all financed by selling shares which are also worth $20 million. The revenue of the company is $30 million and the profit is $1 million. So the shares that are worth $20 million get a return of $1 million, which is 5%.

The next year the company found a way to work more efficient, so they were able to get more revenue and profit with the assets that are still worth $20 million. The revenue is this time $33 million and the profit is $1.1 million. Since the revenue increased by 10% the economy also grew by 10% (assuming 0% inflation for simplicity). Investors realized the company got more profitable, so they started to push up the share price. The value of all of the shares of the company is now $22 million, so the return on those shares is still 5% of the value.

This video also talks about the price of capital and the return of it: https://www.khanacademy.org/economics-finance-domain/macroeconomics/gdp-topic/piketty-capital/v/price-return-relationship

I hope this helped enlightening you.(3 votes)

- what things(reason) lead point decline from 1820~1913 to 1919 ~1950?

Is the world war 2 (1939~1945) happened , impact G&R , from R>G change to G>R ?

so , R>G will lead to inequality and barricade meritocracy and innovation, what if G>R , what will happen and impact our now-day global economic ?(2 votes)- i think in those period of time. our technology i mean world's technology is not really complete. that mean we still need labor to work with the machines and because of the world war people did not interest in investment. they just wanted to keep their capital safety . so we need more labor to work and people did not interest in investment and r<g.

About the impact i think the r<g there will have more labor not only work with the machines but also inventing or developing them until we have higher technology which will be able to replace all the labor. at that moment r>g because we wont need to pay money to labor any more. sorry my english is not good. hope u understand(1 vote)

- What is the gilded age? Why is this so important that many scholars have a debate about it?(2 votes)
- You can know more about Gilded age using this link https://www.khanacademy.org/humanities/us-history/the-gilded-age(1 vote)

- Is there a video that i can use or other material that could help explain the Lorenz Curve?(2 votes)
- shouldn't it be the last little box the 2012 to 1050 box area since we are passed 2012 wouldn't anything before that last box be the past not the last 2 boxes?(1 vote)
- The graph is bit misleading, in think.

It looks as if the boxes represent a time-period, but they don't.

The points that are plotted denote the measurements of a whole period. So "1950-2012" is plotted as a single point on the graph (it is not the box that comes before or after). So after that point we are already "moving" past 2012 into the next period. The average of that period is plotted on the next vertical line (the average of 2012-2050, which can only be measured in 2050 - so it is still hypothetical on the graph).(2 votes)

- How can we define the terms Return on capital?? Economic growth?? and Inequality??I I have concept of all these but if we r going to define them with exactly??(1 vote)
- Return on capital is the total profits, dividends, interest, and rents divided by the total amount of financial capital in the world. Economic growth is the increase in GDP divided by the total GDP. Inequality is slightly more difficult to explain, but it is measured by the Gini coefficient, if you would like to look that up.(1 vote)

- By what reason, if rate of growth is at is highest, does he estimate that the rate of growth will go back down?(1 vote)
- Who has written the book 'Capital' ?(1 vote)

## Video transcript

- [Instructor] So we've already talked about the general idea, the
thesis that if the return on capital is greater than
the growth of an economy, that that could lead to inequality, although we showed a case where, depending on the circumstances
with the right numbers, that's not necessarily going to happen. But what I want to do in this video is to think critically a little bit about some of the other
data from the book. And once again, my point right
over here is not to support or go against the ideas in the book, but really just give you tools
for thinking a little bit more critically about all of these ideas. And what's really neat, as I mentioned in previous videos, is Piketty makes all of his data available, all
of his charts available, at this website right over there. Now this is neat,
because this shows us the after tax rate of return
versus growth rate at the world level, and
you don't see many charts that start at the year zero and go over the course of 2,000 years. And so, you can imagine that the numbers back here are estimates, but let's just go with them for the sake of argument. So what it shows here is
that the annual return, or rate of growth, so this
is the pure return of capital after tax and capital
losses, so after, well, whatever taxes and any losses in the value of the capital or whatever
else, that's that here. And then this is the growth
rate of world output. And you see, for most
of at least the last few thousand years of human history, and this, the horizontal axis here
isn't completely at scale. From here to here is, that's, from here to here gets us almost, well, almost 1,500 years, while
from here to here is, gets us about 50, gets us about 50 years. So it's not completely at scale, but you see that for
most of human history, the annual rate, the
growth of the economy, was much smaller than
the return on capital. And once again, these
are, especially back here, these are just estimates, especially based on feudal times and whatever else. But on some level, they
could be believable, because in feudal times,
and when you had kings and all of that, you had
a lot of coercive power by the feudal lords or the
kings and whoever else. They could, by force, force
people to kind of work on their fields or whatever else. But if we take these numbers, we then see something interesting happens as we go into the early 20th century. The return, the after tax
rate, the after tax return on capital drops below, drops below, the rate of economic
growth of the economy. So we see that right over here, and this is over huge swaths of time. Even this data point,
this is one data point that represents, this represents
37 years right over here. And then we have another data point that represents the next, the next, what is this, the next
62 years right over that. And this is kind of the world
that most of us kinda know. This is modern times right over here, where the rate of economic growth, the rate of world output has been larger than the rate of return
on capital after taxes. Now, when you first
just look at this chart, you say, oh my god, look,
they're gonna cross again. Maybe that means we're
going back to the Gilded Age or feudal times or whatever else. But you have to very,
very, very careful here. Everything after this point is conjecture. This is a model, it might
happen or it might not. We could see something very different. So let me make it very,
let me make it very clear. All of, let me do this in another color, one that's, so all of this that I'm, whoops, that's not another color. All of this that I'm
highlighting in yellow, this over here is all conjecture. You could go the other
way, it is possible. It's completely possible
that you have a reality, let me get my, where
this continues the trend that it's going on, where this, where world growth kinda does this. Actually, let me do, and then it goes, so it goes from here, and maybe
it does something like this. So it's very important
to realize that this kind of intersection right over
here, this is a projection. And you should look at his assumptions, you should decide for
yourself on whether you think that this projection makes sense. Because this is what is saying that hey, this delta between r and g,
that g is greater than r, this makes it look like hey, it's over. But maybe it's not over,
maybe when we average over the next, if we
average over the next, oh what is this going to be over, if we average over the next 38 years, then maybe we'd get something like this. And obviously, we're at
just the very beginning of this interval, so
there's not a lot to go on. And that is also assuming,
even if this does happen, that is still assuming this relationship that r greater than g leads to inequality, which in extreme forms
could eventually lead to some form of a Gilded Age
or kind of dynastic wealth, which could hurt innovation
or which could even hurt, let me write that down,
dynastic wealth, Gilded Age, which maybe hurts, hurts,
hurts meritocracy, meritocracy, or even potentially
innovation, innovation, or the economy as a whole if you have less of a middle class and people
with purchasing powers. But there's a lot of arrows here, and you need to decide for
yourself which parts of these, which parts of this
connection you agree with or disagree with, or
depending on the circumstances or the evidence, you are more
inclined to believe or not.