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Current time:0:00Total duration:5:46

Critically looking at data on ROC and economic growth over millenia

Video transcript

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 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 2000 years and so you could imagine that the numbers back here are our estimates but let's just go with them for the for the sake of argument so what it shows here is that the annual or the annual return or rate of growth so this is the pure return of capital after tax and capital losses so after what whatever taxes and 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 almost 1500 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 the growth of the economy was much smaller than the return on capital and once again with these are especially back here these are just you know estimates especially based on feudal times and whatever else but on some level they could be believable because in few old feudal times and when you had kings and all of that you had a lot of coercive power by the the feudal lords or the Kings and whoever else they could by force force people to to kind of work on their on their fields or whatever else but if we 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 her 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 swathes of time even this data point this is this is a 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 I don't 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 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 going to cross again maybe that means we're going back to the Gilded Age or feudal times or whatever else but you have to be very very very careful here everything after this point is conjecture this is a this is a model it might happen or it might not we could see something very different so let me let me make it very let me let me make it very clear olive let me do this in another color one that's so all of this that I'm high hopes that's not another color all of this that I'm highlighting in yellow this over here is all is all conduct 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 kind of does this actually we did 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 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 this Delta between R and G that are that that G is greater than R this makes it look like hey it's it's over but maybe it's not over maybe when we average over the next if we average over the next what is this going to be over if if we average over the next 38 years and maybe we get something like this and obviously where there's 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 this relationship that are greater than G leads to inequality which in extreme forms could eventually lead to some form of a gilded age or or kind of dynastic wealth which could hurt innovation or which could even hurt hurt let me write that down dynastic dynastic wealth Gilded Age which maybe hurts hurts hurts meritocracy meritocracy or 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