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Critically looking at data on ROC and economic growth over millenia

Video transcript

We have 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. What I want to do in this video is to think critically a little bit about some of the other data from the book. 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. 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 web site, right over there. 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. You can imagine that the numbers back here are estimates but let's just go with them for the sake of argument. What is shows here, is the annual return or rate of growth. This is the pure return of capital after tax and capital loses. So, after whatever taxes and any loses in the value of the capital or whatever else. That's that here and then this is the growth rate of world output. You see for most of, at least, the last few thousand years of human history. The horizontal axis here isn't completely at scale. From here to here gets us almost 1500 years while from here to here 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. Once again, these are, especially back here, these are just estimates especially based on futile times and whatever else. On some level they could be believable because in futile times and when you had kings and all of that. You had a lot of course of power by the feudal Lords or the kings and whoever else. They could force people to kind of work on their fields or whatever else. If we take these numbers, we then see something interesting happens as we go into the early 20th century. The after tax return on capital drops below the rate of economic growth of the economy. We see that right over here and this is over huge [swatches]of time, even this data point, this is one data point that represents 37 years right over here. Then we have another data point that represents the next 62 years right over that. This is kind of the world that most of us kind of know, this is modern times right over here. Where 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 going to cross again, "maybe that means we're going back to "the gilded age or futile times or whatever else." But you have to be 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. Let me make it very clear. Let me do this in another color. One that's... So all of this that I'm high... 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 world growth kind of does this. So it goes from here and maybe it does something like this. It's real 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. This is what it's saying that "Hey, this delta "between r and g that g is greater than r." This makes it look like it's over but maybe it's not over. Maybe if we average over the next, what is this going to be? If we average over the next 38 years, then maybe we get something like this. Obviously we're at just the very beginning of this interval so there's not a lot to go on. 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 dynastic wealth which could hurt innovation which could even hurt, let me write that down. Dynastic wealth, gilded age which maybe hurts meritocracy or even potentially innovation or the economy as a whole if you have less of a middle class then people with purchasing powers. There's a lot of arrows here and you need to decide for yourself 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.