National income and inequality
What is capital?
The title of Thomas Piketty's book is Capital in the 21st Century. It's probably worth having a conversation about what capital is. If you're going to produce anything, you need some input, you need some factors for that production. You'd put them together. Let's say that you are a farm. Your output is food. What are your inputs going to be? This is a farm right over here. Let me a draw a little circle here. Farm and your output is food. What are your inputs going to be? You're going to need some land. You're going to need some water. You're going to need some equipment. And you are going to need some seeds and animals so, I'll just put generally here, supplies. And of course, you're going to need people to put all these things together and essentially work the land, to plow the soil and plant the seeds and harvest the crops and manage the whole operations. You're going to need labor as well. You take all of these factors of production together. They essentially represent a farm that is going to output food. When people talk about capital as a factor of production, sometimes they talk about it in a fairly narrow way. They'll separate things like land and resources or something separate and they'll say capital is hey, that's your equipment and your supplies. When people talk in more general terms, especially, in the focus of this book when there are people talking about labor versus capital. Capital when we just group things in only those two categories in that context, capital would essentially represent pretty much everything else. This right over here would be capital and one way to think about capital is the things that you could maybe you, they are assets that you have that can be valued that will give you future benefit. You can buy and sell those assets and we could think about other businesses here. Other things that are trying to produce something. Let's say you have a mine. This is the operation and it's going to produce, let's just say it's a goldmine. It's going to produce gold. What are the inputs that you would need there? You're clearly gonna need some labor. You're gonna need the miners and the people who would manage the operation of the goldmine but that's not all you need. You also need energy maybe to operate your equipment and I actually, I will put energy in here too. Some of which comes from the sun but some of which you might have to purchase or have somehow and then you would also need equipment. And you would need supplies. I mean we could consider energy as supply if you like or you use supply of energy but you also might need tires or something like that. You might need food in order to provide for the labor. Who knows what else you might need in your mine? And you also would need, of course, land. You need access to land to actually mine. Here, if we're thinking very broad terms, you could view all of this as the capital and of course, you have your labor and you put your labor and your capital together and you produce the gold. Another idea that you will hear in life a lot but obviously, in a book about capital, this will come up a lot, it's the idea of return on capital. This is just a measure of giving a value of capital that you've employed, how much income are you getting for that capital. For example, let's say this farm. The total value of this capital, let's just say it is, I don't know, I'll make up a number here. Let's just say it is $1 million. $1 million is the total value of the land and maybe you have access to your own lake and the equipment and the supplies. It's $1 million of capital. The value of that capital is $1 million. Let's say that the income of the farm after you pay the labor. Actually, let's just do this in a little broader term. Let's say the food's value, the food that's produced has a value of $100,000 in the market. Now, out of that $100,000, you obviously had to pay your labor. Let's say that $50,000 of it, goes to the labor. And then we're saying this is in a given year. You use the capital of the labor, You produce $100,000 worth of food. $50,000 goes to the labor was gonna be returned on capital. You have another 50,000 leftover for the capital for the owners of the capital whoever owned the farm. The owners of the capital would get the other $50,000. Your return on capital is going to be $50,000 that's what the owner of the capital gets and it's thee return on their investment of $1 million. And this is going to be the same thing as 5 divided by 100 or it would be 5%. You have a 5% return on capital. You invest $1 million, you're going to get $50,000. It was a 6% return on capital, you invest $1 million. You get $60,000. Now, that we've thought about that a little bit, let's actually at a pretty neat chart from the book and once again, it's pretty neat. If you look right over here piketty.psc.ens.frcapital21c. He has all the charts from his book, which make for interesting analysis at minimum and he's gathered all of this information. This is pretty interesting. There's capital and slavery in the United States. And what's interesting about that is when you study American history, you talk a lot about slavery but you don't realize that in the time of slavery as abhorrent as it is and was, people viewed slaves as capital, not as laborer. They view them as something that they could buy or sell that they own and that would create future income for them and this just gives us a sense of kind of the breakdown of capital over history. You see down, at least in the United States, you see agricultural land. In 1770, it was a reasonable percentage. This is a value capital as a percentage of national income. The value of the land is a percentage of national income was much higher than it is, today and we see the other trend that the other domestic capital has become much more value. Well, what is this other domestic capital? This could be things like infrastructure. It could be technology. It could be mechanical technology. Things like trains and cars and trucks and buses or, and factories or it could be software. It could be computers, whatever else and as we see as we went through the industrial revolution, the value of other forms of technology became... or other forms of capital other than land became more and more important for our economy and obviously, slavery ended in the mid late 1860's and obviously, that went away but it's just an interesting way to think about macroeconomic trends in the United States. Land in 1770 was a major factor of production and still is obviously. We still need land in order to produce things, especially, agriculture. Well, this is agriculture and it's still a major part. It's not like the land has disappeared. It's just that the economy has grown to be much more than just agriculture. In 1770, agriculture was a big part of our economy. Now, agriculture is a much, much smaller part of our economy. This is just an interesting way to think about, well, okay, this is all of the capital and this both public and private capital included here. Public capital would be something that is owned by the public, by the government while private capital would be something that is owned by private individuals or corporations or whatever else but you see on average, you have had kind of a a fairly constant give or take a little bit that the total value of the capital has been around four to five times the value of the total productive output, four to five times the value of the total productive output of the country.