- [Sal] We've already talked quite a bit
about the idea that if, look,
if you have a market, capitalist economy, that some,
that this will lead, hopefully, to economic growth,
economic growth, but by definition,
a market economy will have some folks who win more
and some folks who don't do as well,
and it's going to, you're also going to have inequality.
Inequality; so inequality is essentially a fact of life
of a market economy, and it's not necessarily
something that you just wanna turn off,
because that might also hurt economic growth,
and that actually might make everyone better off
because the economic growth on a per capita basis
could also be benefiting people
who aren't in the top percentile or decile or quartile.
Not always, but it could be.
But with that thought in the back of our mind,
let's actually think a little bit more
about inequality and how it's measured,
and how it can be tied to things like capital
and growth of income to capital and returns on capital.
So this right over here, this is from Thomas Piketty's book,
and what's neat is he's made all of the charts
of his book available online, right over there,
and this shows income inequality in the United States
between 1910 and 2010, and what you see here,
he measures it by the share of top decile
in national income.
So top decile's the top 10%, so this point right over here
tells us that in 1910, the top 10% of earners
made a little over 40% of the national income.
As we go into the late 20s, that approaches 50%
of the top, the top 10% of earners
were making close to half of the national income.
And then as we go through the Great Depression,
and especially after World War II,
this drops down into the low 30%s,
and then from the 1980s to the present,
this has crept back up to the high 40% range.
So the top decile, the top 10% of earners,
are making close to half of the national income.
Now let's just visualize how this happens, just numerically.
So let's imagine this is your economy in year one.
So this is your economy in year one.
Actually, let me copy and paste that.
I think that'll be useful.
So copy, all right.
And let's say that this is the fraction,
I'll do it in orange, that is going to the top decile.
So let's say it's roughly a third in year one.
So this is the fraction that's going to the top decile.
This is 1/3 right over here.
So the way that you have rising,
so on this chart, this would be kind of a 33.3,
so it would be someplace around here,
so we could pretend like we're some date
in the 60s or 70s right over here,
and now the way that you have this chart moving up,
where you have the top decile
having a larger and larger share of national income,
is if this orange section grows faster
than this green section.
So for example, this grew by 10%
while this grew by 5%,
by 5%, over time this orange section
is going to take a larger and larger chunk
of the green section.
Now as we saw in previous videos,
even if this does happen, and this is by definition
rising inequality, there could be a scenario
where the other 90% are still having a bigger pie,
and on a per capita basis still might be able
to be better off.
But the focus of this video is not that.
The focus of the video is tying this idea
to the idea of increasing returns on capital
driving this phenomenon, driving inequality,
income inequality.
So as we've seen before, income and wealth
are not the same thing, but wealth could be a proxy.
The more wealth that you have, you will have
more income from that wealth.
You will have return on that capital.
So another way to divide the economy
is instead of thinking of the top 10% of earners
and the other 90% of earners, you could think of
how much of this income goes to the owners of capital,
and how much of it goes to the people who provide the labor?
So it's more of a labor-capital split
versus the bottom 90%-top 10% split.
So here we could think of this section right over here,
and I'll just make it a different,
so let's say this is right over here,
this is how much is going to owners of capital,
to capital, to owners of capital,
the people who own the buildings, the real estate,
the resources, and how much of national income
is going to labor.
So this right over here, this right over here
is going to labor.
Now the same, a similar idea is, look,
if this blue section grows,
consistently grows faster than the green pie,
then the percentage of income that goes to capital
is going to grow more and more and more,
and because in capitalist market economies
capital is also not evenly distributed,
mainly because income is not evenly distributed,
because capital is not evenly distributed,
that this would essentially lead.
As more and more income goes to capital
and that capital is disproportionately owned
by the upper decile of income or wealth,
then you're going to, it's essentially going
to drive this phenomenon right over there.
Now I wanna be very clear.
This growth right over here, you'll hear the term
return on capital in conjunction with Piketty's book
where they compare the return on capital to growth rates.
This growth right over here is not the return on capital.
In order to know the return on capital,
you have to know how much, you need to know the income
that the capital generated, but you also have to know
the value of that capital, and here in this diagram,
all I know is the income that the capital generated,
but I don't know the value of that capital,
so I can't calculate the return on capital.
This growth that I'm showing right over here,
maybe after a few years this blue section grows
to over here, while the green section,
while the pie has grown something like this,
this growth right over here,
you could view this as the growth of income to capital,
which isn't something you hear a lot about.
But this growth right over here,
this growth, maybe this is plus 5% for the total economy,
this is the G that's often referred to.
This is the total growth of the economy.