- [Instructor] So much of Piketty's book is about this idea
of more and more returns to capital,
that the return to capital is going to grow faster
than the growth of the economy.
We see charts like this, where we have the value
of private capital as a percentage of income.
And we see this dynamic, and we see this dynamic played out
in multiple charts, where as we go through the Gilded Age,
we hit kind of a peak right over here,
at least a local peak, and then as we get
into the beginning of the 20th century it drops down
and then starts to pick back up until the present time.
And this is the present time
right over here, this data point.
And then everything we see after that,
this is Piketty's projections, really based on this idea
of returns to capital be growing faster,
that R is growing faster than G.
But one thing to think about
is why this dynamic might be happening.
And then that might inform how we think
about what the projections might be.
So let's think about
why the value of private capital could go down
and why the value of private capital could go up.
So one reason, so let's just say we have some asset,
some capital asset right over here,
and let's say its current value,
I went on to some market and I bought it,
and its current value is $100.
Let me just write this, this is today.
Today it has $100, and let's say it gives an income,
an annual income, of $10, of $10.
So for this asset my return on asset right over here is 10%.
I get $10 on $100 investment.
Now there are several reasons
why the value of this could go up.
One reason is that this asset starts producing more income.
So this would be in line with the idea of more,
of maybe income, of capital becoming more and more valuable.
It's able to capture more and more income,
or maybe it's utilized in a better way.
And so, let's write this as the future.
So in the future, you could have a situation
where it's generating an income,
it's generating an income of let's say $20.
And let's say that the return is the same,
so the expected return is the same,
so people are still willing to say I'm willing to pay
as much for things so I still get a 10% return.
So people are saying okay I'll pay as much
so I still get a 10% return,
so that means that they're going to pay,
in the market they'll pay $200 for it.
So this is one reason why you could have an increase
in the value of something. And you could go the other way.
Maybe the value was $200, but because the income
goes in half and the return stays constant,
the value goes in half.
So this is one scenario.
This is one reason why the price of an asset could go up.
But it's not the only reason
why the price of an asset could go up.
Another reason why a price of an asset could go up
is maybe there's more and more capital
and maybe there's fewer and fewer projects to put it to,
especially if the growth of the economy isn't growing.
So more capital, capital chasing, chasing
fewer, fewer projects, or fewer things for it to produce.
And in this world, what is going to happen?
Well, this, we'll just assume that this continues
to produce $10 of income.
So the income continues to be $10 a year,
but people, let's say you and I were able
to buy this for $100, but let's say the next person
who has $100 of capital to invest in capital,
says well I can't find something with $10 of income,
I can't get $10, so hey I'm willing to take 9%,
so I'm gonna bid this up, I'm willing to buy this
from you for $101, or $102, or maybe it goes
all the way where they can't get anything,
they can't get better than a 10% return,
anything better than a 5% return on their incremental $100
and so they're willing to do a 5% return for this asset.
So they would bid this thing up,
the more and more capital you have chasing,
or more and more money you have chasing this project,
I guess you could say, this asset,
could just bid the value of this up.
So the value could go to $200,
it's still producing the same income,
and now the return is 5%.
And so the reason to point this out is increasing value
of capital doesn't necessarily mean increasing returns.
In fact normally in the market,
they move inversely with each other.
When bonds have higher returns,
then you have lower, then their prices are lower.
When their prices are higher, for bond prices,
that means that they have a lower, a lower return.
So when we look at something like this,
when we look at something like this,
this could be speaking to more and more capital accumulation
chasing fewer and fewer potential projects
or whatever it might be,
especially because you have slowing economic growth,
but this would be a story of capital accumulation
but with R slowing down,
with the actual potential return slowing down,
and probably starting to converge to G,
to the rate of growth.
Another similar idea, this is more capital
chasing fewer projects, but you also have,
might have a reality is that the reason why
this is getting a 10% return is people find this scary.
They've been burned on investments before,
there have been wars.
They don't want to put their money into some kind of factory
they want to stuff it into their mattress.
But then over time, maybe people become a little bit
less risk averse and they're willing to invest in the market
they're willing to invest in a project
or start a business or whatever it might be.
And so people become more risk tolerant.
So maybe this is a world that is very risk averse.
Risk averse, so if you want me to invest in capital,
you have to give me a high return.
But maybe the future is going to be more risk tolerant.
Risk tolerant, risk tolerant,
and then in a more risk tolerant world,
you could also go to something like this.
So this is risk, in a more risk tolerant world,
you might say hey okay, well okay,
I don't have to stuff it in my mattress, I'm getting 0%,
or in my bank account, I'm not getting a lot,
but hey now I'm willing to take my money
and invest it more in capital.
And so once again, they will bid up capital,
and they will have a lower expected return.
Here they need a high expected return
because there was a lot of risk, they were scared of things,
hey you better give me a lot of return on my capital
if you want my capital because it's a scary world out there.
Hey okay, maybe now I'm less worried about wars
and my wealth disappearing and whatever else,
so I'm more willing to invest.
And so that also is in line with this more capital,
and so there is a lower expected return,
and so you have the value going up.
And actually this is consistent
with what we see happening right over here,
is that this, this period right over here was a period,
this is a period of major unrest.
You have the two largest wars
in global history right over here,
you can imagine people becoming very very very risk averse.
You can imagine people starting to stuff money in their,
putting their, trying to sell their assets,
worried what might happen.
And so you're going to have less and less capital,
more and more risk aversion driving that reality.
But then as we go into the post-war period,
the memories of those wars go away,
people become more risk tolerant,
more capital comes into the system.
Because of the productivity,
you have more and more capital accumulation.
If we go back into even pre-Industrial Revolution times,
if we go to Medieval Times, and all the rest,
you had a limited amount of capital, it was mainly land.
As you go into the Industrial Revolution,
and especially the 20 and 21st centuries,
land represents a smaller and smaller percentage
of the value of total capital.
Now you have created capital, you have technology,
you have intellectual property.
And so this could be a trend, once again I'm not sure,
it's up for you to make the judgment.
This trend isn't necessarily a return to a Gilded Age,
it could be more and more capital
chasing fewer and fewer projects,
which actually could be a sign of lower returns,
or it could be just people's risk premium is going down.
They're becoming more and more risk tolerant,
and so they're willing to accept lower and lower returns.
So it's not clear what the trajectory is,
but I just want to make it very clear
that this isn't necessarily saying
that hey because this graph looks the same as here
that we're necessarily going into a second Gilded Age.
But it's up for you to decide.