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r isn't the growth rate of capital's share of income though. r represent the return on capital (which is proportional to capital's share of income), not the gr

by om2 10y ago

r isn't the growth rate of capital's share of income though. r represent the return on capital (which is proportional to capital's share of income), not the growth rate of the return on capital, or the growth rate of capital's (share of) income. On the other hand, g isn't the return on labor, or labor's share of income. It's (approximately) the growth rate of the return on labor. Would you rather have $100 and then get 200% of it every year (r = 200%) or get an amount that increases at 100% every year (g = 100%) starting with $1? With the second option you'll have twice as much money in just 11 years. So in this picture income eventually wins, even though r > g. It's not just "not a formula" it is total nonsense. It doesn't make sense to compare a growth rate of an amount to a growth rate of an annual increase!

Mikeb85 10y ago
In Piketty's model, r is return on capital. So that means it's the return on things like equities (and btw, interest is compounding on investments, don't know why you represented otherwise), real estate (Piketty is not overly find of the role of rentiers/landlords in the economy), machinery and so on. So the money accrued by the owners of wealth and machinery that is, essentially passive income, or income generated by capital, is r. g is the growth of the economy. We calculate it as GDP, what he's interested in is basically people's combined incomes and economic activity that goes with it. The premise that r > g is saying that people who have wealth, their return on that wealth will always be higher than the growth of the economy. If the economy grows 1%, the return on capital (remember it's all capital in the economic sense) will be more than 1%. Now this isn't true for all years in all places, but it has been shown to be true in the long run, which is how wealth is accrued quicker by those who already have wealth, and how inequality increases. Keep in mind Piketty's book is a massive tome. And btw, comparing a rate that's calculated as %/year to another calculated as %/year is mathematically correct. Your example is nonsense btw, it almost seems like you've confused r with g, because interest certainly compounds with capital, whereas with income, while you'll get increases over time, it generally isn't of the same magnitude and relates to labour, of which you have a finite amount.
- om2 10y ago
  I haven't confused r with g. I think you may not have thought through what these quantities represent. r is the return on capital. An asset worth A returns A*r per year. This says nothing about wether A increases or decreases. You can use your capital income to buy more capital assets. But you can also use labor income to buy more capital assets. Basically the argument only works if you assume all capital income is saved, but no labor income is saved. But then the savings rate is doing all the work.

by om2 10y ago

Mikeb85 10y ago

In Piketty's model, r is return on capital. So that means it's the return on things like equities (and btw, interest is compounding on investments, don't know why you represented otherwise), real estate (Piketty is not overly find of the role of rentiers/landlords in the economy), machinery and so on. So the money accrued by the owners of wealth and machinery that is, essentially passive income, or income generated by capital, is r. g is the growth of the economy. We calculate it as GDP, what he's interested in is basically people's combined incomes and economic activity that goes with it. The premise that r > g is saying that people who have wealth, their return on that wealth will always be higher than the growth of the economy. If the economy grows 1%, the return on capital (remember it's all capital in the economic sense) will be more than 1%. Now this isn't true for all years in all places, but it has been shown to be true in the long run, which is how wealth is accrued quicker by those who already have wealth, and how inequality increases. Keep in mind Piketty's book is a massive tome. And btw, comparing a rate that's calculated as %/year to another calculated as %/year is mathematically correct. Your example is nonsense btw, it almost seems like you've confused r with g, because interest certainly compounds with capital, whereas with income, while you'll get increases over time, it generally isn't of the same magnitude and relates to labour, of which you have a finite amount.

om2 10y ago
I haven't confused r with g. I think you may not have thought through what these quantities represent. r is the return on capital. An asset worth A returns A*r per year. This says nothing about wether A increases or decreases. You can use your capital income to buy more capital assets. But you can also use labor income to buy more capital assets. Basically the argument only works if you assume all capital income is saved, but no labor income is saved. But then the savings rate is doing all the work.