11 ms·

Also confirming that r>>g, returns are considerably larger than economic growth, validating Piketty. I.e. it is increasingly getting more beneficial to own than

• taffer 7y ago
  I'm far from being an expert in this field, but from what I know, r must be greater than g for investments to make sense in the first place. It also seems that the widening gap can be explained by rising housing prices since the 1950s: https://voxeu.org/article/housing-capital-and-piketty-s-analysis https://voxeu.org/article/housing-capital-and-piketty-s-anal...
  • tptacek 7y ago
    Is that really true? r < g could still make sense if you're constrained on g and less so on r, as long as r earns some return.
  • 317070 7y ago
    > r must be greater than g for investments to make sense in the first place Why would that be true? Say r was lower than g, what is my alternative to investing my capital?
    • deleted 7y ago
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    • wmf 7y ago
      Technically, consumption (spending your whole paycheck) is an alternative to investing but that mostly comes up in macroeconomic discussions.
      • megaremote 7y ago
        Um, so I would a car every few months?
        • wmf 7y ago
          You might be surprised how much money some people are capable of spending. There does seem to be some conflict between exhorting everyone individually to save more while complaining that the economy is suffering from shortfall in aggregate demand (i.e. people not spending enough money).
        • anonymous5133 7y ago
          You just "spend" it on "non-productive" assets like art, gold coins, jewelry....these sorts of things.
          • peanutz454 7y ago
            Is housing, like Gold Coins also a non-productive asset?
            • hedoban 7y ago
              No - its production is either the rent your tenant pays you, or the money you save by not paying rent, if you live in it yourself.
        • ivalm 7y ago
          You can buy real assets (traditionally gold). Think of a world with large inflation -- if you are rich and hold bonds or money in the bank you wealth doesn't grow or potentially diminishes, but if you are a worker you still get money and presumably your wage growth increases quite fast (in line with the large inflation).
          • Dylan16807 7y ago
            Real assets are great if r goes negative. What if r is still positive in real terms, but g is more positive?
  • __blockcipher__ 7y ago
    That makes no sense. If you're not invested you don’t get g, you get a slight negative return from inflation. Long term it always makes sense to invest as long as you can do better than the (generally negative) “return” of inflation.
  • Dylan16807 7y ago
    Let's set up a situation where r is greater than g, and also I'm getting a fair share of g so I can actually experience this tradeoff properly. Okay, so the rational behavior is for me to do the minimum amount of work possible for most of my life, since wages grow faster than savings. Then, the week before retirement, I just have to do 10 years of work all at once! Doesn't really work. If g is one percentage point bigger than r it makes my retirement savings somewhat smaller than I'd like, but it's still far better than not having any. If I already have lots of money, and I don't want to go bankrupt, my only real options are r and leaving it in a box. And r definitely has better results than the box. Preemptively buying products I don't want yet has an even worse return than the box, since they need to be stored and decay over time.
• ls612 7y ago
  You would expect this to be true if returns to scale are concave after some point. Intuitively this makes sense, for anything, after a certain point more of it becomes bad. If production returns to capital are sub-linear at very large (macroeconomic) scales then it would be surprising to see g >= r for any long period of time.
• bko 7y ago
  > it is increasingly getting more beneficial to own than to work. And from this data it seems that the difference is even accelerating. If this were true, wouldn't it be prudent to take out loans and invest in the stock market (own) rather than invest in education (labor)?
  • deleted 7y ago
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  • icebraining 7y ago
    It's not a single decision, you have to decide what to do with each dollar/euro/etc. Education might provide a high rate of return for the first dollars, yet rapidly diminishing returns for the rest.
  • jsnider3 7y ago
    As someone who has borrowed money in order to invest in the stock market, I do feel that it was a prudent decision. Although, I'm not sure I'd pick it if forced to choose between it and college.
• noego 7y ago
  I never understood comparing r and g. r represents the fixed investment income for the rentier. g represents the growth in income for the laborer. Comparing these two numbers, is like comparing velocity vs acceleration. Example: Let's take r=0.1, g=0.03. Consider a Rentier with a real investment income of $100,000/year (ie, off a $1M endowment), and a Worker with wages of $100,000/year. For simplification, let's assume both individuals spend their entire $100,000 income every year. If you follow the r>>g hypothesis, you might assume that after a period of time, the Rentier will be far better off than the Worker. But that's not the case. After 20 years, the Rentier's real income will still be $100,000/year, off the same $1M endowment. Whereas the Worker's wages will now be $100,000 * 1.03^20 ~= $180,000 Clearly a higher r will be to the Rentier's advantage, especially if he supplements his investment income with wages as well, and keeps growing his endowment further. But this is going to be true even for r<g. There's nothing special that occurs when r overtakes g, since they are comparing totally different things.
  • crazygringo 7y ago
    Despite the parent, it's never been an argument that owning is better than working, or anything at all to do with individual people at the micro scale. The argument is when returns are greater than growth, societal inequality increases because the "haves" continue to hold on to their wealth, essentially creating a kind of permanent upper-class, that isn't based on merit the way it should be under capitalism, and that this (arguably) feels fundamentally unfair.
    • littlestymaar 7y ago
      Capitalism had never been about merit. The word “Capitalism” is even a word coined by socialists in the 19th century which means « some people (the capitalists) are owning the means of production and keep all the wealth »
  • knn 7y ago
    Your assumption of a 100% savings rate is not quite reality though. More realistically, suppose both people save 50%. Then in 20 years, the rentier is about 2x richer than the worker. https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50000)(1.1%5Ei) https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50... vs https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50000)(1.03%5Ei) https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50...
• ageek123 7y ago
  There have been some studies that show that if you remove housing, then the r>>g effect goes away (at least over recent decades; I don't think these studies went back to 1870). We could fix a lot of the rent-seeking problem with saner housing/land use policy.
  • e3b0c 7y ago
    > Rognlie, Matthew. 2015. Deciphering the Fall and Rise in the Net Capital Share. Brookings Papers on Economic Activity 46(1): 1–69 The paper briefly mentions it but does not address or refute the point further.
  • onlyrealcuzzo 7y ago
    And I'm sure you could remove the wages of the top 0.1% and r>>g would be true again. The rate at which r is growing compared to g is accelerating. For anyone who works for a living, that should be unsettling.
    • ericd 7y ago
      We’re also (probably) at the tail end of an enormous credit cycle, with rock bottom interest rates, and that means hugely inflated asset prices (and a correspondingly grown wealth gap). After credit cycles end, though, you get deleveraging. Debts get defaulted on, and asset prices fall, both of which hurt the rich far more than those who have no assets and those who are in debt. Of course, deleveraging also coincides with unemployment and a bunch of other issues that harm the less well off.
      • Mirioron 7y ago
        >Of course, deleveraging also coincides with unemployment and a bunch of other issues that harm the less well off. I don't think it's so much a coincidence, but rather a direct effect of it. Less investment into businesses usually means fewer jobs.
        • deleted 7y ago
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• Danieru 7y ago
  Inflation control I think is the notable cause of this acceleration. In the past inflation could get out of hand and thus eat accumulated wealth. Note how the paper talks about the stagflation of the 1970s and the war periods being times of reversal. Of course I would not want to see rapid inflation. Yet the numbers suggest that our strong inflation control has been a cause of labour's reduced portion of GDP. Running the QE hot by letting inflation outpace the central banks inflation goal might be a good idea for assisting labour's income mix. A dangerous idea, so I hope some other country tries it first.
  • ivalm 7y ago
    This is complicated. Debt/bonds do lose value with inflation, but things like commodities/real estate/most stock securities do not (except for via co-occuring recession, which also hits workers through layoffs).
    • AnthonyMouse 7y ago
      On the other hand, the prices of those things are quite inflated already and it's quite a painful adjustment for their nominal values to decline. If nominal housing costs go down then people end up with underwater mortgages, there is a cascade of defaults, etc. But combine e.g. relaxing zoning rules with a reasonable level of inflation and then nominal housing prices don't have to decline to adjust, they can just stay where they are as nominal wages and other prices catch up to them.
• sonnyblarney 7y ago
  Yes, but the problem is that we're not measuring consumer surpluses very well, which is a fundamental component of how we obtain value as individuals. The r/g thing is kind of indirect. 1) Whenever you buy something with money - you're making a 'profit' (surplus). You value that thing more than the money - the delta is the profit. Your personal profit. When companies compete and produce better goods for roughly the same price, we're winning immensely, the company may not make much more money. This is supposed to measured in inflation, but it's not. We basically don't measure individual profit, only corporate profit. 2) We also don't measure the value of things for which money is not changed: when my brother's mother in law comes over to babysit - there's not GDP gain. When he pays a babysitter, well that goes to the GDP, but same value created. So when women came into the workplace en-masse over the last two generations, we saw a much bigger increase in GPD than in reality, because those numbers assumed they were doing 'nothing of economic importance' at home, which is obviously false. If raising children is 'labour' then how the hell were mothers (and stay at home dads, though more rare in the past) not part of the labour market? This is the tip of the iceberg. 3) 120 years ago, governments were tiny. Now they are huge i.e. 30-50% of the economy. We don't even try to measure the value (let alone surpluses) generated by gov. we just count how much they spend! Think of how much of a massive distortion this is in terms of calculating overall wealth! The government could cure cancer, put in a $10 pill and the GDP wouldn't budge. Actually, it would go down because we might have less health spending. Almost all aspects of government have improved quite a lot, but because it's socialized, it might have no bearing on the GDP at all. A regulation that required companies to stop polluting may add some indirect GDP via new equipment, but the vast surpluses go to us, the consumer/citizen in the form of clean air! How is that measured in our GDP? It isn't! So all three of these issues are fairly existential to the nature of how we measure value, and each of them is enough to throw everything offside. They are even more problematic because they point to the existential problem in economics and that is 'how do we measure value'? It's something we used to argue a lot about, but not so much any more (but not because it's settled). There is a good podcast on the FT by Uni College London Prof Mariana Mazzucatto [1] where she talks about this. I'm not that old, but I grew up without the internet, and I was close with my grandparents who grew up on a farm without electricity, plumbing, or cars, or radios. They were not particularly poor for their area, and were the first in the area to get plumbing and TV eventually. The level of increase in surpluses is mind boggling and I don't think we account for it well. Women can now do mostly as they please. Most 'heart surgery' was a wickedly complicated and dangerous thing 30 years ago - now it's usually quick and fast, not a big deal. So many more have access to it. Almost everyone in the west can afford to go on an airplane, but that used to be for the rich. Almost anyone who scores spectacularly in school can get scholarships (I know it's more complicated than that) but it's true. At least technically, Uni is open to everyone. This is new. I could go on forever. (As I often do, sorry) [1] https://podcasts.apple.com/ca/podcast/mariana-mazzucato-on-who-creates-value/id448302257?i=1000426253856 https://podcasts.apple.com/ca/podcast/mariana-mazzucato-on-w...
• dnautics 7y ago
  r > g should be an obvious corollary of an economy based on growth that is stimulated by inflationary policy. Is it a necessary consequence of capitalism in all policy universes? More study would be required, but there are very little data on economies without government driven inflationary policy, going back to the Ronan days when the mint gradually devalued the denarius.
• vasilipupkin 7y ago
  the real problem with this comparison is that it's not done on risk adjusted basis. people who take risk, should be compensated for it, or g will be negative ! it's the typical marxist logic that just assumes g as a fixed number out of thin air. In fact g is only possible because some people make the effort to get r. r causes g.
• rsync 7y ago
  "r is bigger than g in every country and every time period that we consider" I thought Piketty himself conceded that wartime (and, I think, immediate post-war period) was a period where this didn't hold true ...