5 ms·

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 the

by 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...
- noego 7y ago
  Your numbers are off. If both people save $50k each from their investment/wage income, then both of them will earn 10% returns on that $50k of savings. Hence why they cancel each other out. You've only given the worker 3% returns on his savings, not 10%
legulere 7y ago
You’re looking at it from the wrong perspective. If r>>g, Rentierism becomes an ever increasing part of the economy.
- bubblewrap 7y ago
  Isn't that the same fallacy as the "Joseph's Penny" - claiming because if interest, after a while a penny would be worth the weight of the whole earth in gold? Obviously, the worth via interest can't grow forever, because there is no infinite value going around. Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? That is what people aim for when they invent technology to make life easier, after all.
  - smt88 7y ago
    It does seem that less labor is required. Automation has permanently removed large percentage of human workers from various industries (like mining). The problem is that life is not easier because all that efficiency is captured by a tiny group of non-laborers. The people whose labor was replaced are not benefiting from the end of their labor. They're now jobless and forced to compete harder for lower pay.
    - bubblewrap 7y ago
      I don't think that is strictly true. Overall life IS easier for most people, because things are also cheaper to come by. And there still seem to be jobs. But sure, there are various ways of looking at it. As others have pointed out, with increased productivity, the value of labor could also increase.
      - hedvig 7y ago
        What's cheaper nowadays?
        bubblewrap 7y ago
zxcmx 7y ago
So g represents growth of the entire economy, not worker income or some such thing. Note that if Piketty’s hypothesis is true then the conclusion (return on capital will capture more and more of the economy) is more or less tautological.
- notahacker 7y ago
  This. A corollary of the argument is that if r > g, worker income on average grows slower than g.
- Symmetry 7y ago
  Worker incomes kept pace with investment income through the 19th century where r was consistently higher than g and also in the early 20th where it didn't. If your investments are in machines that need people to work them then better machines mean that people's labor is more valuable. It's only recently that we've seen we've seen wages as a share of total income slip from roughly 50% to roughly 40% of total income. But the delta can be almost entirely explained by large amounts of capital returns in owner occupied housing which is a far higher share of the US capital stock than it had been historically. And this form of capital doesn't require (much) labor to maintain its value.
benmoll 7y ago
Below is the logic why r-g matters for wealth inequality and is a reasonable thing to look at. In particular this happens in so-called "random growth theories" of wealth inequality or "theories with multiplicative shocks." At the same time you're right there is nothing special that happens when r overtakes g and it's kind of irrelevant whether r>g or r<g. This is based on a bunch of lecture notes and papers: http://www.princeton.edu/~moll/piketty_notes.pdf http://www.princeton.edu/~moll/piketty_notes.pdf, http://piketty.pse.ens.fr/files/Piketty2015JEP.pdf http://piketty.pse.ens.fr/files/Piketty2015JEP.pdf (this one is by Piketty and also there it's about r-g rather than r>g -- see the discussion on p.75 and 76) and https://www.aeaweb.org/articles?id=10.1257/jep.29.1.29 https://www.aeaweb.org/articles?id=10.1257/jep.29.1.29 Consider r and g in turn. It's easy to see why r matters for wealth accumulation: if you get a high return you have high capital income and so, for any given level of consumption, you will have high wealth tomorrow. In your example with a $1M endowment and assuming people consume 5% of their wealth a 10% return will mean next year's wealth is $1,050,000 and a 20% return will mean next year's wealth is $1,150,000. Next consider g: now the idea is the economy is growing at rate g and therefore people's other income sources are growing at rate g. We therefore de-trend everything by g and end up with r-g ("Detrending" here simply means looking at things RELATIVE to the average). So it does make sense to compare r and g, simply because we're thinking about a growing economy so you want to compare EVERYTHING to g. Also note that these "multiplicative shock" theories aren't really about rentiers vs workers. They are just about people making investments and either getting lucky or unlucky. Here is a good explanation of these theories http://nautil.us/issue/44/luck/investing-is-more-luck-than-talent http://nautil.us/issue/44/luck/investing-is-more-luck-than-t.... Of course, this is just one theory of wealth accumulation/inequality, and there are others with other predictions where r-g would not be so central.
- panarky 7y ago
  > the economy is growing at rate g and therefore people's other income sources are growing at rate g Why does a GDP growth rate of g imply that people's other income sources (wages from labor?) are also growing at rate g? Wage growth in a country depends on confounding factors like worker productivity, relative bargaining power between workers and owners, outsourcing to other countries, automation, and the mix of manufacturing and service jobs in the economy. It's very possible for the rate of economic growth to be, say, +3% while rate of change in the share captured by workers is flat or negative.
lkrubner 7y ago
During each generation of rich people about 20% go bankrupt. Maybe they are alcoholics or they are fools who fall for scams. Your example would come close — a person who is not especially wealthy and who doesn’t work and who consumes 100% of their income. That would put them at a heightened risk of dropping out of the category of the wealthy. A better example would be 2 people who work and who both make $100,000 and who consume 100% of their labor income. But one of these individuals has a $1 million endowment and reinvests every penny earned from interest. You can see how that would accelerate the concentration of wealth.
nabla9 7y ago
When wealth increases, less and less of the investment income is consumed. It's not fixed income anymore, it's added to the capital creating compound interest. Rentier with a real investment income of $100,000 may have just few million in wealth

by noego 7y ago

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...

noego 7y ago
Your numbers are off. If both people save $50k each from their investment/wage income, then both of them will earn 10% returns on that $50k of savings. Hence why they cancel each other out. You've only given the worker 3% returns on his savings, not 10%

legulere 7y ago

You’re looking at it from the wrong perspective. If r>>g, Rentierism becomes an ever increasing part of the economy.

bubblewrap 7y ago
Isn't that the same fallacy as the "Joseph's Penny" - claiming because if interest, after a while a penny would be worth the weight of the whole earth in gold? Obviously, the worth via interest can't grow forever, because there is no infinite value going around. Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? That is what people aim for when they invent technology to make life easier, after all.
- smt88 7y ago
  It does seem that less labor is required. Automation has permanently removed large percentage of human workers from various industries (like mining). The problem is that life is not easier because all that efficiency is captured by a tiny group of non-laborers. The people whose labor was replaced are not benefiting from the end of their labor. They're now jobless and forced to compete harder for lower pay.
  - bubblewrap 7y ago
    I don't think that is strictly true. Overall life IS easier for most people, because things are also cheaper to come by. And there still seem to be jobs. But sure, there are various ways of looking at it. As others have pointed out, with increased productivity, the value of labor could also increase.
    - hedvig 7y ago
      What's cheaper nowadays?
      - bubblewrap 7y ago

zxcmx 7y ago

So g represents growth of the entire economy, not worker income or some such thing. Note that if Piketty’s hypothesis is true then the conclusion (return on capital will capture more and more of the economy) is more or less tautological.

notahacker 7y ago
This. A corollary of the argument is that if r > g, worker income on average grows slower than g.
Symmetry 7y ago
Worker incomes kept pace with investment income through the 19th century where r was consistently higher than g and also in the early 20th where it didn't. If your investments are in machines that need people to work them then better machines mean that people's labor is more valuable. It's only recently that we've seen we've seen wages as a share of total income slip from roughly 50% to roughly 40% of total income. But the delta can be almost entirely explained by large amounts of capital returns in owner occupied housing which is a far higher share of the US capital stock than it had been historically. And this form of capital doesn't require (much) labor to maintain its value.

benmoll 7y ago

Below is the logic why r-g matters for wealth inequality and is a reasonable thing to look at. In particular this happens in so-called "random growth theories" of wealth inequality or "theories with multiplicative shocks." At the same time you're right there is nothing special that happens when r overtakes g and it's kind of irrelevant whether r>g or r<g. This is based on a bunch of lecture notes and papers: http://www.princeton.edu/~moll/piketty_notes.pdf http://www.princeton.edu/~moll/piketty_notes.pdf, http://piketty.pse.ens.fr/files/Piketty2015JEP.pdf http://piketty.pse.ens.fr/files/Piketty2015JEP.pdf (this one is by Piketty and also there it's about r-g rather than r>g -- see the discussion on p.75 and 76) and https://www.aeaweb.org/articles?id=10.1257/jep.29.1.29 https://www.aeaweb.org/articles?id=10.1257/jep.29.1.29 Consider r and g in turn. It's easy to see why r matters for wealth accumulation: if you get a high return you have high capital income and so, for any given level of consumption, you will have high wealth tomorrow. In your example with a $1M endowment and assuming people consume 5% of their wealth a 10% return will mean next year's wealth is $1,050,000 and a 20% return will mean next year's wealth is $1,150,000. Next consider g: now the idea is the economy is growing at rate g and therefore people's other income sources are growing at rate g. We therefore de-trend everything by g and end up with r-g ("Detrending" here simply means looking at things RELATIVE to the average). So it does make sense to compare r and g, simply because we're thinking about a growing economy so you want to compare EVERYTHING to g. Also note that these "multiplicative shock" theories aren't really about rentiers vs workers. They are just about people making investments and either getting lucky or unlucky. Here is a good explanation of these theories http://nautil.us/issue/44/luck/investing-is-more-luck-than-talent http://nautil.us/issue/44/luck/investing-is-more-luck-than-t.... Of course, this is just one theory of wealth accumulation/inequality, and there are others with other predictions where r-g would not be so central.

panarky 7y ago
> the economy is growing at rate g and therefore people's other income sources are growing at rate g Why does a GDP growth rate of g imply that people's other income sources (wages from labor?) are also growing at rate g? Wage growth in a country depends on confounding factors like worker productivity, relative bargaining power between workers and owners, outsourcing to other countries, automation, and the mix of manufacturing and service jobs in the economy. It's very possible for the rate of economic growth to be, say, +3% while rate of change in the share captured by workers is flat or negative.

lkrubner 7y ago

During each generation of rich people about 20% go bankrupt. Maybe they are alcoholics or they are fools who fall for scams. Your example would come close — a person who is not especially wealthy and who doesn’t work and who consumes 100% of their income. That would put them at a heightened risk of dropping out of the category of the wealthy. A better example would be 2 people who work and who both make $100,000 and who consume 100% of their labor income. But one of these individuals has a $1 million endowment and reinvests every penny earned from interest. You can see how that would accelerate the concentration of wealth.

nabla9 7y ago

When wealth increases, less and less of the investment income is consumed. It's not fixed income anymore, it's added to the capital creating compound interest. Rentier with a real investment income of $100,000 may have just few million in wealth