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Hmm, but how do you know that rates of return on capital in general aren't declining simply because of reductions in productivity growth or decreased innovation

• sudosysgen 6y ago
  The issue with that paper is that it takes into account the rate of return of everything, not just capital. From the studies I've read, the decline in capital returns has been compensated for by increase in rents, capital gains, and increase in housing value. It also takes into account all countries, instead of just the US. So in the end it's not really relevant to the rate of return on capital, because they don't even make an attempt to evaluate it - the closest they get is equity, but then they count capital gains and have incomplete dividend data. It's not immediately clear that increases in productivity growth or increases in innovation would necessarily lead to increase in returns - because if everyone innovates, you won't be able to transform those into increased profit easily. There's only a few dozen studies on the return of capital, instead of general returns, and they tend to be made by heterodox economists, but they are correct and peer-reviewed, such as this one : https://journals.sagepub.com/doi/full/10.1177/0486613411423899 https://journals.sagepub.com/doi/full/10.1177/04866134114238...
  • md_ 6y ago
    Huh? In most usage I've seen, "return on capital" means on all capital, not just equity (and not just dividends on equity, which I think you are implying?). But I'm not an economist, so maybe I'm misunderstanding you or the paper. In particular, returns on real estate or capital gains are certainly "return on capital". Are you saying otherwise? > It's not immediately clear that increases in productivity growth or increases in innovation would necessarily lead to increase in returns - because if everyone innovates, you won't be able to transform those into increased profit easily. I'm not sure I agree with that. I recall an argument (I can't remember who makes this) that as labor productivity decreases (i.e., cost of labor goes up relative to its returns), more money flows into capital investments, because (to take a factory example) lower and lower value capital investments now look attractive (relative to spending that money on more labor). So that suggests that as labor gets more expensive, return on capital may (on average) decline. That suggests in turn that if labor productivity increases, less money is invested in capital improvements, meaning on average return on capital increases. But that's a sort of funny way of arguing what I really meant, which is that there's a more direct causal relationship: capital investments result in labor productivity increases, which result in increased return on capital. That is, after all, the very rationale behind such investments.