Difference between wealth and income

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- [Instructor] Before talking
more about inequality,

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I think it's worth talking
about the difference of what,

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the difference between

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wealth and income.

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Wealth and income, because I
think they often get confused

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in conversations about,
well, wealth and income

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and also about inequality.

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As you can imagine, these
two things move together.

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You tend to associate someone

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who has more wealth has a higher income,

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or someone who has a higher income

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is more likely to have more wealth.

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But these are not the same things.

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Wealth,

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wealth is,

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you could view it as the capital
or the assets that you own.

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So this is the value,

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value of capital,

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capital and assets

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that you own,

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capital and assets that are owned,

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while this is how much is made
in a certain period of time,

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so amount,

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amount made

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in a certain,

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certain period.

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And they tend to move
together but not always.

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So let's take an example where
they don't move together.

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So let's say that there's a retiree.

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A retiree might have a lot of wealth

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because they've had a whole
lifetime of income to save.

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So let's say that your grandparents,

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or let's just say

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your grandfather

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has a wealth,

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so the total assets, his total assets,

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let's say he has a million dollars,

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a million dollars in total assets.

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But he's not working
anymore, he's retired,

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so his total income,

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his total income is the return

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that he gets on that one million dollars.

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And let's say that he has invested it

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in reasonably safe things and
some bonds and whatever else.

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And so he's getting a,

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let's say he's getting a 3% return

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after taxes on his wealth,

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so his income is going
to be $30,000 per year.

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Now let's say you,

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let's say this is you over here,

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let's say you,

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maybe you're just out of college,

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maybe you actually have more
debt than you have assets.

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So maybe your wealth could
even be, your wealth if you,

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if, you know, let's say
you have a $20,000-car,

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but you owe $40,000
for your college loans,

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you might have negative wealth.

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You might have

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a wealth of negative $20,000,

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but you've, that
education was to good use,

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you were able to get a really good job,

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and you are now making,

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let's say you're making $80,000 a year.

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So this is a situation
where the younger person,

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they actually have more
liabilities than they have assets,

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could even have negative wealth,

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but has a reasonably high income,

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while someone who's older and retired

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could have a lot of
wealth but a lower income.

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Now, as you can imagine, this is a,

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you know, this is kind of,
I've drawn two extremes here

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between a younger person
making a good amount of money,

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but they have some debt,

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and an older person who's
just living on the returns

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from their cumulated
wealth over their lifetime.

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Now, as you could imagine,

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these two things do start to correlate,

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especially, for example, let's
say wealth got really big.

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Let's say instead of your grandfather

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saving one million over his lifetime,

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let's say it was 10 million,

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Let's say it's 10 million.

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And he's investing it
in the exact same way,

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so now that 3% of 10 million,

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he has $300,000

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per year to live off of.

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So obviously, as wealth grows,

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the income from wealth,

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the income from that capital will grow.

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And at some point, that
income could be larger

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than what you might be able
to make purely from labor.

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But the whole point of this video is

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to at least highlight the difference.

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Sometimes when people talk
about inequality or disparities,

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they'll talk about accumulating wealth

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in a segment of the population,

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while other times they will
talk about accumulating,

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the national income going more
and more towards the top 1%

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or top 10% or the top
quartile or whatever.

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And they often move together,

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but it's important to
realize the difference.


Is rising inequality necessarily bad

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- [Instructor] The word
inequality by it's very nature

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at least sounds, sounds
a little bit unfair.

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Obviously everyone's not
getting the same thing.

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They're not getting the same income

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or they don't have the same wealth.

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But the question needs to be asked is

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is this necessarily a bad thing?

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And even if it is a bad thing,

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are the ways of fixing it
or trying to address it,

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could they make matters worse in some ways

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especially for the people
that you're trying to help.

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And once again my goal
here is to not tell you

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one way or the other,

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but to at least give you a
framework for thinking about this

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So let's just think about

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a world where he have kind
of a fixed pie economy

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and there increasing inequality

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is clearly not doing good for

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for the people who have less resources.

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So let's imagine a fixed pie economy.

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So let's say this, this

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this rectangle right over here

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represents the total national
income in a given period.

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So year one, this is the
total national income.

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Total national income.

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And let's say that in year one,

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the top 10% of earners,

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the top 10% of earners

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make a third of the national income.

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So they make a third
of the national income.

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This is the top 10%.

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Now let me very clear.

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This area right over here is
not 10% of the whole rectangle.

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This is 35%, or actually this not

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I said this is a third,
so this is going to be 33.

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This is 1/3 of the entire rectangle

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but it's the income from the top 10%.

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Income from the top 10%.

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Now that would mean that the other 90%,

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other 90% is essentially splitting

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the remaining 2/3 of
national income between them.

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So if you go, if you take this reality

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and if the total pie,

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so let's do a static pie right over here.

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So pie stays the same.

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So pie,

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now I say pie,

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I'm talking about the square thing here.

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I guess it doesn't look
to, to much like a pie

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so we better call it a pie.

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So national income,
national income static,

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so it's not changing right over here.

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So then you have,

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let me try to draw a
rectangle of the same size,

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of the same size.

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And if you have increasing
inequality in this situation,

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then you might have the
top 10$ of earners by,

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let's just say this is year 10,

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year 10 right over here.

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Maybe instead of having
1/3 of the national income,

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maybe they have 50% of
the national income.

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I'm just picking round
numbers for simplicity.

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So this right over here is
1/2 of national income now

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from the top 10%.

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From the top,

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from the top 10%.

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So clearly if this happens,

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the other 90% are now splitting only 1/2

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of the national income.

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So this is the other,
other 90% right over here.

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So here it's essentially a zero sum game.

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If you had a static economy,

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if it was not growing at all,

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then of course rising
inequality would mean

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that these people,
right over the other 90%

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are going to have lower per capita,

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I think you could say
income lower per capita GDP,

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they're going to have a
lower standard of living.

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So they're not doing
good in this situation.

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But let's think of the other way

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of where do you have economic growth.

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And economic growth that's enough

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so even if you have some inequality,

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the growth more than offsets that

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so that the, the other
90% is still better off.

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So let's se if we could visualize that.

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So,

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so economic growth.

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Economic,

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economic growth.

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Now let's your pie has grown
dramatically over 10 years

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and I'm just,

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maybe I'm exaggerating a little bit

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for the sake of, for
the sake of discussion.

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Let me draw them like this.

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So I'm trying about the same height,

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but now, our whole economy,

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let's say our whole
economy has, has doubled.

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Our whole economy has doubled here.

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And now at this situation,

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let's say you still have this
wealth and equality growing.

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So the top 10% in year one
having 1/3 of national income.

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Let's say that it still grows
to 1/2 of national income

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in year 10.

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So 1/2 of national income,

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so I can draw that a little bit neater.

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So half of national
income right over there.

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Half of national income, so

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1/2 of national income.

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So this is still the situation

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where you've had inequality increase

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but the half of national income,

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that's half going to have to be split

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between the other,

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other 90% has still grown
fairly dramatically.

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If we assume that I've
drawn it pretty close

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to proportional,

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so let me just copy and paste this.

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So copy and paste.

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So this is how much was being split

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amongst the other 90% in year one.

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And notice, it's much smaller
than how much is being split

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by the other 90%

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and naturally I'll put it right over here

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to the other 90% in year 10.

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If we assume that the
population hasn't grown

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by this amount.

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It's grown by something smaller than this

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or maybe the population
has been relatively stable,

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then your per capita,

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your per capita GDP,
your per capita income

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is actually going to improve.

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So this is a situation here,

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where even though
inequality has increased,

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because the pie has gotten bigger,

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these people are better off.

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These people are better, are better off.

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And so that leads to

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really one of the fundamental questions,

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especially when you're thinking
about economic systems,

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is that you have this,

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you have this market system,
this capitalist system,

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this market economy,

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market economy

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and at least in recent
history it's shown us

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that hey, this is, this leads to growth,

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wealth creation.

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So pie, so economic growth,

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economic growth

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but it also leads to inequality.

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It also leads to inequality.

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Inequality is an inevitable by-product.

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Inequality.

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Now the question you might have to ask is

00:06:49.620 --> 00:06:51.610
well look, is this necessarily bad?

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If this economic growth is enough,

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everyone is better off.

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It doesn't matter if some
people are even more better off

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than other people but
everyone is better off

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and it's important to think about

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if you try to just focus on inequality,

00:07:05.810 --> 00:07:07.360
just focus inequality,

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are you also going to
stop this from happening?

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Another way of thinking about it.

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If you're one of the people in this

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in this situation right over here,

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you're the other 90%,

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would you rather stay in this world

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where you're in a static pie

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and inequality is not increasing,

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or would you rather go to
this world right over here.

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Now once again, the point of my video

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isn't to say that this world
is necessarily going to happen.

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There could be a world where
your total economic growth

00:07:34.300 --> 00:07:36.200
was less than this and the pie got bigger

00:07:36.200 --> 00:07:38.460
and these people are not as well off.

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But I, the whole point of this

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is just to highlight that inequality

00:07:42.130 --> 00:07:45.740
is not necessarily always going to lead to

00:07:45.740 --> 00:07:49.470
the people on, I guess who
are getting less of the pie,

00:07:49.470 --> 00:07:53.040
being worse off if the
pie grows fast enough

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and the other thing to realize is well,

00:07:55.580 --> 00:07:58.860
if you sometimes, you
might in an attempt to

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lessen inequality,

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you might also stifle economic growth.

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And that might keep everyone
from being better off

00:08:05.480 --> 00:08:06.770
in this scenario right over here.

00:08:06.770 --> 00:08:09.560
So once again, it really
depends on the context,

00:08:09.560 --> 00:08:11.960
it really depends on the
situation and the variables

00:08:11.960 --> 00:08:13.620
and then the numbers you're looking at,

00:08:13.620 --> 00:08:15.530
but I really just wanna emphasize that

00:08:15.530 --> 00:08:17.980
there's no such thing as hey,
if there's rising inequality

00:08:17.980 --> 00:08:20.560
it's going to hurt always the other 90%.

00:08:20.560 --> 00:08:22.980
It will definitely benefit the people

00:08:22.980 --> 00:08:24.760
who are maybe in the top 10%,

00:08:24.760 --> 00:08:28.210
but it also, because that's a
by-product of economic growth,

00:08:28.210 --> 00:08:30.833
it might make these
people better off as well.


Gilded Age versus Silicon Valley

WEBVTT
Kind: captions
Language: en

00:00:00.510 --> 00:00:01.510
- [Instructor] Let's give ourselves

00:00:01.510 --> 00:00:03.060
a little bit more food for thought

00:00:03.060 --> 00:00:05.700
on this labor versus capital question.

00:00:05.700 --> 00:00:08.010
So like we've mentioned many times,

00:00:08.010 --> 00:00:09.170
in order to produce anything,

00:00:09.170 --> 00:00:10.370
you need a little bit of both

00:00:10.370 --> 00:00:11.980
or you maybe need a lot of both.

00:00:11.980 --> 00:00:12.980
You need labor,

00:00:12.980 --> 00:00:13.813
and,

00:00:16.103 --> 00:00:18.820
and you need capital.

00:00:18.820 --> 00:00:21.640
The question is as you
produce that output,

00:00:21.640 --> 00:00:23.130
as you produce that output,

00:00:23.130 --> 00:00:24.010
or I guess you could say

00:00:24.010 --> 00:00:29.010
as you produce this
aggregate, this product,

00:00:29.390 --> 00:00:32.190
how do you decide how
much of it goes to labor

00:00:32.190 --> 00:00:34.900
and how much of it goes to capital?

00:00:34.900 --> 00:00:36.040
Well, one way to think about it

00:00:36.040 --> 00:00:39.000
is which resource has more leverage?

00:00:39.000 --> 00:00:41.690
If you go back to the Gilded Age,

00:00:41.690 --> 00:00:43.760
Gilded Age,

00:00:43.760 --> 00:00:47.060
really the peak of Industrial Revolution,

00:00:47.060 --> 00:00:49.460
the people who had most of the leverage

00:00:49.460 --> 00:00:50.570
were the owners of capital,

00:00:50.570 --> 00:00:52.410
the growth industries,
as we've said before.

00:00:52.410 --> 00:00:53.520
These were railroads,

00:00:53.520 --> 00:00:55.230
these were manufacturing plants,

00:00:55.230 --> 00:00:58.810
these were people
exploring and finding oil.

00:00:58.810 --> 00:01:01.550
And so capital had all the leverage.

00:01:01.550 --> 00:01:03.880
That the labor, most of
the labor that was involved

00:01:03.880 --> 00:01:07.140
was fairly unskilled and was
viewed by the owners of capital

00:01:07.140 --> 00:01:08.510
as something of a commodity.

00:01:08.510 --> 00:01:10.860
And so more and more of
the outcome or the income

00:01:10.860 --> 00:01:12.750
could go to the capital.

00:01:12.750 --> 00:01:13.740
Now, Piketty

00:01:14.830 --> 00:01:16.120
at least hints that, hey,

00:01:16.120 --> 00:01:18.080
maybe we're going to a second Gilded Age

00:01:18.080 --> 00:01:19.590
because returns on capital are going

00:01:19.590 --> 00:01:20.780
to be larger than growth,

00:01:20.780 --> 00:01:23.630
and more and more wealth is
going to be going to that.

00:01:23.630 --> 00:01:25.130
But to do a thought
experiment, once again,

00:01:25.130 --> 00:01:26.950
this'll give you food for thought,

00:01:26.950 --> 00:01:29.440
and you come up with your own conclusions.

00:01:29.440 --> 00:01:31.960
Let's think about the
world that we now live in.

00:01:31.960 --> 00:01:34.230
And I'll give Silicon Valley as an example

00:01:34.230 --> 00:01:36.040
because one could argue
that Silicon Valley

00:01:36.040 --> 00:01:40.070
is maybe most indicative
of what 21st century,

00:01:40.070 --> 00:01:42.380
what the 21st century
economy is going to look like

00:01:42.380 --> 00:01:45.070
and what 21st century industry
is going to look like.

00:01:45.070 --> 00:01:47.430
So, let's compare the Gilded Age,

00:01:47.430 --> 00:01:48.997
to Silicon Valley,

00:01:51.190 --> 00:01:55.910
home of folks like Google
and Facebook and Apple.

00:01:55.910 --> 00:01:57.900
Well, Silicon Valley is
it about about capital

00:01:57.900 --> 00:01:59.720
or is it about labor?

00:01:59.720 --> 00:02:01.220
Well, the industries in Silicon Valley,

00:02:01.220 --> 00:02:02.690
they're about creating technology,

00:02:02.690 --> 00:02:03.930
they're about creating software.

00:02:03.930 --> 00:02:06.840
Software, in particular,
requires very little capital.

00:02:06.840 --> 00:02:10.310
You don't need large, a billion
dollar manufacturing plants.

00:02:10.310 --> 00:02:11.710
You don't need a ton of land.

00:02:11.710 --> 00:02:14.294
You literally can write
software in your bedroom.

00:02:14.294 --> 00:02:16.300
You could do it in your closet.

00:02:16.300 --> 00:02:17.830
That's how I started.

00:02:17.830 --> 00:02:22.400
And so Silicon Valley is
really much more about labor.

00:02:22.400 --> 00:02:23.850
That's not labor,

00:02:23.850 --> 00:02:24.780
you know, when you think of labor

00:02:24.780 --> 00:02:26.550
in the Gilded Age Industrial Revolution,

00:02:26.550 --> 00:02:29.030
you're thinking about someone
just working on a factory line

00:02:29.030 --> 00:02:31.560
or doing a repetitive
job over and over again.

00:02:31.560 --> 00:02:32.550
While in Silicon Valley,

00:02:32.550 --> 00:02:35.450
it's much more about highly skilled labor.

00:02:35.450 --> 00:02:37.820
So let me write that in that blue color.

00:02:37.820 --> 00:02:38.823
Highly,

00:02:39.840 --> 00:02:42.580
highly skilled,

00:02:42.580 --> 00:02:45.580
highly skilled labor.

00:02:45.580 --> 00:02:48.700
And it's definitely the
case in Silicon Valley

00:02:48.700 --> 00:02:51.816
that highly skilled labor
is viewed as a much,

00:02:51.816 --> 00:02:54.910
a much stronger differentiator
for an organization

00:02:54.910 --> 00:02:57.030
or an individual than capital.

00:02:57.030 --> 00:02:59.490
In fact, the dynamics that
you're seeing more and more

00:02:59.490 --> 00:03:02.930
in Silicon Valley is lots
and lots and lots of capital,

00:03:02.930 --> 00:03:06.070
which is oftentimes
perceived as a commodity

00:03:06.070 --> 00:03:09.380
pursuing a team of five people who've just

00:03:09.380 --> 00:03:11.040
put something together
in the last few months,

00:03:11.040 --> 00:03:12.370
and they're valuing it

00:03:12.370 --> 00:03:14.790
at 10 million dollars
or 50 million dollars.

00:03:14.790 --> 00:03:17.340
We see organizations like
Facebook and WhatsApp

00:03:17.340 --> 00:03:21.030
getting multibillion
dollar valuations based on,

00:03:21.030 --> 00:03:23.300
really the output of highly skilled labor.

00:03:23.300 --> 00:03:25.220
Capital, there's some capital necessary.

00:03:25.220 --> 00:03:26.852
You need office space, you need servers.

00:03:26.852 --> 00:03:28.860
But it's not like the Gilded Age.

00:03:28.860 --> 00:03:31.330
Most of the value is

00:03:31.330 --> 00:03:34.020
in the part that's not
considered a commodity.

00:03:34.020 --> 00:03:35.663
Office space is a commodity.

00:03:36.690 --> 00:03:38.400
Servers are a commodity.

00:03:38.400 --> 00:03:41.360
Highly skilled labor is not a commodity.

00:03:41.360 --> 00:03:43.140
So, the question to ask yourself is:

00:03:43.140 --> 00:03:45.660
Well, is this the case?

00:03:45.660 --> 00:03:48.770
And is the case, will capital,

00:03:48.770 --> 00:03:51.410
will R be able to stay larger than G?

00:03:51.410 --> 00:03:55.740
And will more and more capital,
more income go to capital?

00:03:55.740 --> 00:03:58.830
Or maybe does it go more and
more to highly skilled labor?

00:03:58.830 --> 00:04:00.180
Now, the other question you need to,

00:04:00.180 --> 00:04:01.890
or the other question that
may be going in your mind,

00:04:01.890 --> 00:04:05.130
is well hey look, Silicon Valley
isn't just about software,

00:04:05.130 --> 00:04:06.190
it's also about hardware.

00:04:06.190 --> 00:04:09.080
One of the most highly
successful companies

00:04:09.080 --> 00:04:11.120
in Silicon Valley is Apple Computers,

00:04:11.120 --> 00:04:12.190
and they do write software,

00:04:12.190 --> 00:04:14.200
but they're known for
their hardware products.

00:04:14.200 --> 00:04:17.150
Their iPhone, the iPad, their computers.

00:04:17.150 --> 00:04:18.260
What about that industry?

00:04:18.260 --> 00:04:20.420
Isn't that capital intensive?

00:04:20.420 --> 00:04:21.480
Well, let's just think about

00:04:21.480 --> 00:04:25.290
how your iPhone or your
iPad gets developed.

00:04:25.290 --> 00:04:29.840
It gets designed by Apple
in Cupertino, California,

00:04:29.840 --> 00:04:31.160
and that's what they write on their boxes,

00:04:31.160 --> 00:04:33.100
designed in California.

00:04:33.100 --> 00:04:35.891
And then they send the designs over

00:04:35.891 --> 00:04:37.540
to a bunch of firms.

00:04:37.540 --> 00:04:41.630
This is just some of
Apple's suppliers here.

00:04:41.630 --> 00:04:45.620
And these are incredibly
capital intensive industries.

00:04:45.620 --> 00:04:48.090
But from Apple's point of view,
they view them more or less,

00:04:48.090 --> 00:04:50.710
not all of them, some of them
have differentiated products,

00:04:50.710 --> 00:04:52.980
they make a special type of
material or whatever else.

00:04:52.980 --> 00:04:55.850
But many of them are viewed
as commodity manufacturers.

00:04:55.850 --> 00:04:57.660
That, hey, you don't
give me the right price,

00:04:57.660 --> 00:05:00.210
you're not giving me the right
few pennies per component,

00:05:00.210 --> 00:05:01.410
I'm going to go to the other person

00:05:01.410 --> 00:05:03.920
who can produce that same entity.

00:05:03.920 --> 00:05:05.580
And then these folks put it all together,

00:05:05.580 --> 00:05:08.900
manufacture the pieces,
send it back to Apple,

00:05:08.900 --> 00:05:11.081
who'll package it,

00:05:11.081 --> 00:05:14.100
and then market it.

00:05:14.100 --> 00:05:16.370
And so, what is the high value aspect

00:05:16.370 --> 00:05:18.600
of this supply chain right over here?

00:05:18.600 --> 00:05:20.260
Well, it's clearly the
design and the marketing.

00:05:20.260 --> 00:05:21.160
And if you don't believe that,

00:05:21.160 --> 00:05:22.700
you should look at what portion

00:05:22.700 --> 00:05:26.460
of the output of the income
generated by an iPhone,

00:05:26.460 --> 00:05:27.909
what portion of it goes to Apple

00:05:27.909 --> 00:05:30.590
versus what portion of it goes

00:05:30.590 --> 00:05:33.810
to the suppliers right over here.

00:05:33.810 --> 00:05:38.446
So, one way to think about it
is these are kind of closer

00:05:38.446 --> 00:05:43.446
to the large scale capital
intensive manufacturing plants

00:05:44.080 --> 00:05:44.940
of the Gilded Age.

00:05:44.940 --> 00:05:47.360
Although, even here, R and
D plays a major component,

00:05:47.360 --> 00:05:49.420
it did in the Gilded Age as well.

00:05:49.420 --> 00:05:52.624
And once again, R and
D though, is a labor,

00:05:52.624 --> 00:05:54.670
is a highly skilled labor.

00:05:54.670 --> 00:05:58.210
It is less about, there's
capital definitely involved,

00:05:58.210 --> 00:06:01.640
but when you look at
the real value created,

00:06:01.640 --> 00:06:04.260
it's really on the highly
skilled labor part,

00:06:04.260 --> 00:06:05.950
on the designing and the marketing side,

00:06:05.950 --> 00:06:08.520
the creative aspects of it.

00:06:08.520 --> 00:06:10.620
Now, just this, if you believe it,

00:06:10.620 --> 00:06:12.300
and you should come to
your own judgements.

00:06:12.300 --> 00:06:13.670
This by itself doesn't say that

00:06:13.670 --> 00:06:15.610
we can't worry about inequality

00:06:15.610 --> 00:06:16.850
because even this might say,

00:06:16.850 --> 00:06:17.960
look, more and more income,

00:06:17.960 --> 00:06:19.660
maybe it's not gonna go to capital,

00:06:19.660 --> 00:06:22.620
it's gonna go to more and
more highly skilled labor.

00:06:22.620 --> 00:06:25.810
And that's a small
subset, one could argue,

00:06:25.810 --> 00:06:27.710
of the entire labor pool.

00:06:27.710 --> 00:06:29.470
You have this highly skilled labor here.

00:06:29.470 --> 00:06:30.980
And so you might have inequality,

00:06:30.980 --> 00:06:32.720
not happening like it
happened in the Gilded Age,

00:06:32.720 --> 00:06:34.460
where it's going to owners of capital,

00:06:34.460 --> 00:06:37.520
but now it's going to, the
owners, I guess you could say,

00:06:37.520 --> 00:06:40.510
of highly, highly skilled labor.

00:06:40.510 --> 00:06:42.730
And so, that could drive inequality.

00:06:42.730 --> 00:06:44.600
But this is where the
force of convergence,

00:06:44.600 --> 00:06:46.000
that Piketty talks about, could play in.

00:06:46.000 --> 00:06:47.910
And he seems a little bit skeptical

00:06:47.910 --> 00:06:49.730
of its ability to overweight

00:06:49.730 --> 00:06:53.140
the forces of capital accumulation.

00:06:53.140 --> 00:06:55.860
But if we can have more people participate

00:06:55.860 --> 00:06:58.140
in this more highly skilled labor,

00:06:58.140 --> 00:07:02.850
then potentially this could
be a force of convergence.

00:07:02.850 --> 00:07:05.830
It could balance things off,

00:07:05.830 --> 00:07:10.273
and keep us from going into
some type of neo-Gilded Age.


Convergence on macro scale

WEBVTT
Kind: captions
Language: en

00:00:00.520 --> 00:00:02.400
- [Instructor] We've talked about things

00:00:02.400 --> 00:00:05.850
that might drive inequality,

00:00:05.850 --> 00:00:07.440
things that Thomas Piketty

00:00:07.440 --> 00:00:10.100
refers to as forces of divergence,

00:00:10.100 --> 00:00:11.910
but I always think about or at least what

00:00:11.910 --> 00:00:14.650
some of what he cites is
forces of convergence,

00:00:14.650 --> 00:00:16.140
so forces of convergence

00:00:16.140 --> 00:00:20.100
or things that might make
the world a more equal place,

00:00:20.100 --> 00:00:22.150
and the primary one that he cites

00:00:22.150 --> 00:00:23.850
is one that's very close to my heart,

00:00:23.850 --> 00:00:26.220
and this is the spread of knowledge.

00:00:26.220 --> 00:00:29.560
Spread of knowledge.

00:00:29.560 --> 00:00:32.140
And what we have here
is a couple of charts

00:00:32.140 --> 00:00:33.980
that show the spread of knowledge

00:00:33.980 --> 00:00:37.920
at least on a macro basis,
on a regional basis,

00:00:37.920 --> 00:00:40.930
and show how it has been a driver

00:00:40.930 --> 00:00:43.960
of starting to equalize global output.

00:00:43.960 --> 00:00:47.210
As we start in 1700, we see that,

00:00:47.210 --> 00:00:50.290
it's going from 1700 through
the Industrial Revolution,

00:00:50.290 --> 00:00:54.450
frankly as the West was
developing or industrializing,

00:00:54.450 --> 00:00:55.880
the West, Europe and America,

00:00:55.880 --> 00:01:00.880
became a larger and larger
percentage of global output,

00:01:00.900 --> 00:01:03.750
and Asia became a smaller
and smaller percentage.

00:01:03.750 --> 00:01:06.490
But then as you go into the
second half of the 20th century

00:01:06.490 --> 00:01:09.623
and into the 21st century,
you see the dynamic change.

00:01:11.497 --> 00:01:13.660
Asia's percentage of world output

00:01:13.660 --> 00:01:15.720
is increasing more and more,

00:01:15.720 --> 00:01:17.070
and that's arguably happening

00:01:17.070 --> 00:01:19.260
because you've had a
transfer of knowledge,

00:01:19.260 --> 00:01:21.640
a diffusion of knowledge from the West

00:01:23.662 --> 00:01:26.360
to the East from modern
manufacturing techniques

00:01:26.360 --> 00:01:28.780
and design techniques and
engineering techniques

00:01:28.780 --> 00:01:32.240
and whatever else, and that's
why as we are in the beginning

00:01:32.240 --> 00:01:34.530
of the 21st century Asia is turning into

00:01:34.530 --> 00:01:37.010
a major industrial powerhouse.

00:01:37.010 --> 00:01:39.260
They've learned from the
West and in some dimensions

00:01:39.260 --> 00:01:43.750
are even improving on some of
the knowledge from the West

00:01:43.750 --> 00:01:47.810
to make themselves more
and more productive.

00:01:47.810 --> 00:01:49.160
So at least on a regional basis,

00:01:49.160 --> 00:01:52.100
this shows that the world
is becoming more equal

00:01:52.100 --> 00:01:55.000
because of this spread of knowledge.

00:01:55.000 --> 00:01:59.050
And we could also see it
on a per capita basis,

00:01:59.050 --> 00:02:00.343
so this right over here,

00:02:02.740 --> 00:02:04.630
they're essentially plotting over time

00:02:04.630 --> 00:02:07.710
per capita GDP as a
percentage of world average,

00:02:07.710 --> 00:02:10.900
so the world average right over here

00:02:10.900 --> 00:02:12.920
is obviously 100% of the world average,

00:02:12.920 --> 00:02:15.140
so that's why it's just
a flat line at 100%.

00:02:15.140 --> 00:02:18.260
And we see as we go through
the Industrial Revolution,

00:02:18.260 --> 00:02:21.740
Europe and America, essentially the West,

00:02:21.740 --> 00:02:23.780
the West, its per capita GDP

00:02:23.780 --> 00:02:25.560
becomes a larger and larger percentage

00:02:25.560 --> 00:02:29.100
of the average per
capita GDP for the globe,

00:02:29.100 --> 00:02:31.470
but that was true until recently,

00:02:31.470 --> 00:02:33.490
until the last few decades.

00:02:33.490 --> 00:02:36.120
The last few decades as a
percentage, it's gone down.

00:02:36.120 --> 00:02:39.600
Now that doesn't mean that
per capita GDP is going down.

00:02:39.600 --> 00:02:41.560
It just means that its share

00:02:41.560 --> 00:02:44.510
as a percentage of world
average is going down,

00:02:44.510 --> 00:02:47.830
and that's really because
Asia's per capita GDP

00:02:47.830 --> 00:02:50.220
has been growing even faster

00:02:50.220 --> 00:02:53.740
because of, once again,
that spread of knowledge.

00:02:53.740 --> 00:02:56.100
So at least this idea
of spread of knowledge,

00:02:56.100 --> 00:02:59.950
it does seem to be playing
out at a regional level.

00:02:59.950 --> 00:03:01.290
It's bringing, at least right now,

00:03:01.290 --> 00:03:03.700
it seems like Asia's participating
much more than Africa,

00:03:03.700 --> 00:03:06.780
but it's starting to bring the non-West,

00:03:06.780 --> 00:03:09.220
the East, more in line with the West

00:03:09.220 --> 00:03:11.310
in terms of protective capacity

00:03:11.310 --> 00:03:14.137
and wealth per person and per capita GDP,

00:03:15.150 --> 00:03:16.960
however you want to look at it.

00:03:16.960 --> 00:03:18.990
Now an interesting question,
that's at a regional level.

00:03:18.990 --> 00:03:21.120
What about an individual level?

00:03:21.120 --> 00:03:23.570
And we'll talk about that
more in the next video.


Inverse relationship between capital price and returns

WEBVTT
Kind: captions
Language: en

00:00:00.530 --> 00:00:03.110
- [Instructor] So much of
Piketty's book is about this idea

00:00:03.110 --> 00:00:06.290
of more and more returns to capital,

00:00:06.290 --> 00:00:08.800
that the return to capital
is going to grow faster

00:00:08.800 --> 00:00:10.616
than the growth of the economy.

00:00:10.616 --> 00:00:13.270
We see charts like this,
where we have the value

00:00:13.270 --> 00:00:15.700
of private capital as
a percentage of income.

00:00:15.700 --> 00:00:17.850
And we see this dynamic, and
we see this dynamic played out

00:00:17.850 --> 00:00:20.300
in multiple charts, where as
we go through the Gilded Age,

00:00:20.300 --> 00:00:22.720
we hit kind of a peak right over here,

00:00:22.720 --> 00:00:24.480
at least a local peak, and then as we get

00:00:24.480 --> 00:00:26.830
into the beginning of the
20th century it drops down

00:00:26.830 --> 00:00:29.590
and then starts to pick back
up until the present time.

00:00:29.590 --> 00:00:30.780
And this is the present time

00:00:30.780 --> 00:00:32.120
right over here, this data point.

00:00:32.120 --> 00:00:33.840
And then everything we see after that,

00:00:33.840 --> 00:00:37.040
this is Piketty's projections,
really based on this idea

00:00:37.040 --> 00:00:39.490
of returns to capital be growing faster,

00:00:39.490 --> 00:00:43.610
that R is growing faster than G.

00:00:43.610 --> 00:00:44.730
But one thing to think about

00:00:44.730 --> 00:00:46.970
is why this dynamic might be happening.

00:00:46.970 --> 00:00:49.440
And then that might inform how we think

00:00:49.440 --> 00:00:51.670
about what the projections might be.

00:00:51.670 --> 00:00:52.700
So let's think about

00:00:52.700 --> 00:00:55.700
why the value of private
capital could go down

00:00:55.700 --> 00:00:58.913
and why the value of
private capital could go up.

00:00:59.750 --> 00:01:03.670
So one reason, so let's
just say we have some asset,

00:01:03.670 --> 00:01:05.800
some capital asset right over here,

00:01:05.800 --> 00:01:07.760
and let's say its current value,

00:01:07.760 --> 00:01:10.516
I went on to some market and I bought it,

00:01:10.516 --> 00:01:13.260
and its current value is $100.

00:01:14.690 --> 00:01:17.240
Let me just write this, this is today.

00:01:17.240 --> 00:01:22.240
Today it has $100, and let's
say it gives an income,

00:01:22.540 --> 00:01:27.540
an annual income, of $10, of $10.

00:01:27.910 --> 00:01:32.910
So for this asset my return on
asset right over here is 10%.

00:01:33.980 --> 00:01:38.370
I get $10 on $100 investment.

00:01:38.370 --> 00:01:41.900
Now there are several reasons

00:01:41.900 --> 00:01:44.680
why the value of this could go up.

00:01:44.680 --> 00:01:47.660
One reason is that this asset
starts producing more income.

00:01:47.660 --> 00:01:49.359
So this would be in line
with the idea of more,

00:01:49.359 --> 00:01:53.340
of maybe income, of capital
becoming more and more valuable.

00:01:53.340 --> 00:01:55.150
It's able to capture more and more income,

00:01:55.150 --> 00:01:57.080
or maybe it's utilized in a better way.

00:01:57.080 --> 00:02:00.640
And so, let's write this as the future.

00:02:00.640 --> 00:02:04.460
So in the future, you
could have a situation

00:02:04.460 --> 00:02:06.520
where it's generating an income,

00:02:06.520 --> 00:02:10.180
it's generating an
income of let's say $20.

00:02:10.180 --> 00:02:12.360
And let's say that the return is the same,

00:02:12.360 --> 00:02:13.850
so the expected return is the same,

00:02:13.850 --> 00:02:16.530
so people are still willing
to say I'm willing to pay

00:02:16.530 --> 00:02:19.700
as much for things so I
still get a 10% return.

00:02:19.700 --> 00:02:21.420
So people are saying okay I'll pay as much

00:02:21.420 --> 00:02:22.730
so I still get a 10% return,

00:02:22.730 --> 00:02:24.680
so that means that they're going to pay,

00:02:24.680 --> 00:02:27.760
in the market they'll pay $200 for it.

00:02:27.760 --> 00:02:30.890
So this is one reason why
you could have an increase

00:02:30.890 --> 00:02:33.690
in the value of something. And
you could go the other way.

00:02:33.690 --> 00:02:36.280
Maybe the value was $200,
but because the income

00:02:36.280 --> 00:02:38.970
goes in half and the
return stays constant,

00:02:38.970 --> 00:02:40.390
the value goes in half.

00:02:40.390 --> 00:02:42.180
So this is one scenario.

00:02:42.180 --> 00:02:45.730
This is one reason why the
price of an asset could go up.

00:02:45.730 --> 00:02:46.810
But it's not the only reason

00:02:46.810 --> 00:02:48.810
why the price of an asset could go up.

00:02:48.810 --> 00:02:51.520
Another reason why a price
of an asset could go up

00:02:51.520 --> 00:02:53.900
is maybe there's more and more capital

00:02:53.900 --> 00:02:57.120
and maybe there's fewer and
fewer projects to put it to,

00:02:57.120 --> 00:03:01.280
especially if the growth of
the economy isn't growing.

00:03:01.280 --> 00:03:06.280
So more capital, capital chasing, chasing

00:03:08.430 --> 00:03:13.430
fewer, fewer projects, or
fewer things for it to produce.

00:03:15.060 --> 00:03:17.550
And in this world, what
is going to happen?

00:03:17.550 --> 00:03:20.670
Well, this, we'll just
assume that this continues

00:03:20.670 --> 00:03:23.000
to produce $10 of income.

00:03:23.000 --> 00:03:27.860
So the income continues to be $10 a year,

00:03:27.860 --> 00:03:29.580
but people, let's say you and I were able

00:03:29.580 --> 00:03:31.650
to buy this for $100, but
let's say the next person

00:03:31.650 --> 00:03:35.710
who has $100 of capital
to invest in capital,

00:03:35.710 --> 00:03:38.920
says well I can't find
something with $10 of income,

00:03:38.920 --> 00:03:41.320
I can't get $10, so hey
I'm willing to take 9%,

00:03:41.320 --> 00:03:43.440
so I'm gonna bid this up,
I'm willing to buy this

00:03:43.440 --> 00:03:46.220
from you for $101, or
$102, or maybe it goes

00:03:46.220 --> 00:03:47.987
all the way where they can't get anything,

00:03:47.987 --> 00:03:50.300
they can't get better than a 10% return,

00:03:50.300 --> 00:03:53.920
anything better than a 5%
return on their incremental $100

00:03:53.920 --> 00:03:56.880
and so they're willing to do
a 5% return for this asset.

00:03:56.880 --> 00:03:58.650
So they would bid this thing up,

00:03:58.650 --> 00:04:01.000
the more and more
capital you have chasing,

00:04:01.000 --> 00:04:03.830
or more and more money you
have chasing this project,

00:04:03.830 --> 00:04:05.900
I guess you could say, this asset,

00:04:05.900 --> 00:04:08.230
could just bid the value of this up.

00:04:08.230 --> 00:04:12.230
So the value could go to $200,

00:04:12.230 --> 00:04:14.020
it's still producing the same income,

00:04:14.020 --> 00:04:17.210
and now the return is 5%.

00:04:17.210 --> 00:04:22.210
And so the reason to point
this out is increasing value

00:04:22.520 --> 00:04:26.360
of capital doesn't necessarily
mean increasing returns.

00:04:26.360 --> 00:04:27.940
In fact normally in the market,

00:04:27.940 --> 00:04:30.150
they move inversely with each other.

00:04:30.150 --> 00:04:33.080
When bonds have higher returns,

00:04:33.080 --> 00:04:35.680
then you have lower, then
their prices are lower.

00:04:35.680 --> 00:04:38.700
When their prices are
higher, for bond prices,

00:04:38.700 --> 00:04:43.170
that means that they have
a lower, a lower return.

00:04:43.170 --> 00:04:45.720
So when we look at something like this,

00:04:45.720 --> 00:04:47.640
when we look at something like this,

00:04:47.640 --> 00:04:50.870
this could be speaking to more
and more capital accumulation

00:04:50.870 --> 00:04:54.450
chasing fewer and fewer potential projects

00:04:54.450 --> 00:04:55.580
or whatever it might be,

00:04:55.580 --> 00:04:58.070
especially because you have
slowing economic growth,

00:04:58.070 --> 00:05:00.240
but this would be a story
of capital accumulation

00:05:00.240 --> 00:05:02.530
but with R slowing down,

00:05:02.530 --> 00:05:04.570
with the actual potential
return slowing down,

00:05:04.570 --> 00:05:07.460
and probably starting to converge to G,

00:05:07.460 --> 00:05:09.100
to the rate of growth.

00:05:09.100 --> 00:05:11.900
Another similar idea, this is more capital

00:05:11.900 --> 00:05:14.230
chasing fewer projects, but you also have,

00:05:14.230 --> 00:05:15.860
might have a reality
is that the reason why

00:05:15.860 --> 00:05:18.520
this is getting a 10% return
is people find this scary.

00:05:18.520 --> 00:05:20.250
They've been burned on investments before,

00:05:20.250 --> 00:05:21.550
there have been wars.

00:05:21.550 --> 00:05:24.320
They don't want to put their
money into some kind of factory

00:05:24.320 --> 00:05:27.450
they want to stuff it into their mattress.

00:05:27.450 --> 00:05:29.990
But then over time, maybe
people become a little bit

00:05:29.990 --> 00:05:33.050
less risk averse and they're
willing to invest in the market

00:05:33.050 --> 00:05:36.910
they're willing to invest in a project

00:05:36.910 --> 00:05:38.880
or start a business or
whatever it might be.

00:05:38.880 --> 00:05:41.820
And so people become more risk tolerant.

00:05:41.820 --> 00:05:45.570
So maybe this is a world
that is very risk averse.

00:05:45.570 --> 00:05:48.330
Risk averse, so if you want
me to invest in capital,

00:05:48.330 --> 00:05:50.320
you have to give me a high return.

00:05:50.320 --> 00:05:53.850
But maybe the future is going
to be more risk tolerant.

00:05:53.850 --> 00:05:57.470
Risk tolerant, risk tolerant,

00:05:57.470 --> 00:05:59.610
and then in a more risk tolerant world,

00:05:59.610 --> 00:06:01.500
you could also go to something like this.

00:06:01.500 --> 00:06:05.520
So this is risk, in a
more risk tolerant world,

00:06:05.520 --> 00:06:07.350
you might say hey okay, well okay,

00:06:07.350 --> 00:06:09.410
I don't have to stuff it in
my mattress, I'm getting 0%,

00:06:09.410 --> 00:06:11.520
or in my bank account,
I'm not getting a lot,

00:06:11.520 --> 00:06:13.147
but hey now I'm willing to take my money

00:06:13.147 --> 00:06:15.490
and invest it more in capital.

00:06:15.490 --> 00:06:18.000
And so once again, they
will bid up capital,

00:06:18.000 --> 00:06:21.520
and they will have a
lower expected return.

00:06:21.520 --> 00:06:23.370
Here they need a high expected return

00:06:23.370 --> 00:06:25.220
because there was a lot of risk,
they were scared of things,

00:06:25.220 --> 00:06:27.350
hey you better give me a
lot of return on my capital

00:06:27.350 --> 00:06:30.220
if you want my capital because
it's a scary world out there.

00:06:30.220 --> 00:06:33.040
Hey okay, maybe now I'm
less worried about wars

00:06:33.040 --> 00:06:35.790
and my wealth disappearing
and whatever else,

00:06:35.790 --> 00:06:37.910
so I'm more willing to invest.

00:06:37.910 --> 00:06:40.320
And so that also is in line
with this more capital,

00:06:40.320 --> 00:06:42.690
and so there is a lower expected return,

00:06:42.690 --> 00:06:44.500
and so you have the value going up.

00:06:44.500 --> 00:06:46.550
And actually this is consistent

00:06:46.550 --> 00:06:49.390
with what we see
happening right over here,

00:06:49.390 --> 00:06:53.660
is that this, this period
right over here was a period,

00:06:53.660 --> 00:06:56.570
this is a period of major unrest.

00:06:56.570 --> 00:06:58.760
You have the two largest wars

00:06:58.760 --> 00:07:00.810
in global history right over here,

00:07:00.810 --> 00:07:04.770
you can imagine people becoming
very very very risk averse.

00:07:04.770 --> 00:07:07.713
You can imagine people starting
to stuff money in their,

00:07:07.713 --> 00:07:11.160
putting their, trying
to sell their assets,

00:07:11.160 --> 00:07:12.500
worried what might happen.

00:07:12.500 --> 00:07:14.470
And so you're going to
have less and less capital,

00:07:14.470 --> 00:07:18.610
more and more risk aversion
driving that reality.

00:07:18.610 --> 00:07:20.310
But then as we go into
the post-war period,

00:07:20.310 --> 00:07:22.350
the memories of those wars go away,

00:07:22.350 --> 00:07:24.020
people become more risk tolerant,

00:07:24.020 --> 00:07:25.930
more capital comes into the system.

00:07:25.930 --> 00:07:27.180
Because of the productivity,

00:07:27.180 --> 00:07:29.270
you have more and more
capital accumulation.

00:07:29.270 --> 00:07:33.480
If we go back into even
pre-Industrial Revolution times,

00:07:33.480 --> 00:07:35.900
if we go to Medieval
Times, and all the rest,

00:07:35.900 --> 00:07:38.780
you had a limited amount of
capital, it was mainly land.

00:07:38.780 --> 00:07:41.180
As you go into the Industrial Revolution,

00:07:41.180 --> 00:07:43.350
and especially the 20 and 21st centuries,

00:07:43.350 --> 00:07:45.850
land represents a smaller
and smaller percentage

00:07:45.850 --> 00:07:47.310
of the value of total capital.

00:07:47.310 --> 00:07:49.410
Now you have created
capital, you have technology,

00:07:49.410 --> 00:07:50.910
you have intellectual property.

00:07:50.910 --> 00:07:53.890
And so this could be a trend,
once again I'm not sure,

00:07:53.890 --> 00:07:55.900
it's up for you to make the judgment.

00:07:55.900 --> 00:07:59.350
This trend isn't necessarily
a return to a Gilded Age,

00:07:59.350 --> 00:08:01.470
it could be more and more capital

00:08:01.470 --> 00:08:03.250
chasing fewer and fewer projects,

00:08:03.250 --> 00:08:06.010
which actually could be
a sign of lower returns,

00:08:06.010 --> 00:08:09.200
or it could be just people's
risk premium is going down.

00:08:09.200 --> 00:08:11.030
They're becoming more
and more risk tolerant,

00:08:11.030 --> 00:08:14.870
and so they're willing to
accept lower and lower returns.

00:08:14.870 --> 00:08:17.210
So it's not clear what the trajectory is,

00:08:17.210 --> 00:08:18.370
but I just want to make it very clear

00:08:18.370 --> 00:08:20.580
that this isn't necessarily saying

00:08:20.580 --> 00:08:23.120
that hey because this graph
looks the same as here

00:08:23.120 --> 00:08:26.430
that we're necessarily going
into a second Gilded Age.

00:08:26.430 --> 00:08:28.533
But it's up for you to decide.


Indifference curves and marginal rate of substitution

WEBVTT
Kind: captions
Language: en

00:00:00.720 --> 00:00:03.100
- [Narrator] In this video,
we're going to explore the idea

00:00:03.100 --> 00:00:05.330
of an indifference curve.

00:00:05.330 --> 00:00:07.400
Indifference.

00:00:07.400 --> 00:00:10.290
Indifference curve.

00:00:10.290 --> 00:00:13.850
And what it is, is it
describes all of the points,

00:00:13.850 --> 00:00:16.980
all of the combinations of
things to which I am indifferent.

00:00:16.980 --> 00:00:19.650
In the past, we've thought
about maximizing total utility.

00:00:19.650 --> 00:00:21.310
Now, we're going to talk
about all of the combinations

00:00:21.310 --> 00:00:24.230
that essentially give us
the same total utility.

00:00:24.230 --> 00:00:29.230
So, let's draw a graph

00:00:29.410 --> 00:00:32.720
that tells us all of the different
combinations of two goods

00:00:32.720 --> 00:00:33.850
to which we are indifferent

00:00:33.850 --> 00:00:35.490
and like I've, we've mentioned before,

00:00:35.490 --> 00:00:38.050
we're focusing on two goods,
because if we did three goods

00:00:38.050 --> 00:00:39.440
we would have to do it
in three dimensions,

00:00:39.440 --> 00:00:42.000
and four goods would get very abstract.

00:00:42.000 --> 00:00:44.910
So, let's say in this
axis, the vertical axis,

00:00:44.910 --> 00:00:46.160
this is going to be the quantity

00:00:46.160 --> 00:00:48.780
and we'll stay with the chocolate
and the fruit trade-off.

00:00:48.780 --> 00:00:51.250
Those are the only two
things that we consume.

00:00:51.250 --> 00:00:54.190
So, this is going to be the
quantity of chocolate in bars

00:00:55.190 --> 00:00:58.130
and in the horizontal axis,
this is going to be the quantity

00:00:58.130 --> 00:01:01.810
of fruit and this is going
to be in pounds of fruit.

00:01:01.810 --> 00:01:05.360
And this will go, see
this is 10, this is 20

00:01:05.360 --> 00:01:07.997
this is 10, and this is 20

00:01:07.997 --> 00:01:12.250
and this would be 15, 5, 5, and then 15.

00:01:12.250 --> 00:01:17.170
And let's say, let's say that
right now, at some point,

00:01:17.170 --> 00:01:21.690
I am consuming 5 pounds of fruit per month

00:01:21.690 --> 00:01:24.240
and 15 bars of chocolate per month.

00:01:24.240 --> 00:01:26.060
So, that would put me right there.

00:01:26.060 --> 00:01:29.840
And if someone were to ask,
"Sal, how would you feel,

00:01:29.840 --> 00:01:33.040
how would you feel if instead
of that, instead of that,

00:01:33.040 --> 00:01:35.400
I were to give you, let's say,

00:01:35.400 --> 00:01:40.400
10 bars of chocolate and 7
pounds, and 7 pounds of fruit?"

00:01:42.800 --> 00:01:45.700
And I would say, you know
what, I'm indifferent.

00:01:45.700 --> 00:01:49.530
I wouldn't care whether I have,
so this right over here is,

00:01:49.530 --> 00:01:52.660
I wouldn't care whether I
have 15 bars of chocolate

00:01:52.660 --> 00:01:56.810
and 5 pounds of fruit or
whether I have 10 bars

00:01:56.810 --> 00:01:59.560
of chocolate and 7 pounds of fruit.

00:01:59.560 --> 00:02:01.960
I am indifferent between these two.

00:02:01.960 --> 00:02:03.920
I have introspected on what I like

00:02:03.920 --> 00:02:06.540
and what I derive benefit
and satisfaction out of,

00:02:06.540 --> 00:02:10.720
and I get the same total
utility out of either of these,

00:02:10.720 --> 00:02:12.570
out of either of these points.

00:02:12.570 --> 00:02:16.300
So, both of these are on
the same indifference curve

00:02:16.300 --> 00:02:19.410
and in general, I can plot all
of the different combinations

00:02:19.410 --> 00:02:22.580
that give me the exact same total utility

00:02:22.580 --> 00:02:25.130
and it might look something like this.

00:02:25.130 --> 00:02:26.760
Let me try to draw it
as neatly as possible.

00:02:26.760 --> 00:02:28.170
I'll do it in magenta.

00:02:28.170 --> 00:02:31.630
It might look something like this

00:02:31.630 --> 00:02:34.490
and then keep going all
the way down like that.

00:02:34.490 --> 00:02:38.410
So, any point on this
curve right over here,

00:02:38.410 --> 00:02:41.180
I'm indifferent relative
to my current predicament

00:02:41.180 --> 00:02:44.420
of 15 bars and 5 pounds of chocolate.

00:02:44.420 --> 00:02:47.330
So, that is my indifference curve.

00:02:47.330 --> 00:02:49.210
Indifference.

00:02:49.210 --> 00:02:51.010
Indifference curve.

00:02:51.010 --> 00:02:52.960
Now, let's think about, so, obviously,

00:02:52.960 --> 00:02:57.250
if I go all over here, 20 pounds of fruit,

00:02:57.250 --> 00:02:59.820
and I don't know, that looks
about 2 bars of chocolate,

00:02:59.820 --> 00:03:03.220
to me, the same utility
based on my preferences,

00:03:03.220 --> 00:03:04.780
as where I started off with.

00:03:04.780 --> 00:03:06.870
So, someone just swapped everything out.

00:03:06.870 --> 00:03:09.030
I would just kind of, you know,

00:03:09.030 --> 00:03:11.650
shrug my shoulders and
say yeah, no big deal.

00:03:11.650 --> 00:03:12.483
I wouldn't be happy.

00:03:12.483 --> 00:03:13.360
I wouldn't be sad.

00:03:13.360 --> 00:03:15.230
I am indifferent.

00:03:15.230 --> 00:03:17.427
Now, what about points down here?

00:03:18.975 --> 00:03:20.920
What about a point like this?

00:03:20.920 --> 00:03:24.060
Well, that is clearly not
preferable because, for example,

00:03:24.060 --> 00:03:27.320
that point I just showed,
I can show a point

00:03:27.320 --> 00:03:30.070
on the indifference curve
where I am better off.

00:03:30.070 --> 00:03:31.820
For example, that point that I just did,

00:03:31.820 --> 00:03:34.820
that's 5 pounds of fruit and
about 5 bars of chocolate,

00:03:34.820 --> 00:03:37.500
but assuming that the marginal
benefit of more chocolate

00:03:37.500 --> 00:03:39.780
is positive, and the way I've drawn this,

00:03:39.780 --> 00:03:42.060
or the assumption is that it is, then,

00:03:42.060 --> 00:03:43.610
I'm obviously getting more benefit

00:03:43.610 --> 00:03:46.520
if I'm get even more chocolate per month.

00:03:46.520 --> 00:03:49.740
And so, anything down here,
below the indifference curve,

00:03:49.740 --> 00:03:51.430
is not preferred.

00:03:51.430 --> 00:03:53.620
Not preferred.

00:03:53.620 --> 00:03:54.630
Preferred.

00:03:54.630 --> 00:03:59.210
And, using the same exact
logic, anything out here,

00:03:59.210 --> 00:04:02.350
anything out here,

00:04:02.350 --> 00:04:05.780
well, that would be good
because we're neutral

00:04:05.780 --> 00:04:07.640
between all of these points on the curve

00:04:07.640 --> 00:04:09.300
but this green point right over here,

00:04:09.300 --> 00:04:12.520
I have the same number of
bars as a point on the curve,

00:04:12.520 --> 00:04:15.810
but I have a lot more pounds of fruit.

00:04:15.810 --> 00:04:17.970
It looks like I have 11
or 12 pounds of fruit.

00:04:17.970 --> 00:04:20.150
So, assuming that I'm
getting marginal benefits

00:04:20.150 --> 00:04:21.980
from those incremental pounds of fruit,

00:04:21.980 --> 00:04:23.950
and we will make that assumption,

00:04:23.950 --> 00:04:26.270
then, this right over
here, anything out here,

00:04:26.270 --> 00:04:27.470
is going to be preferred.

00:04:27.470 --> 00:04:30.500
So, this whole area is
going to be preferred

00:04:30.500 --> 00:04:32.440
to everything on the curve.

00:04:32.440 --> 00:04:33.363
Preferred.

00:04:34.580 --> 00:04:38.440
And the whole area down
here, is, obviously, we've

00:04:39.880 --> 00:04:41.670
not preferred to anything on the curve.

00:04:41.670 --> 00:04:43.710
And let me, just to show
you this, not those points.

00:04:43.710 --> 00:04:45.310
So, all of this, and let me do that

00:04:45.310 --> 00:04:48.290
in a different color actually,
'cause our curve is purple,

00:04:48.290 --> 00:04:53.200
everything in blue is not preferred.

00:04:53.200 --> 00:04:55.570
Now, the last thing I want
to think about in this video

00:04:55.570 --> 00:04:58.700
is what the slope of this
indifference curve tells us.

00:04:58.700 --> 00:05:00.480
When I talk about the slope,
and this is really kind

00:05:00.480 --> 00:05:02.110
of an idea out of Calculus,

00:05:02.110 --> 00:05:04.420
'cause we're used to thinking
about slopes of lines.

00:05:04.420 --> 00:05:06.730
So, if you give me a line like that,

00:05:06.730 --> 00:05:11.220
the slope is how much does
my vertical axis change

00:05:11.220 --> 00:05:13.810
for every change in my horizontal axis?

00:05:13.810 --> 00:05:17.410
So, in a typical algebra class,
that axis is your Y axis.

00:05:17.410 --> 00:05:19.110
That is your X axis.

00:05:19.110 --> 00:05:21.960
And when we think about
slope, we say, okay,

00:05:21.960 --> 00:05:26.960
when I have a certain change
in Y when I change in X by 1.

00:05:27.510 --> 00:05:29.450
So, we have something like this.

00:05:29.450 --> 00:05:33.560
So, when I change, I get
a certain change in Y,

00:05:33.560 --> 00:05:37.620
the triangle means change
in, delta, change in Y,

00:05:37.620 --> 00:05:39.853
when I get a certain change in X.

00:05:41.570 --> 00:05:43.730
And delta Y, the change in Y,

00:05:43.730 --> 00:05:47.120
over change in X is equal to the slope.

00:05:47.120 --> 00:05:49.210
But this is when it's a line
and the slope isn't changing.

00:05:49.210 --> 00:05:52.040
At any point on this line,
if I do the same ratio

00:05:52.040 --> 00:05:53.470
between the change in
Y and the change in X,

00:05:53.470 --> 00:05:55.370
I'm going to get the same value.

00:05:55.370 --> 00:05:59.410
On a curve like this, the
slope is constantly changing.

00:05:59.410 --> 00:06:01.730
So, what we really do, to
figure out the slope exactly

00:06:01.730 --> 00:06:03.790
at a point, you can imagine,
it's really the slope

00:06:03.790 --> 00:06:05.360
of the tangent line at that point.

00:06:05.360 --> 00:06:07.810
A line that would just
touch at that point.

00:06:07.810 --> 00:06:12.490
So, for example, let's say
that I draw a tangent line,

00:06:12.490 --> 00:06:13.680
I am going to draw my best attempt

00:06:13.680 --> 00:06:15.980
at drawing a tangent line
and I'll do it in pink.

00:06:15.980 --> 00:06:17.330
Let's say I have a tangent line right

00:06:17.330 --> 00:06:20.270
from our starting
predicament, just like that.

00:06:20.270 --> 00:06:22.003
And it looks something like that.

00:06:23.030 --> 00:06:25.810
It looks something like that.

00:06:25.810 --> 00:06:30.810
And so, right where we are
now, exactly at this point,

00:06:31.580 --> 00:06:32.760
you know, if we veer away,

00:06:32.760 --> 00:06:35.170
it seems like our slope is changing.

00:06:35.170 --> 00:06:36.640
Matter of fact, it definitely is changing.

00:06:36.640 --> 00:06:38.760
It's becoming less steep as
we go forward to the right.

00:06:38.760 --> 00:06:40.300
It's becoming more steep
as we go to the left.

00:06:40.300 --> 00:06:42.090
But right there, the slope

00:06:42.090 --> 00:06:43.620
of the tangent line looks right like that

00:06:43.620 --> 00:06:46.690
or you can view that as the
instantaneous slope right there.

00:06:46.690 --> 00:06:49.280
And we can measure the
slope of the tangent line.

00:06:49.280 --> 00:06:52.820
We can say, look, if we want an extra,

00:06:52.820 --> 00:06:54.463
let's see, this looks like about,

00:06:56.180 --> 00:06:59.320
if we want an extra 2 pounds of fruit,

00:06:59.320 --> 00:07:02.540
how many bars are we
going to have to give up?

00:07:02.540 --> 00:07:04.760
How many bars are we
going to have to give up?

00:07:04.760 --> 00:07:06.570
Well, it looks like we're
going to have to give up,

00:07:06.570 --> 00:07:08.640
based on the slope right over there,

00:07:08.640 --> 00:07:11.457
looks like we're going to
have to give up 5 bars.

00:07:11.457 --> 00:07:13.760
So, this is 5 and this is 2.

00:07:13.760 --> 00:07:17.063
So, what is your change
in, what is the slope here?

00:07:18.540 --> 00:07:23.130
The slope here, is going
to be your change in bars,

00:07:23.130 --> 00:07:24.450
and I should actually say this

00:07:24.450 --> 00:07:26.100
is a negative right over there,

00:07:26.100 --> 00:07:28.710
it's going to be your change in bars,

00:07:28.710 --> 00:07:33.710
your change in chocolate bars,
over your change in fruit.

00:07:33.880 --> 00:07:36.520
Over your change in fruit.

00:07:36.520 --> 00:07:40.377
And in this situation, it is -5 bars

00:07:43.110 --> 00:07:45.760
for every 2 fruit that you get.

00:07:45.760 --> 00:07:50.290
So, bars per fruit.

00:07:50.290 --> 00:07:55.290
Or you can say this is equal
to -2.5 bars per fruit.

00:07:57.710 --> 00:08:00.510
So, it's essentially saying,
exactly at that point,

00:08:00.510 --> 00:08:03.300
how are you willing to
trade off bars for fruit?

00:08:03.300 --> 00:08:05.150
Exactly at that point, it's gonna change,

00:08:05.150 --> 00:08:07.530
as things change along this curve.

00:08:07.530 --> 00:08:09.270
But it's saying, exactly where
you're sitting right now,

00:08:09.270 --> 00:08:11.320
you would be indifferent but it's only

00:08:11.320 --> 00:08:14.680
as you just slightly move
for an extra drop of fruit,

00:08:14.680 --> 00:08:17.580
an extra ounce of fruit,
not even a whole pound,

00:08:17.580 --> 00:08:21.900
you'd be willing to trade
off 2 1/2 bars per fruit.

00:08:21.900 --> 00:08:23.820
And what this says, so
you're willing to give up,

00:08:23.820 --> 00:08:26.190
since it's negative,
you're giving up 2 1/2 bars

00:08:26.190 --> 00:08:28.930
of chocolate for every pound of fruit.

00:08:28.930 --> 00:08:30.060
Now, it's going to be different.

00:08:30.060 --> 00:08:32.360
Once you have a lot
more fruit, you're going

00:08:32.360 --> 00:08:34.950
to be much less willing to
give up bars of chocolate.

00:08:34.950 --> 00:08:37.490
Over here, you have a lot of
bars and not a lot of fruit.

00:08:37.490 --> 00:08:40.510
So, you're willing to give
up a lot of bars for fruit.

00:08:40.510 --> 00:08:43.110
Over here, if we go over here,

00:08:43.110 --> 00:08:45.010
the slope looks a little bit different.

00:08:45.010 --> 00:08:48.290
Over here, it is much flatter.

00:08:48.290 --> 00:08:51.350
So let me draw it in a
color we haven't used yet.

00:08:51.350 --> 00:08:54.530
So, over here, the tangent
line looks something like this.

00:08:54.530 --> 00:08:56.230
It looks something like this.

00:08:56.230 --> 00:09:01.230
And let's say, when you
calculate it, in order to get,

00:09:01.460 --> 00:09:04.640
I don't know, this looks
about 5 pounds of fruit,

00:09:04.640 --> 00:09:07.180
in order to get 5 pounds
of fruit, you are going

00:09:07.180 --> 00:09:08.997
to have to give up 2 bars.

00:09:11.426 --> 00:09:14.514
So, once again, the slope is
the change in the vertical axis

00:09:14.514 --> 00:09:16.854
over the change in the horizontal axis.

00:09:16.854 --> 00:09:21.137
So, over here, at this
point, your change in bars

00:09:21.137 --> 00:09:25.043
over your change in fruit, is going to be,

00:09:25.043 --> 00:09:30.043
well, you're going to give
up 2 bars, for every 5 fruit.

00:09:30.239 --> 00:09:33.543
Bars per fruit.

00:09:35.300 --> 00:09:39.563
So, this right over here, is -0.4.

00:09:41.270 --> 00:09:43.040
I'll say B for F.

00:09:43.040 --> 00:09:45.440
So over here, you're willing
to give up much fewer bars

00:09:45.440 --> 00:09:46.860
for every incremental fruit.

00:09:46.860 --> 00:09:48.770
Up here, you were willing
to give many bars away

00:09:48.770 --> 00:09:49.960
for every fruit and that makes sense.

00:09:49.960 --> 00:09:51.880
Over here, you had a lot of chocolate bars

00:09:51.880 --> 00:09:52.820
and not a lot of fruit.

00:09:52.820 --> 00:09:55.780
So, you were willing to give
up more bars for your fruit.

00:09:55.780 --> 00:09:59.500
And over here, you have many fewer bars

00:09:59.500 --> 00:10:03.780
so you're much more resistant
to giving up bars for fruit.

00:10:03.780 --> 00:10:07.300
But this number, how
many bars you're willing

00:10:07.300 --> 00:10:11.270
to give up for an incremental
fruit at any point here,

00:10:11.270 --> 00:10:14.940
or you could view it as a slope
of the indifference curve,

00:10:14.940 --> 00:10:16.250
or the slope of a tangent line

00:10:16.250 --> 00:10:18.080
at that point of the indifference curve,

00:10:18.080 --> 00:10:19.520
this, right over here is called

00:10:19.520 --> 00:10:21.833
our marginal rate of substitution.

00:10:22.690 --> 00:10:27.460
Marginal rate of substitution.

00:10:27.460 --> 00:10:30.170
It's a very fancy word
but all it's really saying

00:10:30.170 --> 00:10:33.670
is how much you're willing to
give up of the vertical axis

00:10:33.670 --> 00:10:36.640
for an increment of the horizontal axis.

00:10:36.640 --> 00:10:39.080
Right at that point, and it
changes, as soon as you move,

00:10:39.080 --> 00:10:40.790
because this is a curve,
it changes a little bit,

00:10:40.790 --> 00:10:43.590
but right at that point, for
a super super small amount,

00:10:43.590 --> 00:10:46.860
how many bars are you
willing to give up for fruit?

00:10:46.860 --> 00:10:47.960
And obviously, it changes

00:10:47.960 --> 00:10:50.553
as we go along this indifference curve.


Capital by Thomas Piketty

WEBVTT
Kind: captions
Language: en

00:00:00.610 --> 00:00:02.740
- [Instructor] Thomas Piketty's Capital

00:00:02.740 --> 00:00:05.480
in the Twenty-First Century
has been getting a lot

00:00:05.480 --> 00:00:08.679
of attention lately, because
it's addressing an issue

00:00:08.679 --> 00:00:10.730
that matters a lot to a lot of folks,

00:00:10.730 --> 00:00:14.540
the issue of income inequality
and wealth inequality.

00:00:14.540 --> 00:00:17.670
And my goal here isn't to
have a view on the book,

00:00:17.670 --> 00:00:20.820
to say the book is all
right or it's all wrong,

00:00:20.820 --> 00:00:22.840
but to really use this book as a tool

00:00:22.840 --> 00:00:26.560
to give you the critical thinking tools

00:00:26.560 --> 00:00:28.880
you need to make your own judgment.

00:00:28.880 --> 00:00:30.760
The one thing that is
neat about the book is

00:00:30.760 --> 00:00:33.310
that he makes all of the
charts and figures available

00:00:33.310 --> 00:00:36.450
on his website, so all of
these screenshots that I got,

00:00:36.450 --> 00:00:41.450
these are from
piketty.pse.ens.fr/en/capital21c2.

00:00:44.880 --> 00:00:45.920
And I encourage you to go there

00:00:45.920 --> 00:00:47.850
on your own and to browse these charts,

00:00:47.850 --> 00:00:49.210
because there's a lot
of interesting charts.

00:00:49.210 --> 00:00:52.690
But as you do so, always look
at them with both an open

00:00:52.690 --> 00:00:55.900
and a critical eye to see
how, what might make sense,

00:00:55.900 --> 00:00:58.240
or what might not make sense,
or what questions start

00:00:58.240 --> 00:01:01.510
to emerge that you would
like to dig deeper on.

00:01:01.510 --> 00:01:03.950
But let me just start with
this chart right over here,

00:01:03.950 --> 00:01:08.740
because this begins to lay
out what might be an issue.

00:01:08.740 --> 00:01:10.740
So this is wealth inequality

00:01:10.740 --> 00:01:14.800
in the United States
between 1810 and 2010.

00:01:14.800 --> 00:01:17.610
And the way that they're
measuring wealth inequality is

00:01:17.610 --> 00:01:22.390
the share of top decile or
percentile in total wealth.

00:01:22.390 --> 00:01:25.280
So here they're saying the
top 1% share of wealth,

00:01:25.280 --> 00:01:27.730
that's this line right over here.

00:01:27.730 --> 00:01:29.220
And then you have the top decile,

00:01:29.220 --> 00:01:31.630
the top 10% share in wealth.

00:01:31.630 --> 00:01:34.030
So this right over here,
or this data point,

00:01:34.030 --> 00:01:37.390
let me do this in magenta,
this is telling us

00:01:37.390 --> 00:01:42.283
that based on his data,
in 1810 the top 1%,

00:01:42.283 --> 00:01:45.270
the wealthiest 1%, had
roughly, it looks like

00:01:45.270 --> 00:01:49.410
about 25% of the wealth of the country.

00:01:49.410 --> 00:01:54.200
And the top 10% had about,
looks like it's almost maybe,

00:01:54.200 --> 00:01:58.120
almost 60% of the wealth of the country.

00:01:58.120 --> 00:01:59.830
And then we see how this is trending,

00:01:59.830 --> 00:02:02.700
and it was trending up as
we go through the 1800s

00:02:02.700 --> 00:02:06.340
all the way until the
beginning of the 20th century.

00:02:06.340 --> 00:02:08.310
So this is the 19th
century right over here,

00:02:08.310 --> 00:02:09.760
beginning of the 20th century.

00:02:09.760 --> 00:02:12.590
And in particular, we have this period

00:02:12.590 --> 00:02:16.190
in the last few decades, the
last two or three decades,

00:02:16.190 --> 00:02:20.600
of the 19th century, the
1800s, that's often known

00:02:20.600 --> 00:02:24.380
as the Gilded Age, the
Gilded Age, that's associated

00:02:24.380 --> 00:02:29.380
with fairly dramatic wealth
inequality, Gilded, Gilded Age.

00:02:29.800 --> 00:02:33.830
And one of the questions
that this book raises is,

00:02:33.830 --> 00:02:36.690
are we entering into another Gilded Age?

00:02:36.690 --> 00:02:38.620
Now, if you just look
at this trend line here,

00:02:38.620 --> 00:02:42.620
it's clear that the wealth
inequality isn't as severe

00:02:42.620 --> 00:02:46.220
as it was in the, I guess you
could say, formal Gilded Age.

00:02:46.220 --> 00:02:48.530
But it's a question of where is this going

00:02:48.530 --> 00:02:51.640
and is this something that
people should be concerned about?

00:02:51.640 --> 00:02:55.480
So the question is, is
this trend line going to do

00:02:55.480 --> 00:02:59.120
what it did in the last few
decades of the 19th century

00:02:59.120 --> 00:03:01.870
and do something like this, essentially,

00:03:01.870 --> 00:03:04.820
maybe bringing at least
this chart more in line

00:03:04.820 --> 00:03:07.310
with what happened during
the first Gilded Age?

00:03:07.310 --> 00:03:09.470
Or is it going to do something like this?

00:03:09.470 --> 00:03:11.350
Or is it going to do something like that?

00:03:11.350 --> 00:03:14.090
And even if it does do
something like this,

00:03:14.090 --> 00:03:16.020
are we going to have the same realities

00:03:16.020 --> 00:03:18.100
that we had in the first Gilded Age,

00:03:18.100 --> 00:03:20.440
where it's maybe
disproportionate power associated

00:03:20.440 --> 00:03:22.500
with that wealth or whatever else?

00:03:22.500 --> 00:03:24.300
So these are all the types of questions

00:03:24.300 --> 00:03:26.220
that we should be thinking about.

00:03:26.220 --> 00:03:28.650
What type of a reality are we going into?

00:03:28.650 --> 00:03:32.160
What is the data that is making
us believe one or the other?

00:03:32.160 --> 00:03:35.090
And what are the policy decisions

00:03:35.090 --> 00:03:40.090
on things like innovation,
or taxation, or education,

00:03:40.230 --> 00:03:43.530
that might lead us one way or another?

00:03:43.530 --> 00:03:47.220
And so, I will dig deeper
into all of those ideas

00:03:47.220 --> 00:03:51.373
over the next few videos in this tutorial.


Return on capital and economic growth

WEBVTT
Kind: captions
Language: en

00:00:00.670 --> 00:00:01.870
- [Instructor] One of the core ideas

00:00:01.870 --> 00:00:04.658
of Capital in the Twenty-First Century

00:00:04.658 --> 00:00:09.120
is looking at the after-tax
return on capital.

00:00:09.120 --> 00:00:13.030
Return, on, let me write
that a little bit neater,

00:00:13.030 --> 00:00:16.301
return on capital,

00:00:16.301 --> 00:00:21.030
and comparing that to economic growth

00:00:22.550 --> 00:00:25.810
with the contention that
if the return on capital,

00:00:25.810 --> 00:00:28.730
if R is greater than G,

00:00:28.730 --> 00:00:31.650
if R is greater than G,

00:00:31.650 --> 00:00:33.880
than this is associated with,

00:00:33.880 --> 00:00:37.296
this right over here would be associated

00:00:37.296 --> 00:00:39.310
with rising income equality

00:00:39.310 --> 00:00:41.860
and that more and more
income is going to go

00:00:41.860 --> 00:00:45.640
towards the owners of
capital versus labor.

00:00:45.640 --> 00:00:48.060
And since capital tends to be concentrated

00:00:48.060 --> 00:00:50.410
and wealth, you could
view capital as wealth,

00:00:50.410 --> 00:00:52.010
and since wealth tends to be concentrated,

00:00:52.010 --> 00:00:53.410
that'll just make the concentration

00:00:53.410 --> 00:00:57.080
happen even further, even
more inequalities in wealth.

00:00:57.080 --> 00:00:58.577
Now before we get into that,

00:00:58.577 --> 00:01:02.080
and whether you believe
that causality or not,

00:01:02.080 --> 00:01:04.950
is let's just understand return on capital

00:01:04.950 --> 00:01:07.230
and how that might
compare to economic growth

00:01:07.230 --> 00:01:10.890
and how that might
create returns to income

00:01:10.890 --> 00:01:14.913
to the owners of capital
or income to labor.

00:01:15.900 --> 00:01:17.700
To think this through, let's just think

00:01:17.700 --> 00:01:20.940
of a very, very simple economy.

00:01:20.940 --> 00:01:24.210
Let's say the whole economy
is nothing but a gold mine.

00:01:24.210 --> 00:01:27.680
So let's say this is
year one right over here

00:01:28.670 --> 00:01:31.280
and the whole value of the economy,

00:01:31.280 --> 00:01:33.290
all the wealth in the economy,

00:01:33.290 --> 00:01:36.960
so the capital in the economy,

00:01:36.960 --> 00:01:40.280
let's say that we just value
it as 1,000 gold pieces.

00:01:40.280 --> 00:01:44.080
And obviously, we could go
into how is that valued, etc.

00:01:44.080 --> 00:01:46.230
And that actually does
come into the conversation,

00:01:46.230 --> 00:01:49.500
is are we thinking about
the market value of things

00:01:49.500 --> 00:01:52.580
or are we looking at some things
on a more intrinsic basis,

00:01:52.580 --> 00:01:55.230
but let's just go with this
simple analogy right now

00:01:55.230 --> 00:01:57.220
just to start to get our
hands around the idea,

00:01:57.220 --> 00:02:00.080
our heads around the
ideas of return on capital

00:02:00.080 --> 00:02:03.110
and economic growth and how
they might relate to each other.

00:02:03.110 --> 00:02:06.440
So the capital, let's say
it's 1,000 gold pieces.

00:02:06.440 --> 00:02:08.590
I'll just write gp for short.

00:02:08.590 --> 00:02:12.360
1,000 gold pieces.

00:02:12.360 --> 00:02:15.920
And let's say that in that
year, the national income,

00:02:15.920 --> 00:02:18.640
so it's a gold mine, so
it's just producing gold.

00:02:18.640 --> 00:02:21.150
So, let me do this in green,

00:02:21.150 --> 00:02:24.733
so national income.

00:02:25.890 --> 00:02:28.630
And the whole nation is
just a big gold mine.

00:02:28.630 --> 00:02:33.120
National income, let's say

00:02:33.120 --> 00:02:37.580
we have a national income
of 100 gold pieces.

00:02:37.580 --> 00:02:41.000
100 gold pieces.

00:02:41.000 --> 00:02:42.830
And let's say that that's divided

00:02:42.830 --> 00:02:45.310
between income to labor, you needed people

00:02:45.310 --> 00:02:47.587
to work on the gold mine,
to actually mine things

00:02:47.587 --> 00:02:49.740
and whatever else,

00:02:49.740 --> 00:02:53.320
and this 100 gold pieces
is going to be split

00:02:53.320 --> 00:02:54.950
between the owners of the capital,

00:02:54.950 --> 00:02:57.440
the people who own the land and the tools

00:02:57.440 --> 00:02:59.830
and whatever else of the gold mine,

00:02:59.830 --> 00:03:01.792
and the people doing the work, the labor.

00:03:01.792 --> 00:03:06.792
So let's say that 50
of this, 50 gold pieces

00:03:07.850 --> 00:03:11.900
goes to labor, so that's
the part that goes to labor

00:03:11.900 --> 00:03:15.580
and let's say that 50 gold pieces

00:03:15.580 --> 00:03:19.000
goes to the owners of capital.

00:03:19.000 --> 00:03:21.383
So I'll just say it goes to capital.

00:03:23.020 --> 00:03:24.440
And let's say maybe
there's no taxes in this,

00:03:24.440 --> 00:03:25.710
we're not going to go into taxes

00:03:25.710 --> 00:03:26.900
and complicate things just yet.

00:03:26.900 --> 00:03:28.780
So this is the after tax.

00:03:28.780 --> 00:03:31.770
So we can now calculate
the return on capital.

00:03:31.770 --> 00:03:33.740
R in year one,

00:03:33.740 --> 00:03:36.800
R is going to be equal to,

00:03:36.800 --> 00:03:40.210
well, the owners of
capital got 50 gold pieces.

00:03:40.210 --> 00:03:42.093
They got 50 gold pieces.

00:03:43.081 --> 00:03:47.570
And the capital that they
employed was 1,000 gold pieces,

00:03:47.570 --> 00:03:52.570
50 divided by 1,000,
this is going to be 5%

00:03:53.290 --> 00:03:54.830
right over here.

00:03:54.830 --> 00:03:56.400
Now, let's think about this

00:03:56.400 --> 00:03:58.260
in the context of economic growth.

00:03:58.260 --> 00:04:01.210
Let's say we go from year one to year two.

00:04:01.210 --> 00:04:04.277
So now let's go to year two.

00:04:08.012 --> 00:04:09.160
And we'll just say for
the sake of argument

00:04:09.160 --> 00:04:11.120
that all of this capital that the owners

00:04:11.120 --> 00:04:13.430
of the capital got,
that they reinvested it

00:04:13.430 --> 00:04:14.750
back into the gold mine.

00:04:14.750 --> 00:04:17.050
So now the value of the gold mine,

00:04:17.050 --> 00:04:20.580
so the capital now in year two,

00:04:20.580 --> 00:04:25.460
is going to be 1,050 gold pieces.

00:04:25.460 --> 00:04:27.900
The 1,000 that we started
with, we earned another 50,

00:04:27.900 --> 00:04:30.040
we're reinvesting that
back into the capital,

00:04:30.040 --> 00:04:32.180
maybe we buy some more
equipment, some more land,

00:04:32.180 --> 00:04:37.080
whatever it might be, and so
now it's 1,050 gold pieces.

00:04:37.080 --> 00:04:40.800
And let's say the next year,
the national income grows.

00:04:40.800 --> 00:04:45.800
So, national income, once again,

00:04:46.270 --> 00:04:48.770
we're saying this is a
super-simplified economy,

00:04:48.770 --> 00:04:51.151
overly simplified,
arguably, that's nothing

00:04:51.151 --> 00:04:54.210
but one big gold mine.

00:04:54.210 --> 00:04:57.360
And now let's say the
national income grew by,

00:05:00.130 --> 00:05:02.090
let's say it grew by 2%.

00:05:02.090 --> 00:05:07.090
So the national income
is 102, 102 gold pieces.

00:05:09.140 --> 00:05:13.280
Now, there's a bunch of ways
that we could split this,

00:05:13.280 --> 00:05:15.520
but let's just say for
the sake of argument,

00:05:15.520 --> 00:05:18.023
well, let's just make it
clear what we just said,

00:05:19.626 --> 00:05:23.270
we just said that our growth
right over here is 2%.

00:05:23.270 --> 00:05:25.270
Now the question, and this is one

00:05:25.270 --> 00:05:27.280
of the central questions of the book,

00:05:27.280 --> 00:05:32.280
is just because R is greater
than G in this situation,

00:05:32.410 --> 00:05:36.490
is that going to lead to
more of the national income

00:05:36.490 --> 00:05:38.510
going to the owners of capital

00:05:38.510 --> 00:05:41.350
or is going to go the other way around?

00:05:41.350 --> 00:05:44.670
Or is the level of inequality
going to stay neutral?

00:05:44.670 --> 00:05:46.370
I encourage you to pause
this video right now

00:05:46.370 --> 00:05:47.890
and try to think about that on your own.

00:05:47.890 --> 00:05:49.530
Given all of these numbers,

00:05:49.530 --> 00:05:51.240
come up with different break downs

00:05:51.240 --> 00:05:53.760
of, say, year two's national income,

00:05:53.760 --> 00:05:55.960
breaking it down between
how much goes to labor

00:05:55.960 --> 00:05:57.460
and how much goes to capital.

00:05:57.460 --> 00:05:59.450
And think about, in this situation

00:05:59.450 --> 00:06:00.360
where r is greater than g,

00:06:00.360 --> 00:06:02.963
is it always going to
lead to more inequality?

00:06:02.963 --> 00:06:06.480
Well, it actually depends how
you break it down this year.

00:06:06.480 --> 00:06:08.740
So you could definitely have a situation

00:06:08.740 --> 00:06:11.750
where you have, potentially,
growing inequality.

00:06:11.750 --> 00:06:13.822
So, for example, you
could have a situation

00:06:13.822 --> 00:06:17.873
where still labor gets 50 gold pieces,

00:06:18.930 --> 00:06:20.250
50 gold pieces,

00:06:20.250 --> 00:06:25.250
while capital is getting
52, 52 gold pieces.

00:06:25.770 --> 00:06:29.430
Now the return on capital is going to be

00:06:29.430 --> 00:06:32.500
52 divided by 1,050,

00:06:32.500 --> 00:06:34.463
52 divided by 1,050.

00:06:35.700 --> 00:06:38.650
The amount of income to capital is 52,

00:06:38.650 --> 00:06:41.480
the value of the capital
is 1,050 gold pieces.

00:06:41.480 --> 00:06:46.160
And so we have a return
on capital of four point,

00:06:46.160 --> 00:06:48.810
almost five percent, but a
little bit under five percent.

00:06:48.810 --> 00:06:53.810
4.95%, so in this scenario,
the return on capital

00:06:57.387 --> 00:06:59.083
is approximately 4.95%.

00:07:00.850 --> 00:07:03.780
And we see that, once
again, R is greater than G,

00:07:03.780 --> 00:07:06.893
and inequality seems to be
getting a little bit more,

00:07:08.316 --> 00:07:10.030
the owners of the capital are getting more

00:07:10.030 --> 00:07:11.580
of the income, a larger percentage.

00:07:11.580 --> 00:07:14.580
They're getting more than
50%, than they saw before.

00:07:14.580 --> 00:07:17.480
But you could have things
go the other way around.

00:07:17.480 --> 00:07:20.980
You could have things
go the other way around.

00:07:20.980 --> 00:07:24.060
Maybe labor had a little
bit more leverage this year,

00:07:24.060 --> 00:07:27.700
and they were able to
negotiate some wage increases,

00:07:27.700 --> 00:07:30.610
and so you have 52 gold
pieces going to labor

00:07:30.610 --> 00:07:33.100
and 50 going to capital.

00:07:33.100 --> 00:07:35.340
Now, what's the return on capital?

00:07:35.340 --> 00:07:37.510
Well, in this situation,
the return on capital

00:07:37.510 --> 00:07:40.490
is going to be 50,

00:07:40.490 --> 00:07:42.410
so they're essentially
getting the same income,

00:07:42.410 --> 00:07:44.010
but over a larger investment,

00:07:44.010 --> 00:07:45.940
over a larger capital base.

00:07:45.940 --> 00:07:49.830
Over 1,050, which is equal to...

00:07:49.830 --> 00:07:54.830
So 50 divided by 1,050 gets us to 4.76%.

00:07:59.690 --> 00:08:02.730
So, approximately 4.76%.

00:08:02.730 --> 00:08:06.600
Approximately 4.76%.

00:08:06.600 --> 00:08:08.590
So just in this very,
I guess you could say,

00:08:08.590 --> 00:08:12.920
simplified analysis, you
could see just looking

00:08:12.920 --> 00:08:14.900
superficially at R and comparing it

00:08:14.900 --> 00:08:18.034
superficially to G from
one year to the next

00:08:18.034 --> 00:08:22.580
doesn't necessarily mean
that you're going to have

00:08:22.580 --> 00:08:24.660
rising income equality.

00:08:24.660 --> 00:08:26.520
Now, it could be a proxy for it,

00:08:26.520 --> 00:08:29.060
it could be kind of a very high level way

00:08:29.060 --> 00:08:29.893
of looking at things,

00:08:29.893 --> 00:08:31.920
but just in and of itself,
if someone told you

00:08:31.920 --> 00:08:34.410
in a year, hey, R, the return on capital

00:08:34.410 --> 00:08:37.460
is greater than G, you can't say for sure

00:08:37.460 --> 00:08:41.580
in that year that has gone by

00:08:41.580 --> 00:08:44.950
that there has been an
increase in inequality.

00:08:44.950 --> 00:08:46.790
Now, what we will do
in the next few videos

00:08:46.790 --> 00:08:48.556
is dig a little bit
deeper in that question

00:08:48.556 --> 00:08:51.558
and use some spreadsheets
to look at some scenarios.

00:08:51.558 --> 00:08:55.378
Look at scenarios where
maybe we hold R constant

00:08:55.378 --> 00:08:59.500
or R and G constant and see
what happens to inequality,

00:08:59.500 --> 00:09:02.825
or maybe we hold inequality
constant and see what

00:09:02.825 --> 00:09:05.040
R has to trend to.

00:09:05.040 --> 00:09:06.863
And we'll do that in the next video.


Critically looking at data on ROC and economic growth over millenia

WEBVTT
Kind: captions
Language: en

00:00:00.760 --> 00:00:01.670
- [Instructor] So we've already talked

00:00:01.670 --> 00:00:04.790
about the general idea, the
thesis that if the return

00:00:04.790 --> 00:00:08.350
on capital is greater than
the growth of an economy,

00:00:08.350 --> 00:00:09.990
that that could lead to inequality,

00:00:09.990 --> 00:00:11.520
although we showed a case where,

00:00:11.520 --> 00:00:13.740
depending on the circumstances
with the right numbers,

00:00:13.740 --> 00:00:16.000
that's not necessarily going to happen.

00:00:16.000 --> 00:00:18.270
But what I want to do in this video is

00:00:18.270 --> 00:00:19.510
to think critically a little bit

00:00:19.510 --> 00:00:21.040
about some of the other
data from the book.

00:00:21.040 --> 00:00:24.370
And once again, my point right
over here is not to support

00:00:24.370 --> 00:00:26.510
or go against the ideas in the book,

00:00:26.510 --> 00:00:28.610
but really just give you tools
for thinking a little bit

00:00:28.610 --> 00:00:31.260
more critically about all of these ideas.

00:00:31.260 --> 00:00:32.990
And what's really neat, as I mentioned

00:00:32.990 --> 00:00:35.240
in previous videos, is Piketty makes all

00:00:35.240 --> 00:00:37.810
of his data available, all
of his charts available,

00:00:37.810 --> 00:00:40.490
at this website right over there.

00:00:40.490 --> 00:00:42.270
Now this is neat,
because this shows us the

00:00:42.270 --> 00:00:44.930
after tax rate of return
versus growth rate

00:00:44.930 --> 00:00:47.720
at the world level, and
you don't see many charts

00:00:47.720 --> 00:00:50.270
that start at the year zero

00:00:50.270 --> 00:00:53.630
and go over the course of 2,000 years.

00:00:53.630 --> 00:00:55.410
And so, you can imagine that the numbers

00:00:55.410 --> 00:00:59.260
back here are estimates, but let's just go

00:00:59.260 --> 00:01:01.540
with them for the sake of argument.

00:01:01.540 --> 00:01:04.187
So what it shows here is
that the annual return,

00:01:05.231 --> 00:01:08.320
or rate of growth, so this
is the pure return of capital

00:01:08.320 --> 00:01:11.230
after tax and capital
losses, so after, well,

00:01:11.230 --> 00:01:13.760
whatever taxes and any losses in the value

00:01:13.760 --> 00:01:17.080
of the capital or whatever
else, that's that here.

00:01:17.080 --> 00:01:19.790
And then this is the growth
rate of world output.

00:01:19.790 --> 00:01:23.130
And you see, for most
of at least the last few

00:01:23.130 --> 00:01:25.460
thousand years of human history, and this,

00:01:25.460 --> 00:01:27.880
the horizontal axis here
isn't completely at scale.

00:01:27.880 --> 00:01:29.850
From here to here is, that's,

00:01:29.850 --> 00:01:32.080
from here to here gets us almost, well,

00:01:32.080 --> 00:01:37.010
almost 1,500 years, while
from here to here is,

00:01:37.010 --> 00:01:39.990
gets us about 50, gets us about 50 years.

00:01:39.990 --> 00:01:42.160
So it's not completely at scale,

00:01:42.160 --> 00:01:45.030
but you see that for
most of human history,

00:01:45.030 --> 00:01:48.380
the annual rate, the
growth of the economy,

00:01:48.380 --> 00:01:50.740
was much smaller than
the return on capital.

00:01:50.740 --> 00:01:53.510
And once again, these
are, especially back here,

00:01:53.510 --> 00:01:56.200
these are just estimates, especially based

00:01:56.200 --> 00:01:58.310
on feudal times and whatever else.

00:01:58.310 --> 00:02:00.540
But on some level, they
could be believable,

00:02:00.540 --> 00:02:03.330
because in feudal times,
and when you had kings

00:02:03.330 --> 00:02:05.810
and all of that, you had
a lot of coercive power

00:02:05.810 --> 00:02:08.500
by the feudal lords or the
kings and whoever else.

00:02:08.500 --> 00:02:12.785
They could, by force, force
people to kind of work

00:02:12.785 --> 00:02:16.470
on their fields or whatever else.

00:02:16.470 --> 00:02:18.680
But if we take these numbers,

00:02:18.680 --> 00:02:20.780
we then see something interesting happens

00:02:20.780 --> 00:02:23.370
as we go into the early 20th century.

00:02:23.370 --> 00:02:27.150
The return, the after tax
rate, the after tax return

00:02:27.150 --> 00:02:31.380
on capital drops below, drops below,

00:02:31.380 --> 00:02:34.870
the rate of economic
growth of the economy.

00:02:34.870 --> 00:02:35.707
So we see that right over here,

00:02:35.707 --> 00:02:37.580
and this is over huge swaths of time.

00:02:37.580 --> 00:02:40.470
Even this data point,
this is one data point

00:02:40.470 --> 00:02:44.830
that represents, this represents
37 years right over here.

00:02:44.830 --> 00:02:46.450
And then we have another data point

00:02:46.450 --> 00:02:49.490
that represents the next, the next,

00:02:49.490 --> 00:02:52.830
what is this, the next
62 years right over that.

00:02:52.830 --> 00:02:56.160
And this is kind of the world
that most of us kinda know.

00:02:56.160 --> 00:02:58.430
This is modern times right over here,

00:02:58.430 --> 00:03:01.240
where the rate of economic growth,

00:03:01.240 --> 00:03:04.120
the rate of world output has been larger

00:03:04.120 --> 00:03:09.120
than the rate of return
on capital after taxes.

00:03:09.390 --> 00:03:11.370
Now, when you first
just look at this chart,

00:03:11.370 --> 00:03:13.220
you say, oh my god, look,
they're gonna cross again.

00:03:13.220 --> 00:03:15.530
Maybe that means we're
going back to the Gilded Age

00:03:15.530 --> 00:03:17.450
or feudal times or whatever else.

00:03:17.450 --> 00:03:19.950
But you have to very,
very, very careful here.

00:03:19.950 --> 00:03:22.698
Everything after this point is conjecture.

00:03:22.698 --> 00:03:26.040
This is a model, it might
happen or it might not.

00:03:26.040 --> 00:03:27.820
We could see something very different.

00:03:27.820 --> 00:03:32.330
So let me make it very,
let me make it very clear.

00:03:32.330 --> 00:03:34.810
All of, let me do this in another color,

00:03:34.810 --> 00:03:37.810
one that's, so all of this that I'm,

00:03:37.810 --> 00:03:39.900
whoops, that's not another color.

00:03:39.900 --> 00:03:43.240
All of this that I'm
highlighting in yellow,

00:03:43.240 --> 00:03:47.920
this over here is all conjecture.

00:03:47.920 --> 00:03:50.460
You could go the other
way, it is possible.

00:03:50.460 --> 00:03:54.240
It's completely possible
that you have a reality,

00:03:54.240 --> 00:03:58.980
let me get my, where
this continues the trend

00:03:58.980 --> 00:04:00.740
that it's going on, where this,

00:04:00.740 --> 00:04:02.910
where world growth kinda does this.

00:04:02.910 --> 00:04:05.190
Actually, let me do, and then it goes,

00:04:05.190 --> 00:04:08.860
so it goes from here, and maybe
it does something like this.

00:04:08.860 --> 00:04:11.400
So it's very important
to realize that this kind

00:04:11.400 --> 00:04:14.100
of intersection right over
here, this is a projection.

00:04:14.100 --> 00:04:15.730
And you should look at his assumptions,

00:04:15.730 --> 00:04:18.610
you should decide for
yourself on whether you think

00:04:18.610 --> 00:04:20.720
that this projection makes sense.

00:04:20.720 --> 00:04:22.490
Because this is what is saying that hey,

00:04:22.490 --> 00:04:27.490
this delta between r and g,
that g is greater than r,

00:04:29.100 --> 00:04:31.160
this makes it look like hey, it's over.

00:04:31.160 --> 00:04:33.130
But maybe it's not over,
maybe when we average

00:04:33.130 --> 00:04:35.910
over the next, if we
average over the next,

00:04:35.910 --> 00:04:37.380
oh what is this going to be over,

00:04:37.380 --> 00:04:40.413
if we average over the next 38 years,

00:04:40.413 --> 00:04:42.510
then maybe we'd get something like this.

00:04:42.510 --> 00:04:44.690
And obviously, we're at
just the very beginning

00:04:44.690 --> 00:04:46.830
of this interval, so
there's not a lot to go on.

00:04:46.830 --> 00:04:50.120
And that is also assuming,
even if this does happen,

00:04:50.120 --> 00:04:54.340
that is still assuming this relationship

00:04:54.340 --> 00:04:58.453
that r greater than g leads to inequality,

00:04:59.430 --> 00:05:02.350
which in extreme forms
could eventually lead

00:05:02.350 --> 00:05:06.700
to some form of a Gilded Age
or kind of dynastic wealth,

00:05:06.700 --> 00:05:10.340
which could hurt innovation
or which could even hurt,

00:05:10.340 --> 00:05:15.340
let me write that down,
dynastic wealth, Gilded Age,

00:05:15.470 --> 00:05:20.470
which maybe hurts, hurts,
hurts meritocracy, meritocracy,

00:05:22.780 --> 00:05:27.330
or even potentially
innovation, innovation,

00:05:27.330 --> 00:05:29.450
or the economy as a whole if you have less

00:05:29.450 --> 00:05:31.630
of a middle class and people
with purchasing powers.

00:05:31.630 --> 00:05:32.740
But there's a lot of arrows here,

00:05:32.740 --> 00:05:35.670
and you need to decide for
yourself which parts of these,

00:05:35.670 --> 00:05:38.350
which parts of this
connection you agree with

00:05:38.350 --> 00:05:40.410
or disagree with, or
depending on the circumstances

00:05:40.410 --> 00:05:44.153
or the evidence, you are more
inclined to believe or not.