Example: Let's take r=0.1, g=0.03. Consider a Rentier with a real investment income of $100,000/year (ie, off a $1M endowment), and a Worker with wages of $100,000/year. For simplification, let's assume both individuals spend their entire $100,000 income every year.

If you follow the r>>g hypothesis, you might assume that after a period of time, the Rentier will be far better off than the Worker. But that's not the case. After 20 years, the Rentier's real income will still be $100,000/year, off the same $1M endowment. Whereas the Worker's wages will now be $100,000 * 1.03^20 ~= $180,000

Clearly a higher r will be to the Rentier's advantage, especially if he supplements his investment income with wages as well, and keeps growing his endowment further. But this is going to be true even for r<g. There's nothing special that occurs when r overtakes g, since they are comparing totally different things.

This is based on a bunch of lecture notes and papers: http://www.princeton.edu/~moll/piketty_notes.pdf, http://piketty.pse.ens.fr/files/Piketty2015JEP.pdf (this one is by Piketty and also there it's about r-g rather than r>g -- see the discussion on p.75 and 76) and https://www.aeaweb.org/articles?id=10.1257/jep.29.1.29

Consider r and g in turn. It's easy to see why r matters for wealth accumulation: if you get a high return you have high capital income and so, for any given level of consumption, you will have high wealth tomorrow. In your example with a $1M endowment and assuming people consume 5% of their wealth a 10% return will mean next year's wealth is $1,050,000 and a 20% return will mean next year's wealth is $1,150,000.

Next consider g: now the idea is the economy is growing at rate g and therefore people's other income sources are growing at rate g. We therefore de-trend everything by g and end up with r-g ("Detrending" here simply means looking at things RELATIVE to the average). So it does make sense to compare r and g, simply because we're thinking about a growing economy so you want to compare EVERYTHING to g.

Also note that these "multiplicative shock" theories aren't really about rentiers vs workers. They are just about people making investments and either getting lucky or unlucky. Here is a good explanation of these theories http://nautil.us/issue/44/luck/investing-is-more-luck-than-t.... Of course, this is just one theory of wealth accumulation/inequality, and there are others with other predictions where r-g would not be so central.

Why does a GDP growth rate of g imply that people's other income sources (wages from labor?) are also growing at rate g?

Wage growth in a country depends on confounding factors like worker productivity, relative bargaining power between workers and owners, outsourcing to other countries, automation, and the mix of manufacturing and service jobs in the economy.

It's very possible for the rate of economic growth to be, say, +3% while rate of change in the share captured by workers is flat or negative.

If labor income is growing at a different rate, the "correct" version of the theory should have r-g(labor_income). This would probably give even more extreme because it seems like in many countries the growth rate of labor income is less than the growth rate of the economy, i.e. r-g(labor_income)>r-g(GDP).

If you're interested in the dynamics of the economy and distribution if different variables grow at different rates, see here see e.g. http://www.princeton.edu/~moll/UG-slides.pdf

It's only recently that we've seen we've seen wages as a share of total income slip from roughly 50% to roughly 40% of total income. But the delta can be almost entirely explained by large amounts of capital returns in owner occupied housing which is a far higher share of the US capital stock than it had been historically. And this form of capital doesn't require (much) labor to maintain its value.

Obviously, the worth via interest can't grow forever, because there is no infinite value going around.

Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? That is what people aim for when they invent technology to make life easier, after all.

I think you may have this backwards.

If I generate $1 of value/hr that's kind of the maximum you can justify my wages being. If you give me a machine that increases my productivity 10 fold and the machine costs $2/hr then my maximum wage tops out at $8.

Now in this situation less labour is required, but the labour isn't less valuable. Obviously now you need a new industry to come along to employ the other 9 people who aren't now needed, possibly now servicing me and my newfound wealth, or possibly building the machines that put them out of a job.

'value' is what someone is willing to pay. My employer would have been willing to pay me a maximum of $1 and $8 pre and post machine introduction, so you could say my value increased. But I'm not likely to see much of that in the short term, because all my mates are now unemployed, and would be willing to do the job for their old pay, so my leverage is very low, so worst case I keep the same pay, in which the value of the job to me hasn't changed.

Of course, as you say, it could work the other way, and working could become more valuable because one worker could generate more returns. But that requires there to be more demand for everything.

Like, say, people eat only potatoes, and all work 8 hours per day to harvest just enough potatoes for everyone. If a machine could do their work, and they couldn't think of anything else to do, there would still be the same amount of potatoes, but less work to do.

Could your pay go down in the example? Theoretically yes, in practice we see the opposite. Economic development couldn't happen if it did. Although I suppose short term dislocations could lead to lower pay in the short term, before increasing long term?

Don't forget 'progress' is people increasing productivity. In a world where everyone has to work full time digging potatoes, that's all anyone has. If it only takes 1 member of the group to dig potatoes, that frees the other members to discover science, religion, chips. We are in a situation now where a fraction of the population work in food production, but we all have jobs and more wealth than potato growing us could possibly imagine.

That added productivity doesn't disappear, in our earlier example the owner of the means of production has captured all the value that I didn't get from it. He has to do something with it. Even if he puts it in the bank, that's possible seed money for a venture that ends up employing my 9 ex workmates.

Also don't forget that the one potato digger won't want to dig potatoes all day whilst everyone else sits around. If there's no reason to dig more he'll dig enough for himself and take the rest of the day off. Now you could entice him to dig for you in exchange for beans, because you know he doesn't like picking beans, and as you don't like digging potatoes. And of course I could offer to trade apples...

The problem is that life is not easier because all that efficiency is captured by a tiny group of non-laborers.

The people whose labor was replaced are not benefiting from the end of their labor. They're now jobless and forced to compete harder for lower pay.

But sure, there are various ways of looking at it. As others have pointed out, with increased productivity, the value of labor could also increase.

But it is of course a relevant question how to measure.

I suppose you can also get a computer that is as expensive or more expensive than a computer 20 years ago. But it would also be a million times faster (or more, I am too lazy to look). You could also get a Raspberry Pie for 30$.

I used to think this.

I came to the conclusion that families and familial lines, like individual people, are living organisms.

Some of those living organisms (familial lines) are relatively young and inexperienced - and they will not gain that experience within one family members' lifetime. It will take multiple generations of growth and nurturing to "grow up" to produce individuals, like you, who can operate in a more complicated society and transact more abstracted work products for more abstracted rewards.

In the meantime, as in all of history, members of juvenile family lines need meaningful, satisfying labor that they can transact for reasonable currency to thrive as a living organism.

Asking why we need any labor to be done is like asking why all those infants can't just get with the program and eat solid foods already.

If less labor is required for tasks A, B and C, then that frees up people to do new tasks D, E and F.

It is untrue that there is a fixed amount of work to be done, so when some of it is automated, then that necessarily creates unemployment. That's the "lump of labor fallacy".

https://en.wikipedia.org/wiki/Lump_of_labour_fallacy

It's also fallacious thinking to assume that every person must be employed working for wages.

If someday the economy as a whole can produce everything people need by employing 10% of the people to build robots, then we can organize it such that the people who like to build robots can do that, and the people who like to paint, or sculpt, or hike or sail can do that.

There is no universal law of the universe that requires the 10% of robot builders to own everything on earth, and the other 90% should live in rags, filth and sickness.

I know this sounds hard to believe for some. But today, agriculture takes up about 2% of labor, and manufacturing about 10%. And we consume about 2x what we did per person compared to the late 1970's. So, cut back manufacturing to about 4% of the labor force and use another 3% of the labor force for distribution. Voila, 10% of the labor force is used to sustain a 1970's level standard of living. Everyone else can improve their themselves, create arts, study nature or contemplate the nature of existence (that's sarcasm there).

In your universe the universal law is that the robot builders have (collectively) nigh absolute leverage over the rest of society. Without the angel assumption they would slowly (or quickly) use that leverage to amass power.

People wouldn't live in rags or whatever but all secondary economies point to providing value to the robot builders.

But wages are always relative to prices. If everything is being made by robots that nobody has a monopoly on then everything should be very inexpensive. Having to work for the same nominal wages as you had in 2003 is not that much of a problem if nominal prices are now 5% of what they were then.

The problem comes when you have some kind of corruption or distortion or regulatory compliance costs keeping some prices high (see: housing, education, medicine) even as general wages are flat or decline, or just grow less than those costs.

The argument is when returns are greater than growth, societal inequality increases because the "haves" continue to hold on to their wealth, essentially creating a kind of permanent upper-class, that isn't based on merit the way it should be under capitalism, and that this (arguably) feels fundamentally unfair.

A better example would be 2 people who work and who both make $100,000 and who consume 100% of their labor income. But one of these individuals has a $1 million endowment and reinvests every penny earned from interest. You can see how that would accelerate the concentration of wealth.

Rentier with a real investment income of $100,000 may have just few million in wealth

my take away was that equities produce a lot of wealth, but squander it by not returning it to shareholders (lack of dividends). look how many tech companies refuse to pay dividends because 'we are a growth company, we are always a start up". i hate stock buy backs, I think it just rewards people exiting the stock.

in short, if you are a property owner, you can garentee cash flows. economy goes up, down, you more less have an income stream. stocks, they will always go out of business. a company that never returns money to share holders in the end is always worthless, but today, that is in vogue.

Removing housing reduces returns seems like a tautology: if you remove one of the best-returning asset classes, returns are lower.

* Residential real estate market size was $33 trillion in 2018, of which about 80 million units are privately owned and 60 million units are not.

* Commercial real estate market size (Office buildings etc.) was about $15 trillion.

But even regardless of that, it doesn't change the numbers. The majority of the increase in real estate prices goes to corporations rather than individuals. An explanation of why it happens doesn't change that it does.

Some cities and countries (e.g. Vienna, or the Netherlands) provide public housing through gouvernement and/or not for profit organisations (i.e. with 0% returns), to a large part of the population. These places also have some of the lowest inequalities, which seems to validate the parent's message.

Make it cheaper and easier to build new housing and you'll see a lot more new housing.

So zoning contributes substantially to wealth inequality.

They were saying that most of the imbalance if from housing, that a lot of people own, not just from owning stocks/bonds/etc...

The paper briefly mentions it but does not address or refute the point further.

The rate at which r is growing compared to g is accelerating. For anyone who works for a living, that should be unsettling.

I don't think it's so much a coincidence, but rather a direct effect of it. Less investment into businesses usually means fewer jobs.

We know that debt will grow the economy, but it certainly seems like households are debt-saturated at this point.

What makes you so sure the US is at the tail end of it?

Of course I would not want to see rapid inflation. Yet the numbers suggest that our strong inflation control has been a cause of labour's reduced portion of GDP. Running the QE hot by letting inflation outpace the central banks inflation goal might be a good idea for assisting labour's income mix. A dangerous idea, so I hope some other country tries it first.

But combine e.g. relaxing zoning rules with a reasonable level of inflation and then nominal housing prices don't have to decline to adjust, they can just stay where they are as nominal wages and other prices catch up to them.

If this were true, wouldn't it be prudent to take out loans and invest in the stock market (own) rather than invest in education (labor)?

Why would that be true? Say r was lower than g, what is my alternative to investing my capital?

There does seem to be some conflict between exhorting everyone individually to save more while complaining that the economy is suffering from shortfall in aggregate demand (i.e. people not spending enough money).

The way r can get suppressed long-term is through (1) wealth taxation, (2) depreciation of an important asset class (eg as birth rate falls further below replacement housing can start to depreciate), or (3) high inflation.

If it is (1) then there really isn't much to be done, although hopefully the redistribution will be administered sufficiently well to help everyone achieve a high quality of life. If it is (2) then you can avoid the depreciating assets. If it is (3) then you once again avoid depreciating assets (don't hold cash/bonds/cash-like assets).

Long term it always makes sense to invest as long as you can do better than the (generally negative) “return” of inflation.

Okay, so the rational behavior is for me to do the minimum amount of work possible for most of my life, since wages grow faster than savings. Then, the week before retirement, I just have to do 10 years of work all at once!

Doesn't really work.

If g is one percentage point bigger than r it makes my retirement savings somewhat smaller than I'd like, but it's still far better than not having any.

If I already have lots of money, and I don't want to go bankrupt, my only real options are r and leaving it in a box. And r definitely has better results than the box.

Preemptively buying products I don't want yet has an even worse return than the box, since they need to be stored and decay over time.

I thought Piketty himself conceded that wartime (and, I think, immediate post-war period) was a period where this didn't hold true ...

The r/g thing is kind of indirect.

1) Whenever you buy something with money - you're making a 'profit' (surplus). You value that thing more than the money - the delta is the profit. Your personal profit.

When companies compete and produce better goods for roughly the same price, we're winning immensely, the company may not make much more money.

This is supposed to measured in inflation, but it's not.

We basically don't measure individual profit, only corporate profit.

2) We also don't measure the value of things for which money is not changed: when my brother's mother in law comes over to babysit - there's not GDP gain. When he pays a babysitter, well that goes to the GDP, but same value created.

So when women came into the workplace en-masse over the last two generations, we saw a much bigger increase in GPD than in reality, because those numbers assumed they were doing 'nothing of economic importance' at home, which is obviously false. If raising children is 'labour' then how the hell were mothers (and stay at home dads, though more rare in the past) not part of the labour market?

This is the tip of the iceberg.

3) 120 years ago, governments were tiny. Now they are huge i.e. 30-50% of the economy. We don't even try to measure the value (let alone surpluses) generated by gov. we just count how much they spend! Think of how much of a massive distortion this is in terms of calculating overall wealth!

The government could cure cancer, put in a $10 pill and the GDP wouldn't budge. Actually, it would go down because we might have less health spending.

Almost all aspects of government have improved quite a lot, but because it's socialized, it might have no bearing on the GDP at all.

A regulation that required companies to stop polluting may add some indirect GDP via new equipment, but the vast surpluses go to us, the consumer/citizen in the form of clean air! How is that measured in our GDP? It isn't!

So all three of these issues are fairly existential to the nature of how we measure value, and each of them is enough to throw everything offside.

They are even more problematic because they point to the existential problem in economics and that is 'how do we measure value'? It's something we used to argue a lot about, but not so much any more (but not because it's settled).

There is a good podcast on the FT by Uni College London Prof Mariana Mazzucatto [1] where she talks about this.

I'm not that old, but I grew up without the internet, and I was close with my grandparents who grew up on a farm without electricity, plumbing, or cars, or radios. They were not particularly poor for their area, and were the first in the area to get plumbing and TV eventually.

The level of increase in surpluses is mind boggling and I don't think we account for it well.

Women can now do mostly as they please.

Most 'heart surgery' was a wickedly complicated and dangerous thing 30 years ago - now it's usually quick and fast, not a big deal. So many more have access to it.

Almost everyone in the west can afford to go on an airplane, but that used to be for the rich.

Almost anyone who scores spectacularly in school can get scholarships (I know it's more complicated than that) but it's true. At least technically, Uni is open to everyone. This is new.

I could go on forever. (As I often do, sorry)

[1] https://podcasts.apple.com/ca/podcast/mariana-mazzucato-on-w...

This explains why the average quality of life/wealth gap between (Socialist) East Europe and West Europe was smaller than the raw difference of GDPs.