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Also confirming that r>>g, returns are considerably larger than economic growth, validating Piketty. I.e. it is increasingly getting more beneficial to own than to work. And from this data it seems that the difference is even accelerating.

Page 53: >Despite some variation, the positive gap between r and g is a persistent feature of the data: r is bigger than g in every country and every time period that we consider. The last few decades prior to the Global Financial Crisis saw a general widening of this gap

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I never understood comparing r and g. r represents the fixed investment income for the rentier. g represents the growth in income for the laborer. Comparing these two numbers, is like comparing velocity vs acceleration.

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

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

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

Despite the parent, it's never been an argument that owning is better than working, or anything at all to do with individual people at the micro scale.

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

Capitalism had never been about merit. The word “Capitalism” is even a word coined by socialists in the 19th century which means « some people (the capitalists) are owning the means of production and keep all the wealth »

Your assumption of a 100% savings rate is not quite reality though. More realistically, suppose both people save 50%. Then in 20 years, the rentier is about 2x richer than the worker. https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50... vs https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50...

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

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

Isn't that the same fallacy as the "Joseph's Penny" - claiming because if interest, after a while a penny would be worth the weight of the whole earth in gold?

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

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

It does seem that less labor is required. Automation has permanently removed large percentage of human workers from various industries (like mining).

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

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

I don't think that is strictly true. Overall life IS easier for most people, because things are also cheaper to come by. And there still seem to be jobs.

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

What's cheaper nowadays?

Food, clothing, health care, TVs, computers, pretty much everything. Maybe housing is an exception, but it may also depend on where you live. At least building is probably also cheaper (more efficient methods).

Is health care really cheaper? It's obviously much better, more effective and leads to much better outcomes. However most of these medicines and procedures that gave us these better outcomes are very expensive.

I would expect the medical procedures you could get 50 years ago would be very cheap today.

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$.

"Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? "

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.

With the machine, less workers would be required, so all other things remaining equal, the wages should fall because of supply and demand (assuming the machine doesn't need rare skills to operate).

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.

I was trying to highlight that theres your value to your employer, which is kind of divorced from your pay. And the value of the job to you, which is your pay.

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...

> implying that less labor is REQUIRED

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.

> There is no universal law of the universe that requires the 10% of robot builders to own everything on earth

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.

That's assuming the robot builders have some kind of a monopoly. If anybody can build robots but it only takes 10% of people to do it before we have all the robots we need to do everything then the wages for robot builders will be as low as the wages for anything else, otherwise more people would become robot builders and drive down their wages.

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.

We will have to pass regulations to keep those evil tech companies under control, and those regulations will conveniently create huge barriers to entry in the robot construction business.

The economy already produces "everything people need" using 10% of the labor force in nations with industrialized economies. It's just that the standard of living would be at about 1970's levels.

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).

Doesn't your robot example say exactly what I meant?

"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 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.

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

This. A corollary of the argument is that if r > g, worker income on average grows slower than g.

Worker incomes kept pace with investment income through the 19th century where r was consistently higher than g and also in the early 20th where it didn't. If your investments are in machines that need people to work them then better machines mean that people's labor is more valuable.

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

Below is the logic why r-g matters for wealth inequality and is a reasonable thing to look at. In particular this happens in so-called "random growth theories" of wealth inequality or "theories with multiplicative shocks." At the same time you're right there is nothing special that happens when r overtakes g and it's kind of irrelevant whether r>g or r<g.

This is based on a bunch of lecture notes and papers: http://www.princeton.edu/~moll/piketty_notes.pdf, http://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.

> the economy is growing at rate g and therefore people's other income sources are growing at rate g

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

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

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

Yes you're 100% spot on. That other income sources and in particular labor income grow at g is just an assumption in Piketty's theory.

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

During each generation of rich people about 20% go bankrupt. Maybe they are alcoholics or they are fools who fall for scams. Your example would come close — a person who is not especially wealthy and who doesn’t work and who consumes 100% of their income. That would put them at a heightened risk of dropping out of the category of the wealthy.

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

When wealth increases, less and less of the investment income is consumed. It's not fixed income anymore, it's added to the capital creating compound interest.

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

There have been some studies that show that if you remove housing, then the r>>g effect goes away (at least over recent decades; I don't think these studies went back to 1870). We could fix a lot of the rent-seeking problem with saner housing/land use policy.

I would be curious as to the basis for removing one of the largest components of the economy. There's a lot of money tied up in housing!

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

Won’t this make housing more affordable and allow people to live a decent life? At least in the Bay Area, even rickety shacks now cost >$1M to buy.

Isn't the person you're replying to talking about saner use of land, not removing housing entirely..?

The basis is that when people say "r >> g" they think "business owners and the stock market" rather than "the house my parents own", and they think about reforms to the business sector rather than reforms to the housing sector.

It seems they would be more right than wrong, though, as business owners indeed also own the majority of US real estate, with about $30 trillion business-owned vs. $19 trillion privately owned:

* 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.

Isn't that an unfair comparison? Businesses usually make property more valuable, because businesses provide jobs and people want to live somewhere near where they work. Businesses also congregate in the most expensive areas, because they're the only ones that can afford those prices, but people usually don't buy real estate in the most expensive areas purely as a real estate investment. How many city centres have property that sits empty? So I'm not sure that this is a good comparison.

For one thing you're talking about two different businesses. It's very common for companies to rent the space they're in. Then the commercial tenant is providing the value you're referring to but the landlord is the one who receives the increase in property values.

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.

But it matters in a comparison like this, because commercial real estate gets used to run businesses. Businesses, especially in high value real estate areas, tend to increase real estate prices even further by providing well-paying jobs and useful services. The comparison is like looking at a fireplace and then saying that it's warmer in the fireplace areas. We're talking about justifying action against businesses here. It matters where the value comes from.

I'm not sure what your point is. Business ownership of real estate is irrelevant. The fundamental problem is the structure of the real estate market, not the competitive environment for business.

You can remove returns generated by the housing economy and while still providing housing.

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.

I'm on your side regarding your implication that the reduced inequality might be helped by public housing. Correlation, however, does not provide validation for a causal implication. Validation should require stronger evidence than correlation.

Also it's strange to not include the Norway, Sweden, Finland in this. Do they have similar programs?

... and also France, where ~17% (4,5 millions) of main residences are "HLM" (habitations à loyers modérés).

Henry George had that figured out over 100 years ago. I highly recommend Progress and Poverty to anyone seriously interested in political economy.

You don't even need public housing for this. The higher rents are the more profitable it is to construct new housing. The issue is currently that we literally prohibit it with zoning rules, then make construction less profitable (and therefore less common) by using property tax as opposed to LVT, then (to a much lesser but still relevant level) make construction more expensive through various regulations and trade licensing rules that increase construction costs.

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

I don't think they was saying we physically remove all housing.

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 argument is that there is an artificial, government imposed basis to the scarcity of housing in high value areas due to zoning.

So zoning contributes substantially to wealth inequality.

Is that related to an increase in population driving up density and "selectivity" of highly desirable areas? What happens when population growth flattens and starts going down (for example, what is the case for Japan now?)

Can you link to one of these studies? I can't find them.

https://www.brookings.edu/bpea-articles/deciphering-the-fall...

cough cough land value taxes cough cough

It is not surprising that property rights are the source of true wealth, and that property owners as cultural descendants of the feudal lords of the past have the history of the development of law and economy on their side

from paper: "However, the rental yield component is typically considerably higher and more stable than the dividend yield of equities so that total returns are of comparable magnitude"

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.

Putting profits into stock buy backs instead of dividends still returns money to share holders (through the retiring of shares bought back.) It’s generally preferred since it allows shareholders to postpone (perhaps indefinitely) paying tax on the money returned. Good for shareholders but bad for society.

Unless the stock price declines after the buyback....

If you sell enough stock to own the same dollar amount of the company whenever a buyback happens, it should be basically equivalent to a dividend.

> Rognlie, Matthew. 2015. Deciphering the Fall and Rise in the Net Capital Share. Brookings Papers on Economic Activity 46(1): 1–69

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

And I'm sure you could remove the wages of the top 0.1% and r>>g would be true again.

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

We’re also (probably) at the tail end of an enormous credit cycle, with rock bottom interest rates, and that means hugely inflated asset prices (and a correspondingly grown wealth gap). After credit cycles end, though, you get deleveraging. Debts get defaulted on, and asset prices fall, both of which hurt the rich far more than those who have no assets and those who are in debt. Of course, deleveraging also coincides with unemployment and a bunch of other issues that harm the less well off.

>Of course, deleveraging also coincides with unemployment and a bunch of other issues that harm the less well off.

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

Yep, that's exactly what I meant, coincide just means to occur at the same time. (https://www.merriam-webster.com/dictionary/coincide)

I guess I was caught by the word usage. It seemed to me that you were saying that they correlate rather than have a causal relationship. My bad.

People have been saying Japan has been at the tail end of it for 20+ years.

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

I'm not sure, it just seems likely to me. I'm enjoying reading Ray Dalio's Big Debt Crises right now, which covers these cycles.

That didn't seem to happen after the 2008 financial crash - the rich were bailed out by Quantative Easing while the poor lost their homes and had to suffer the taxes and austerity to bail out the rich.

Yep, QE seems to have largely limited the deleveraging in 2008 before it went all the way, and the USG took over a lot of the bad debts and socialized the costs. But the govt would have more limited options this time, since rates are so low already. Also, governments around the world have been doing QE since then, so this would be a world-wide thing. I don't know how it's going to play out, I just have some ideas.

I don't see interest rates going up anytime soon. The fed tried that and a handful of quarters later is reversing course.

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

I agree, it doesn't seem politically possible with the current government to continue raising rates.

Inflation control I think is the notable cause of this acceleration. In the past inflation could get out of hand and thus eat accumulated wealth. Note how the paper talks about the stagflation of the 1970s and the war periods being times of reversal.

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

This is complicated. Debt/bonds do lose value with inflation, but things like commodities/real estate/most stock securities do not (except for via co-occuring recession, which also hits workers through layoffs).

On the other hand, the prices of those things are quite inflated already and it's quite a painful adjustment for their nominal values to decline. If nominal housing costs go down then people end up with underwater mortgages, there is a cascade of defaults, etc.

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

> it is increasingly getting more beneficial to own than to work. And from this data it seems that the difference is even accelerating.

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

As someone who has borrowed money in order to invest in the stock market, I do feel that it was a prudent decision. Although, I'm not sure I'd pick it if forced to choose between it and college.

It's not a single decision, you have to decide what to do with each dollar/euro/etc. Education might provide a high rate of return for the first dollars, yet rapidly diminishing returns for the rest.

I'm far from being an expert in this field, but from what I know, r must be greater than g for investments to make sense in the first place. It also seems that the widening gap can be explained by rising housing prices since the 1950s: https://voxeu.org/article/housing-capital-and-piketty-s-anal...

Is that really true? r < g could still make sense if you're constrained on g and less so on r, as long as r earns some return.

> r must be greater than g for investments to make sense in the first place

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

Technically, consumption (spending your whole paycheck) is an alternative to investing but that mostly comes up in macroeconomic discussions.

Um, so I would a car every few months?

You might be surprised how much money some people are capable of spending.

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

You just "spend" it on "non-productive" assets like art, gold coins, jewelry....these sorts of things.

Is housing, like Gold Coins also a non-productive asset?

No - its production is either the rent your tenant pays you, or the money you save by not paying rent, if you live in it yourself.

You can buy real assets (traditionally gold). Think of a world with large inflation -- if you are rich and hold bonds or money in the bank you wealth doesn't grow or potentially diminishes, but if you are a worker you still get money and presumably your wage growth increases quite fast (in line with the large inflation).

Real assets are great if r goes negative. What if r is still positive in real terms, but g is more positive?

First, it's hard to imagine such a world. Under normal circumstances as productivity/automation increases worker labor will always be an increasingly smaller part of the value added, which means capex grows relative to opex which drives r.

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).

That makes no sense. If you're not invested you don’t get g, you get a slight negative return from inflation.

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

Let's set up a situation where r is greater than g, and also I'm getting a fair share of g so I can actually experience this tradeoff properly.

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

Doesn't really work.

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

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

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

"r is bigger than g in every country and every time period that we consider"

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

the real problem with this comparison is that it's not done on risk adjusted basis. people who take risk, should be compensated for it, or g will be negative ! it's the typical marxist logic that just assumes g as a fixed number out of thin air. In fact g is only possible because some people make the effort to get r. r causes g.

You would expect this to be true if returns to scale are concave after some point. Intuitively this makes sense, for anything, after a certain point more of it becomes bad. If production returns to capital are sub-linear at very large (macroeconomic) scales then it would be surprising to see g >= r for any long period of time.

r > g should be an obvious corollary of an economy based on growth that is stimulated by inflationary policy. Is it a necessary consequence of capitalism in all policy universes? More study would be required, but there are very little data on economies without government driven inflationary policy, going back to the Ronan days when the mint gradually devalued the denarius.

Yes, but the problem is that we're not measuring consumer surpluses very well, which is a fundamental component of how we obtain value as individuals.

The r/g thing is kind of indirect.

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

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

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

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

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

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

This is the tip of the iceberg.

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

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

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

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

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

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

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

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

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

Women can now do mostly as they please.

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

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

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

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

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

Bobby Kennedy had a pretty good, short speech on the GDP: https://www.theguardian.com/news/datablog/2012/may/24/robert...

Great comment. Thank you.

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.

Even if the GDP Soviet Union were measured in other terms, it would still be very bad, the economic output was still utterly abysmal. It went way beyond just 'inefficient'.

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