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Macroeconomics
Course: Macroeconomics > Unit 8
Lesson 2: National income and inequality- Capital by Thomas Piketty
- Difference between wealth and income
- What is capital?
- Piketty's two drivers of divergence
- Is rising inequality necessarily bad?
- Convergence on macro scale
- Education as a force of convergence
- Gilded Age versus Silicon Valley
- Inverse relationship between capital price and returns
- Connecting income to capital growth and potential inequality
- r greater than g but less inequality
- Return on capital and economic growth
- Critically looking at data on ROC and economic growth over millenia
- Simple model to understand r and g relationship
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Gilded Age versus Silicon Valley
Explore labor vs. capital in the economy. In the Gilded Age, capital had more leverage, but in today's Silicon Valley, highly skilled labor is more important. The video questions if capital will continue to dominate or if highly skilled labor will gain more income. Created by Sal Khan.
Want to join the conversation?
- I think there is something that has been overlooked in this hailing of software as a tool for convergence and economic mobility, and that is, intellectual property.
intellectual property, copyright, and trade secrets are all forms of capital which promote inequality by removing a laborers ability to gain knowledge and specialization in a field (thus increasing their economic leverage) and instead putting that education into the hands of the firm in the form of in house training.
So i guess my question is this: is intellectual property a form of capital and if so how does that effect the value of labor(21 votes)- In past times, stonemasons would hold the secrets of their trade, as would skilled labourers and craftsmen. Whether it was making shoes, painting, or working a forge and anvil, the 'trade secrets' and techniques learned by these craftsmen were closely guarded secrets, because of course, no one wants to give up their competitive edge.
Today we have big firms and IP laws, patents, copyrights, etc. But I think what we're not considering, is that the original craftsmen, who held their secrets to secure their wages as high as possible, WERE SUPPLIERS NOT LABOUR. Whilst yes, they were surely working alone or in small groups, you mustn't forget that they owned their own enterprise, pocketed all the proceeds and tried to profit maximize.
I'd suggest IP laws do not affect the value of labour, the relationship between labour, suppliers, and trade secrets has remained a constant one, where the supplier owns the right or beneficial information. In any case, the third wave of industry revolution is commencing with automation, so I would suspect IP laws will quickly fade out, and the mass unemployment will become he bigger issue.(4 votes)
- So, a large propotion of the profits generated by Apple Products goes to highly skilled labor compared relatively to that goes to capital in the Information Age, right ? How, in detail, does this affect inequality between the small group of talented, creative workers and the rest who are "left out" ?(8 votes)
- The way I understood it, the take-home message is that in capital-intensive industries, the owners of the capital have all the power, and can thus channel more money to themselves. In labour-intensive industries, the labourers have all the power and can channel more money to themselves (e.g. by threatening to leave to another company).
The way this affects income inequality would then be that skilled labour can come from any person, rich or poor. Capital comes only from the wealthy people. Therefore, labour-intensive industries drive down the income inequality.(17 votes)
- Apple had a $5B market cap in 2001. It is now valued at over $700B. How is that return on capital compared to the income paid to the workers at Apple? I believe the investors made more...even in this great example of high paying skilled labor (including options and RSUs), the owner of the capital benefited more. I read Pikkety's book and this is how I understood his example. What do I have wrong? Thanks.(7 votes)
- At, how is highly skilled labor going to take more of the income pie when they are dependent on the firms that employ them, and firms are dependent on investments in their stocks and loans etc, that come from the wealthy(capital owners), who in turn make a return on investment off of the highly skilled laborers production? 6:12(6 votes)
- this lecture made me think that in near future the value of civil engineers or others (except computer engineering) will become less important than before?(3 votes)
- That may be the case, but then again it may not be. Economics can't predict the future, but right now, it would seem as if there would be more demand for other fields such as biotech or software engineering.(3 votes)
- There's something I seem to be missing here. I do understand that highly skilled labor is more valued now and thus receives a greater share of money than capital. But what I don't understand is how that could potentially make the problem of people earning a lot of money from investing their capital, causing growing inequality in income, dissapear. Wouldn't the people who receive high wages for their higly skilled labor make a growing amount of money of investing that money? Just like Piketty says is happening now? Or is the point that the returns on investing that money will be less, due to capital being less valued than highly skilled labor nowadays?(3 votes)
- Isn't there an assumption that corporations are open to more participation from "the rest" into highly-skilled labor? But that is quite not the case. They can only create so many jobs. They have cycles of layoffs. I tend to agree more with Piketty's argument that it would do little to converge inequality. Sal Khan's argument seems to have many assumptions. Are corporations paying the taxes? Is the economy trickling down to "the rest"?(2 votes)
- I disagree totally that Silicon Valley is Labor driven - it's capital driven. No matter the amount of highly skilled there are, the focus is on those highly skilled to only produce a product that will elevate the business.(1 vote)
- Sal's point is that Silicon Valley isn't having any trouble getting capital. It is having trouble getting the labor. So, the limiting factor is labor, and so as a result, wages are going up, not dividends.(3 votes)
- Ok. It is well illustrated how high skilled labour can command the bulk of market value, as in the example of Apple's design and marketing.
But how much of that market value goes to the labour vs. to shareholders? Is the rate of annual growth in their income greater than the rate of growth on financial capital?
And why would financial capital not be considered, even in the Apple example, especially if shareholder returns may be growing more rapidly than average skilled labour salaries? Or average salaries nationally, for that matter?(1 vote) - Is this video and the last video, Sal seems to puts forward the idea that the inequality gap can be closed by education or highly skilled labor. However, doesn't this overlook supply and demand? Supposing that the percentage of the population with lots of education grows, income for skilled laborers would decrease due to a larger pool of skill.(1 vote)
Video transcript
- [Instructor] Let's give ourselves a little bit more food for thought on this labor versus capital question. So like we've mentioned many times, in order to produce anything, you need a little bit of both or you maybe need a lot of both. You need labor, and, and you need capital. The question is as you
produce that output, as you produce that output, or I guess you could say as you produce this
aggregate, this product, how do you decide how
much of it goes to labor and how much of it goes to capital? Well, one way to think about it is which resource has more leverage? If you go back to the Gilded Age, Gilded Age, really the peak of Industrial Revolution, the people who had most of the leverage were the owners of capital, the growth industries,
as we've said before. These were railroads, these were manufacturing plants, these were people
exploring and finding oil. And so capital had all the leverage. That the labor, most of
the labor that was involved was fairly unskilled and was
viewed by the owners of capital as something of a commodity. And so more and more of
the outcome or the income could go to the capital. Now, Piketty at least hints that, hey, maybe we're going to a second Gilded Age because returns on capital are going to be larger than growth, and more and more wealth is
going to be going to that. But to do a thought
experiment, once again, this'll give you food for thought, and you come up with your own conclusions. Let's think about the
world that we now live in. And I'll give Silicon Valley as an example because one could argue
that Silicon Valley is maybe most indicative
of what 21st century, what the 21st century
economy is going to look like and what 21st century industry
is going to look like. So, let's compare the Gilded Age, to Silicon Valley, home of folks like Google
and Facebook and Apple. Well, Silicon Valley is
it about about capital or is it about labor? Well, the industries in Silicon Valley, they're about creating technology, they're about creating software. Software, in particular,
requires very little capital. You don't need large, a billion
dollar manufacturing plants. You don't need a ton of land. You literally can write
software in your bedroom. You could do it in your closet. That's how I started. And so Silicon Valley is
really much more about labor. That's not labor, you know, when you think of labor in the Gilded Age Industrial Revolution, you're thinking about someone
just working on a factory line or doing a repetitive
job over and over again. While in Silicon Valley, it's much more about highly skilled labor. So let me write that in that blue color. Highly, highly skilled, highly skilled labor. And it's definitely the
case in Silicon Valley that highly skilled labor
is viewed as a much, a much stronger differentiator
for an organization or an individual than capital. In fact, the dynamics that
you're seeing more and more in Silicon Valley is lots
and lots and lots of capital, which is oftentimes
perceived as a commodity pursuing a team of five people who've just put something together
in the last few months, and they're valuing it at 10 million dollars
or 50 million dollars. We see organizations like
Facebook and WhatsApp getting multibillion
dollar valuations based on, really the output of highly skilled labor. Capital, there's some capital necessary. You need office space, you need servers. But it's not like the Gilded Age. Most of the value is in the part that's not
considered a commodity. Office space is a commodity. Servers are a commodity. Highly skilled labor is not a commodity. So, the question to ask yourself is: Well, is this the case? And is the case, will capital, will R be able to stay larger than G? And will more and more capital,
more income go to capital? Or maybe does it go more and
more to highly skilled labor? Now, the other question you need to, or the other question that
may be going in your mind, is well hey look, Silicon Valley
isn't just about software, it's also about hardware. One of the most highly
successful companies in Silicon Valley is Apple Computers, and they do write software, but they're known for
their hardware products. Their iPhone, the iPad, their computers. What about that industry? Isn't that capital intensive? Well, let's just think about how your iPhone or your
iPad gets developed. It gets designed by Apple
in Cupertino, California, and that's what they write on their boxes, designed in California. And then they send the designs over to a bunch of firms. This is just some of
Apple's suppliers here. And these are incredibly
capital intensive industries. But from Apple's point of view,
they view them more or less, not all of them, some of them
have differentiated products, they make a special type of
material or whatever else. But many of them are viewed
as commodity manufacturers. That, hey, you don't
give me the right price, you're not giving me the right
few pennies per component, I'm going to go to the other person who can produce that same entity. And then these folks put it all together, manufacture the pieces,
send it back to Apple, who'll package it, and then market it. And so, what is the high value aspect of this supply chain right over here? Well, it's clearly the
design and the marketing. And if you don't believe that, you should look at what portion of the output of the income
generated by an iPhone, what portion of it goes to Apple versus what portion of it goes to the suppliers right over here. So, one way to think about it
is these are kind of closer to the large scale capital
intensive manufacturing plants of the Gilded Age. Although, even here, R and
D plays a major component, it did in the Gilded Age as well. And once again, R and
D though, is a labor, is a highly skilled labor. It is less about, there's
capital definitely involved, but when you look at
the real value created, it's really on the highly
skilled labor part, on the designing and the marketing side, the creative aspects of it. Now, just this, if you believe it, and you should come to
your own judgements. This by itself doesn't say that we can't worry about inequality because even this might say, look, more and more income, maybe it's not gonna go to capital, it's gonna go to more and
more highly skilled labor. And that's a small
subset, one could argue, of the entire labor pool. You have this highly skilled labor here. And so you might have inequality, not happening like it
happened in the Gilded Age, where it's going to owners of capital, but now it's going to, the
owners, I guess you could say, of highly, highly skilled labor. And so, that could drive inequality. But this is where the
force of convergence, that Piketty talks about, could play in. And he seems a little bit skeptical of its ability to overweight the forces of capital accumulation. But if we can have more people participate in this more highly skilled labor, then potentially this could
be a force of convergence. It could balance things off, and keep us from going into
some type of neo-Gilded Age.