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Return on capital and economic growth

Explore the relationship between return on capital (R) and economic growth (G). If R is greater than G, it may lead to rising income inequality. Use the example of a simple gold mine economy to show different scenarios. Created by Sal Khan.

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• At , what determines which party has more leverage over the other? "Leverage" seems key to the distribution of income, but Sal never explains what "leverage" means.
• Sal just trying to show different scenarios without complicating things. examples for leverage might be that the workers started a union and are able to negotiate a better salary or someone opened a new gold mine and now the owners need to increase salaries to attract the same amount of workers
• Thanks!
What does income inequality mean? In the example of this video, what happens if the gold mine is owned by just 1 people, and there are 10 people who provide the labor? If I add these assumption, doesn't it show that there exist income inequality because 1 people who owns the gold mine collects 50 g.p. and 10 people who provide the labor own 50 g.p?
Hope you can get my point and I don't confuse you.
• Yes, if there is only `1` owner, but `10` workers, then owner income is `50` per capita, and worker income is `5` per capita. However the whole premise behind the "r > g" scenario is that even if worker income started out higher, that if `r` is high enough it would eventually surpass worker income.
• So Sal is telling us the owners of capitals when they get 102 pieces there's a chance to give the 52 g.p. to the labor and not themselves?To be honest I find it naive how utopian this is because usually people are greedy and selfish by nature so they will want the 52 g.p. for themselves.From the other side usually the laborers can pressure the "owners" to share their gains by means that hurt the economy like strike etc..
• This seems a little bit too smooth - after all, the owners are "having" the gold mine after the first year, so the diminuishing of the income is just in a proportion to the worth of it if they had to put it up again. The laborers, however, are giving another year of work. Or am I getting this wrong?
• The "diminishing" return appears when the owners reinvest in capital, increasing the total value, and so the income seems a smaller percent of the total value of capital. This does not mean that they are earning less income from capital.

Yes, the laborers have to break their backs again another year.

I don't know if this answers your question but let me know!
• How did people in the first place determine who "owns" what? Did someone's ancestor said he owned a land and eventually everyone honored that?

We "agree" to all this when in reality we can just go caveman and kill the owner.

I am not saying we should do that, but I find it interesting that if people really feel they are not getting their fair share, they could really take a bigger share but they don't.
(1 vote)
• Philosophers have discussed this idea for centuries. It's the theory of the social contract.

You might enjoy reading some thinkers like Hobbes, Locke, Rousseau, and Marx.
• Please excuse me if you folks have addressed this question some where else, but I am wondering, what happens when g is greater than r (if that is even possible)?
• Yes, it is possible. g can be greater than r. In that situation, the share of profit shared among labor will increase. Per capita income of the national will increase, and labor will be a little better off.
(1 vote)
• even with the possiblity no.2 where the return on capital= 4.76% , it stills much greater than the grtowh .. it's also increasing in inequality but with a smaller rate?

isn't that right?!
• No, it's actually decreasing inequality. This is because an even larger return is going to the labor, who don't actually own the capital to start, than to the capital owners.
• Interesting discussion. Its unfortunate though that at no point do you mention that those who put up capital also stand too lose that capital and therefore r needs to be some factor that includes growth and compensation for risk. Inequality is capital markets arises from the greed of consumption, lack of self control in saving and lazyness to research and invest in lucrative ventures.