Noah Smith — R vs. g

In his new book, Thomas Piketty argues that R, the rate of return on capital (which is different than the safe interest rate "r") is greater than g, the rate of economic growth, and that this fact can be expected to continue into the indefinite future, resulting in an ever-rising capital share of income and an ever-falling labor share. The big question is whether R really will be greater than g into the foreseeable future.

It occurs to me that this is just the "robots vs. globalization" argument all over again....

These explanations aren't mutually exclusive, of course. But in terms of policy, if the "rise of the robots" is the biggest factor, we need to think about all kinds of difficult policy decisions and welfare arguments. But if globalization is the main reason for R>g over the last 4 decades, then all we can do - and all we should do - is wait for the big wave to end.

Why either-or and not both-and? Seems to me that both factors are operative. The result of technological innovation has been greater distributed leisure and we can expect that to continue as long as workers maintain bargaining power.

However, it is going to be along time before the global labor glut has been overcome considering the situation in most of the world. During this time — the foreseeable future — workers in emerging countries can look forward to improving job opportunities and rising wages, while workers in already developed countries can look forward to few job opportunities, job opportunities of generally lower quality, and lower pay.

In addition the rate of growth in the developed world is lagging and promises to lag for the foreseeable future, while the rate of growth in the developing world is forging ahead. However, global ownership is dominated by investors from developed countries and so the rate of capital accumulation in the developed countries can be projected to greatly exceed the growth rate.

Noahpinion
R vs. g

Noah Smith | Assistant Professor of Finance, Stony Brook University