\u03b1<\/strong> is the share of the nation\u2019s income that comes from capital (a.k.a. property), as opposed to from labor.<\/p>\n r<\/em><\/strong> is\u00a0<\/strong>the average rate of return on capital.<\/p>\n \u03b2<\/strong> is the Capital \/ Income ratio.<\/p>\n <\/p>\n \u201cFor example, in the wealthy countries around 2010, income from capital (profits, interests, dividends, rents, etc.) generally hovered around 30% of national income (\u03b1).\u00a0 With a capital\/income ratio (\u03b2) on the order of 600 percent, this meant that the [average] rate of return on capital (r<\/em>) was around 5 percent.\u201d\u00a0 (Page 53)<\/p>\n As Thomas Piketty states, this is \u201ca pure accounting identity,\u201d meaning by definition it is true.\u00a0 You can plug in any two variables, and solve for the third.\u00a0 However, he points out that historically speaking, for at least the last few hundred years r usually has been hovering around 4% to 5%. \u00a0\u201c<\/p>\n In the novels of Jane Austen and Honore de Balzac, the fact that land (like government bonds) yields roughly 5 percent of the amount of capital invested (or, equivalently, that the value of capital corresponds to roughly twenty years of annual rent) is so taken for granted that it often goes unmentioned.\u00a0 Contemporary readers were well aware that it took capital on the order of 1 million francs to produce an annual rent of 50,000 francs. For nineteenth-century novelists and their readers, the relation between capital and annual rent was self-evident, and the two measuring scales used interchangeably, as if rent and capital were synonymous, or perfectly equivalent in two different languages.(Page 53)<\/em><\/p>\n <\/p>\n For example, the erstwhile heartthrob Mr. Darcy from Jane Austin\u2019s Pride and Prejudice, had an annual income of \u201cover 10,000 pounds,\u201d which meant his wealth was over 500,000 pounds.<\/p>\n <\/p>\n <\/p>\n <\/p>\n Also, this identity can be used to analyze a business (to calculate the rate of return it gets on capital) as well as a country.<\/p>\n It\u2019s worth noting that throughout the book, Thomas Piketty is already accounting for inflation.\u00a0 During the 19th<\/sup> Century there was essentially no inflation (in England and the United States at least), so 5% meant 5%.\u00a0 Today inflation is a few percent, so the average rate of return is 4%-to-5% above the inflation rate, on average.\u00a0 Of course, with averages, some assets do worse, others do better.<\/p>\n While the exact rate of return bounces around from year to year, if you assume that r usually hovers around 5%, the value of \u03b1 = r<\/em> \u00d7 \u03b2 becomes clear, as it simplifies to \u03b1 = .05<\/em> \u03b2.\u00a0 Thus, the higher the capital\/income ratio, the larger the fraction of all income that will go to capital, as opposed to going to labor.<\/p>\n <\/p>\n A cartoon from over a century ago which portrays capital and labor as intractable enemies. \u00a0While a thriving economy needs both, there is an element of perpetual conflict as individuals attempt to maximize their income.<\/p>\n","protected":false},"excerpt":{"rendered":" Thomas Piketty describes the importance of the capital \/ income ratio, \u03b2.\u00a0 \u201cThe capital\/income ratio for a country as a whole tells is nothing about the inequalities within a country, but \u03b2 does measure the overall importance of capital in a society, so analyzing this ratio is a necessary first step in the study of … Continue reading ![\"pride](\"https:\/\/blockschwenkcollective.com\/cool_by_osmosis\/wp-content\/uploads\/2015\/09\/pride-and-prejudice-mr-darcy-and-elizabeth.jpg\")
<\/a><\/p>\n<\/a><\/p>\n