Tuesday, June 24, 2014

Beware R > G

I have not read Thomas Picketty's Capital in the Twenty-First Century, but really I probably should.  Its basic hypothesis is simple::  Historic trend is for return on assets to grow faster than the overall economy, leading to ever increased concentration of wealth.  We broke from trend for a while, but are returning to it.  Or, to put it more simply, the rate of return on assets is greater than overall economic growth.  R > G, in economic speak.  That could explain a lot.

As I understand it, Picketty focuses mostly on modern times, but modern times have been unusual. His data apparently goes all the way back to 0 A.D. and shows that historically, the return on assets has generally been around 4.5%, going up slightly to about 5% around the time of the Industrial Revolution. World economic growth has never been this high.*  Indeed, world economic growth was minimal from 0 to 1000 and under 1% until the Industrial Revolution got going.  R abnormally dropped to around 1% around 1913-1950; G reached the extraordinary height approaching 4% (still below the historical return on assets, bear in mind) between 1950 and the present, while R has been moving toward its historical level, but remains (narrowly) below G.  Picketty presupposes that R will return to its historic level, while G falls, though not all the way to its historic level.

This graph (and, presumably, Picketty's book) does not go back to pre-0 A.D., but his hypothesis could explain a lot.  Because so far as I can tell, the failure of democratically elective government in Classical Antiquity can roughly be summed up as R > G.  There was (I assume) real economic growth in classical Greece and Rome (remember, the G in the graph is world  economic growth).  The wealth became increasingly concentrated, while growing portions of the population became impoverished.  In Rome, at least, a lot of what was happening was the growth of vast slave plantations that really could grow more food with less labor -- but the result of supporting a larger population with less work was massive unemployment.  England suffered the same problem pre-Industrial Revolution and ultimately solved it with industrialization.  In Classical times, no such resolution was found.  Wealth simply accumulated in fewer and fewer hands and more and more people were poor and unemployed, with no relief in sight.  The details, of course, differed from time to time and place to place, and I look forward to learning about them.  But underlying it all was the iron law of R > G.

And Picketty's hypothesis, if true, has scary implications for the future.  I do not expect R > G to be as much of an issue in the modern failure of democracy as in Classical times (although do not forget that democracy is most likely to fail when a country's G falls) because the massive increase in G from industrial development came to the rescue.  But if Picketty is right, and if others are right in their fears that automation will make people obsolete, we could end up right back where so many other societies -- from Classical Greece and Rome to England before the Industrial Revolution -- great at producing stuff, but unable to make room for large portions of the population.

R > G may prove to be a major difference in failing democracy in Classical versus modern times.

*Economic growth has reached and exceeded this level in individual countries, but only up to a point, and never world-wide.

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