Net capital

Deciphering the fall and rise in the net share of capital

Income from capital does not increase without limit at the expense of labor, and further accumulation of capital in fact most likely means a fall in the share of capital in total income – refuting one of the main theories in the popular book of l ‘economist Thomas Piketty Capital in the 21st Century.

Existing studies that show an increase in the share of capital in income ignore the growing role of short-term capital depreciation in things like software, says Matthew Rognlie of MIT in “Deciphering the Fall and Rise in the Net Capital Share ”. Rognlie subtracts depreciation in seven major developed economies (United States, Japan, Germany, France, United Kingdom, Italy and Canada) to obtain net income from capital, and finds that the only long-term increase in the share of capital in income is in housing. Capital income elsewhere in the economy has grown moderately, but is only recovering from a significant drop that lasted from 1948 to the 1970s.

Piketty Capital city argues that the role of capital in the economy, after falling during the Depression and the two world wars, is on the verge of returning to the high levels of the 19e and early 20e centuries. According to Piketty, wealth will accumulate against a backdrop of slowing economic growth to increase the capital-to-GDP ratio in the economy, which in turn will lead to an increase in the share of capital in income – and an increase in inequality.

In contrast, Rognlie finds that an increase in the capital-to-GDP ratio is more likely to lead to a decline in the capital’s share of income, since the net rate of return on capital will fall by an even greater proportion than the capital ratio. / GDP. ratio increases. Apart from housing, post-war changes in the value of the capital stock did not lead to parallel changes in the share of capital in income. In fact, the value of the capital stock relative to private income peaked in the late 1970s and early 1980s, when capital’s share of income was near a low.

Rognlie shows that the share of net income generated by housing has increased in the seven major developed economies since the data became available. “The central role of housing in the long-term behavior of the aggregate share of net equity has … not been emphasized elsewhere … Observers concerned with the distribution of income should keep an eye on the costs of housing,” he writes. .

“Housing plays a central role in the modern history of income distribution. Since housing is the subject of relatively large ownership, it does not conform to the traditional story of labor versus capital, nor can its growth be easily explained with most commonly used stories. proposed for income sharing elsewhere in the economy – the bargaining power of labor, the growing role of technology, etc.

“Beyond housing, the results of this article suggest that the concern about inequalities should be shifted from the division between capital and labor, and towards other aspects of the distribution, such as the distribution of income within work. Although the net equity share has seen dramatic shifts both up and down at times, outside of housing, its long-term movement has been quite small, and there is no good reason to think that this pattern will change in the future, ”concludes Rognlie.