Capital & Labor

I have been following some of Paul Krugman’s thoughts on the relative portion of income from capital and labor.

What I get so far is that one can produce income either from doing something: swinging a hammer (okay, firing a nail gun); driving a tractor; guiding mountain trips; making executive decisions, or any other activity that provides income as a function of one’s efforts, aka labors. Or, one can produce income by owning something and renting it out. One might own 100, or 100,000, nail guns and rent them to carpenters; or one might own a similar number of tractors and rent them to farmers. Or own and rent real estate of one kind or another.

The rise of technology, and the things we produce with it, has made income produced from capital possible. Before the discovery that we could make, own, and rent things, the portion of our income derived from labor was 100%. And, as the number and variety of things we make, own, and rent increases, so too does the portion of income from capital.

Clearly, one must have capital to access income from capital. And the unhitching of income from our universal 24-hour allotment means that income from capital can more readily be large than can that from labor. So there is a positive feedback loop with capital income: more capital, more income; more income, more capital. We can guess that the Reagan-introduced policy of low taxes for folks with more money, might also support this loop. There are, of course, limitations on this loop; most significantly in my mind is the risk that the bet on what to own and rent is wrong and the capital, and any income it might have produced, is lost.

I guess that this trend will have many implications, and surprises. One implication might be that folks with money come to have an increasing share of money in the population overall, especially if favored with lower taxes. Krugman reports that we are observing just this.

The 14% increase in wealth share of the top 0.1% since the Reagan era suggests that his tax-policy legacy has had a significant impact. It also implies that the 99.9% have lost the 14% of the nation’s wealth the 0.1% now have.

Another possible implication of reductions in the portion of economic activity available as labor income is that there are fewer jobs and/or lower wages to be had. That the benefits of a growing economy are increasingly unavailable to folks without capital. How far could this trend go? One could speculate that the recent return of American manufacturing is not necessarily associated with a proportionate return of jobs, but of robots, as illustrated by the experience of coal miners.

It looks to me like this trend will be a big, perhaps much bigger, thing than we are aware. And like maybe I should go see if I can round up a bunch of nail guns.

UPDATE: I neglected to note that income from capital also comes from selling the product of one’s capital assets, so owning a farm allows one to sell the wheat that it produces and owning a factory, or the intellectual property used in a factory, produces income from selling the factory’s output; and the things that one owns may increase in value if others perceive the rent, or sales of output, to be promising.