Capital vs Labor

A lot is being said these days about inequality. It is an issue that probably won’t be going away anytime soon as the trends continue to push the top 1% of earners even further away from the 99% as the middle class is getting hollowed out.

In the ground breaking book Capital in the Twenty-First Century Thomas Piketty goes into great detail about the real data about inequality over the past 100+ across 10+ countries.  It’s the most thorough data ever compiled on inequality.  The economic theory put forth after examining the evidence is that when the return on capital investments is greater than the growth rate of the overall economy inequality increases.  This seems to make sense intuitively as the families with capital to invest are the ones that see the most gains (on average)

What does this result have to teach us about running a business right now?  Well, we live in a time where capital is returning better than labor.  In concrete terms that means that in the aggregate (ignoring local anomalies) the cost of employees is going to grow slower than the value you get from their work.  If there’s something you can take home it’s that it is a great time to be investing and growing your business.  Hire employees, create products, launch services!  Take your profits and re-invest it – acquire assets, purchase stocks/bonds, and don’t let it sit idle.

On the other hand you will be on the loosing side of the equation if you are the employee eeking out minor raises every year.  If that is your situation then now is the time to get your shit together.  Aggressively get yourself into a position where you have capital to invest (pay off debt, grow your savings). Create assets such as publish a book, write software or invent something (something that doesn’t require ongoing labor). It has never been easier to sell things into a global marketplace.

Interestingly, during the time when the rate of return on capital was less than the economies growth rate, it was a great time to be an employee.  This happened during the golden years between 1945 and 1970 when the classic advice of get any job at the bottom of a corporation and work your way up by being a go-getter actually worked!