Capital has an exorbitant privilege. With capital we are able to undertake productive investments and reap a potentially infinite amount of rewards. However, capital is not the only factor of production: for those investments to succeed, we also need labor. Unfortunately the rewards received by labor are infinitesimal and declining. In the majority of the industrialized world, the share of national income received by labor has been dropping over the past decades as a result of a myriad of factors like globalization, deregulation of labor markets, and the neutering of the power and influence of unions. The root of this privilege goes back to the origins of capital and its historic process of accumulation.
Where does capital come from? One source is from capital itself. Any increase in the value of an asset provides the owner with additional income which can then be reinvested into other capital assets. Similarly, some assets like stocks and bonds provide a regular stream of income in the form of interest payments or dividends. Additionally, physical capital like robots or other types of automated equipment can also produce additional capital without human input. However, the main source of capital is labor. Your work, as an employee of any firm, contributes to the profits of the firm through which the firm is then able to accumulate further capital. No amount of capital will make a firm thrive in the absence of labor which is why the two are not perfect substitutes. But capital’s exorbitant privilege comes from the fact that, unlike labor, it can generate infinite returns. Let’s see how this process takes place in practice. Continue reading