Factor shares

By the time this post is up, I should have finished Capital in the 21st Century.  However, I write my posts well in advance – so this isn’t really about it.

For the next three weeks (starting Monday) I am going to have different posts up about historic “schools” of looking at factor shares, all based on the book Theories of Income Distribution.  I wrote the eight essays on the same day as I read the book (Thursday 20 March), so they are more like book notes than anything else.  As these posts come out I want you all to be highly critical of my posts – and where you can throw literature at me.  I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂

After that, I will have a review of Capital up, and then hopefully a document describing how to look at different income inequality/distribution indices.  That is what I will be doing while these posts are going up.

Anyway I thought I should quickly say what factor shares “are”. <!–more> A factor is a factor of production – so you can think about this in terms of capital, labour, and land at its base level.  Factors of production go into the production process to form output.  Furthermore, of that output/income factors of production will be paid – this is (to stick to the same type of distinction) through interest/profit, wages, and rent.  Factor shares is the share of income that accrues to this factor of production.

So note here that when we are talking about factor shares, we are talking about a nominal value (quantity of that factor times its price) and then we are comparing it to a nominal income (quantity of output from factor times the price of output).  This is a useful way to conceptualise things early on, when we treat a number of prices as “fixed” – but hopefully the posts will make clear that factor shares get harder to say much about (or interpret) as we start moving prices and having to talk about elasticities.

From those who are used to GDP/Value added, remember that we can have GDP in expenditure terms, production terms, or income terms.  Factors shares are essentially income GDP shares.

My impression is that Capital relies strongly on this characteristation, which is why my notes on the book are going up.

One note I will make about factor shares is that factors of production do not define themselves neatly into “individuals” or “households”.  We, and our asset holdings, are all part labour, land, and capital.  The purpose of the characterisation is to shed light on a specific way of viewing the economic process and its evolution – and factors shares are used constantly in macroeconomics and international economics (as well as income distribution) as a result.  Many of the stylized facts and/or assumptions about shares Piketty is likely to attack or agree with (from Ricardo to Marx to Kuznets to Okun) are the same facts used or disputed in macroeconomic and international economic analysis.  You don’t see the open economy dudes calling things “factor models” for nothing, and you don’t see macroeconomists describing GDP as C+I+G+X-M (capturing the accumulation of capital out of current income) for kicks 😉