Why You Must Invest: Understanding R > G and the K-Shaped Economy
- Gradragstoriches
- Nov 25, 2025
- 5 min read
Updated: Jan 7
This blog explains why investing is essential for personal financial success in the modern economy. It references Thomas Piketty's famous formula, R > G, and the concept of the K-shaped economy.
This simple data shows why the wealthy continuously get richer while the cost of living hits regular people hard. Inequality keeps growing, and it’s crucial to understand why.
Why the Rich Get Richer: The Power of R > G
Thomas Piketty's equation is often called the most important formula in economics:
R > G
This means that the rate of return on capital (R) is consistently greater than the rate of economic growth (G).
This simple equation explains why the wealthy continuously get richer. The cost of living is hitting normal people hard, and inequality is growing.
Evidence shows that the wealthy are significantly increasing their wealth, while wages are stagnant. Whatever you hear about hard work creating prosperity, the evidence tells a different story.
Those who own wealth or assets, such as investments, see their wealth grow faster than wages. This is the current reality, a result of deliberate economic design, not an inevitable truth.
Let’s break it down:
R (Rate of Return on Capital): This is the profit you make from owning assets, such as rents, dividends, and equity gains from stock market investing.
G (Growth of National Income): This is the payment for your labour, typically in the form of wages from a job.
When R is greater than G, asset wealth grows faster than wages. This creates ever-increasing inequality. The wealthy simply need to own wealth; they don't need to work to get richer. Access to assets becomes the crucial dividing line in society.
The Post-War Anomaly: When G > R (1945–1975)
There was a brief, rare moment in history, from 1945 to 1975, when this formula was inverted. During this time, the rate of economic growth (G) grew faster than the rate of return to capital (R).
After the Second World War, we experienced something entirely different from everything that had been seen before or since. We had full employment, rising real wages, high levels of public ownership, and strong trade unions. These factors kept the returns to labour high, and we also had high taxes on wealth.
During this period, the rate of growth in the economy (G) outpaced the rate of return to capital (R). In other words, people received a greater share of the return from growth than did the owners of wealth. Society shared the gains of that period of extraordinary political change. However, we now know that this was a historical anomaly.
The Reversal of Fortune: How Policy Made R > G Permanent
From the 1980s onwards, leaders like Margaret Thatcher in the UK and Ronald Reagan in the USA, influenced by Milton Friedman and Friedrich Hayek, ensured that the march towards inequality resumed. Governments cut taxes for the wealthy, and finance was deregulated, inflating asset prices. Money flowed out of productive investment and into stock markets, benefiting the wealthy.
The societal gains from the extraordinary period between 1945 and 1975 were reversed. The rate of return to capital (R) rose above the rate of return to the economy (G), leading to a return of inequality.
Over the last decade, UK income has grown by just 6%, while the rate of return from the S&P 500 is roughly 250%.
The rate of return from saving rather than investing has been just 10%.
The cumulative rate of inflation in the UK over the last decade has been approximately 30%.
The Hidden Tax: Inflation and the Cost of Saving Cash
Inflation is often called a hidden tax because it reduces your purchasing power just as surely as government taxes do. For example, if you saved £1 in 1995 and left it under the bed, it could only buy goods worth £0.47 thirty years later. In contrast, that same £1 invested in the stock market is now worth just short of £20!
You must learn the game of investing. If you sit in cash, you get screwed by The System.
How to Address National Inequality
To rebalance inequality in society, we need to strengthen workers' bargaining power. Wages must rise to match productivity growth. We need to reinforce trade union powers and redistribute personal and business wealth more effectively through taxation.
The rate of return from work (G) has to be greater than the rate of return to capital (R).
This change will lead to a more equal, fairer society where everyone can prosper. The wealthy will still be wealthy, but they won’t grow disproportionately compared to the rest of us. This balance is fundamental for the future well-being of our society.
This is Why You Must Invest! We can wait for this change to happen, and we’ll all be better off, or we can be proactive and improve our situation by investing in wealth-making assets.
The K-Shaped Economy: Choose the Upward Arm
Imagine the UK economy as two separate economies. This is what Simon Dixon calls the K-shaped economy. There is the upward path to wealth and financial independence or the downward path to economic insecurity and financial serfdom.
Everyone who has read Grad Rags to Riches will know that to achieve Financial Independence, we must Save, Protect, and Invest.
In what currently passes for “free-market” capitalism, the side of capital is the upward arm of the K. On this side, we have banks, the stock market, and private equity, all supervised by billionaires. As new technologies progress, the divergence accelerates. In the ancient battle between labour and capital, capital has always won, and now it’s not even close.
The side of labour, which includes ordinary wage earners and cash savers, is the downward arm of the K. We live in a financial and monetary system that tilts the odds in favour of asset owners.
Once you own those assets in the form of equity, the maths of Compound Interest is so powerful that those who understand it earn it, while those who don’t pay it. You must get on the upward arm of the K!
Final Verdict: You Must Invest for Financial Security
The key takeaway is that the last decade has seen wages and savings fail to keep pace with the rising cost of living. However, those who invested comfortably beat inflation and saw significant real-term gains!
You must get on the upward arm of the K! Everyone who has read Grad Rags to Riches knows that to achieve Financial Independence, we must Save, Protect, and Invest.
Don't sit in cash and let The System take advantage of you.
Ready to get started? Our "Start Here" page provides the simple three-step guide you need to move from the 'side of labour' to the 'side of capital' today!
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