R > G: This is Why You Must Invest to Build Wealth
- Gradragstoriches
- 5 days ago
- 5 min read
This blog explains why investing is essential for personal financial success in the modern economy, referencing Thomas Piketty's famous formula, R > G, and the concept of the K-shaped economy.
This simple data explains why the wealthy continuously get richer, while the cost of living hits regular people hard and inequality keeps growing.
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
which 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, while the cost of living hits regular people hard and inequality keeps growing.
The evidence we see all around shows that the wealthy are significantly increasing their wealth, whilst the cost of living is hitting normal people hard. Whatever you are told about the fact that hard work supposedly creates prosperity, the evidence is otherwise.
Those who now own wealth, or assets such as investments, are seeing their wealth grow faster than wages are rising. That's the way the world is now, and this is the result of deliberate economic design, not an inevitable truth.
The simple formula created by Thomas Piketty in 2013 explains this:
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. The consequence is that wealth compounds over time, but wages do not, creating 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, and the rate of economic growth G grew faster than the rate of return to capital R.
In the aftermath of the Second World War, we had something which was entirely different from everything that had been seen before or since. We had full employment. We had rising real wages. We had high levels of public ownership. We had strong trade unions to keep the returns to labour high, and we had high taxes on wealth.
During this period, something that has not been seen before or since happened: the rate of growth in the economy G grew faster than the rate of return to capital R.
In other words, people got 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, but we now know that this was a historical anomaly.
The Reversal of Fortune: How Policy Made R > G Permanent
From the 1980s onwards, Margaret Thatcher in the UK and Ronald Reagan in the USA, basing their ideas on the work of Milton Friedman and Friedrich Hayek, ensured that the march towards inequality resumed, and it did. Governments cut taxes for the wealthy, and finance was deregulated to ensure that asset prices were inflated. Money flowed out of productive investment and into stock markets, and the wealthy gained.
The consequence was that the societal gains in the extraordinary period from 1945 to 1975 were reversed. Once again, the rate of return to capital R rose above the rate of return to the economy G, and because G reflects the return to labour, inequality returned.
Over the last decade, UK income has grown by just 6%, whereas 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%.
And 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 has been called a hidden tax because it reduces your purchasing power just as surely as government taking part of what you’ve earned in taxes. As the graph shows, if you saved $1 in 1995 and left it under the bed, it could only buy goods 30 years later to the value of $0.47. That same $1 invested in the stock market is now worth just short of $20!
You must learn the game of investing because if you sit in cash, you get screwed by The System.
How to address National Inequality
To rebalance this inequality in society, we need to strengthen workers' bargaining power so wages rise to match the growth in productivity. We need trade union powers reinforced and not weakened yet again, and we need to 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.
Then we will have a more equal, fairer society where everybody can prosper, including the wealthy, because let's be clear, they'll still be wealthy, but they just won't be growing disproportionately to the rest of us, and that's fundamental to the future well-being of our society.
This is Why You Must Invest! We can wait for this to happen, and we’ll all be better off….. or we can be proactive and make ourselves better off by taking a stake in wealth-making assets like investing.
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 the side of capital, we have the banks, the stock market, private equity, all supervised by the Billionaires, and as new technologies progress, the divergence accelerates. In the ancient battle between labour and capital, not only has capital always won…now it’s not even close.
The side of labour, ordinary wage earners and cash savers, is the downward arm of the K. We live in a financial and monetary system which tilts the odds in favour of asset owners, or wealth.
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, and those who don’t, pay it. You have to get on the upward arm of the K!
Final Verdict: You Must Invest for Financial Security
The key takeaway, for many people in the UK, is that the last decade was characterised by wages and savings failing to keep pace with the increase in the cost of living. But those who invested comfortably beat inflation and saw big real-term gains!
You have to get on the upward arm of the K! Everyone who has read Grad Rags to Riches will know that to achieve Financial Independence, we must Save, Protect, and Invest.
Don't sit in cash and get screwed by The System.
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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