The difference between 'capital share rises' and 'labor share goes to zero' is huge, and I appreciate that you focused on the transition path.
The idea of obsolescence as depreciation seems under-discussed in AI scenarios, since rapid progress raises the hurdle rate.
I also liked your reminder about incidence: if capital is as mobile and flexible as the 'robots build robots' story suggests, capital taxes might be reflected in lower wages or output well before reaching any endpoint.
If the labor share of income goes to zero, who will consume the output of machines? Without broad income distribution—whether through wages or capital ownership—wouldn’t returns on capital eventually collapse?
That assumes capital owners can absorb all output. If the top 1% owns most capital (which is more realistic), their consumption simply can’t scale with production—so where does demand come from, and why wouldn’t returns collapse?
This is a strong and careful piece, and I agree with your central warning about knife-edge endpoints. The jump from “labor share falls” to “labor share goes to zero” does require much stronger assumptions than are often acknowledged, and your emphasis on transition paths rather than endpoints is exactly right.
That said, I think your argument leans heavily on treating capital as primarily reproducible physical capital subject to rapid obsolescence. In an AI-driven economy, a growing share of capital income may come less from MPK in the traditional sense and more from rents — model IP, data advantages, compute chokepoints, ecosystem lock-in, and market power. These returns are not obviously disciplined by depreciation in the same way as hardware.
If capital income increasingly reflects rents rather than reproducible capital returns, the “high depreciation as a stabilizer” mechanism may be much weaker than your framework suggests. In that world, the r > δ + ρ condition can remain satisfied not because capital is endlessly productive, but because it is scarce, protected, or strategically bottlenecked.
So I’m largely with you on the dangers of importing endpoint logic directly into current policy debates. But I’m less convinced that depreciation alone does the disciplining work once capital income shifts from machines to control. I’d be curious how you’d extend this framework to explicitly distinguish reproducible capital from rent-generating AI capital — because that distinction seems central to both the inequality dynamics and the policy implications.
Have you happened to read or at least heard about a few economics papers or reviews of Piketty's big book that claim to show that most of the increase in the returna gap is due to the increases in housing prices? If so, what do you think of the quality of the evidence?
I think I heard about it from Bryan Caplan, but who knows, maybe it was from you. Anyway, I asked ChatGPT 5 about it a few days ago, and this was the beginning of its response:
"Rognlie (2014) A note on Piketty and diminishing returns to capital
Rognlie explicitly frames his note as a critique of Piketty’s predictions about capital’s share and the gap r − g, and then argues that the measured rise in wealth/capital relative to income is dominated by housing."
My first issue with this is the abstract treatment of "labour".
The interim scenario where "labour" still has value is that a tiny minority of people have some value and the vast majority have none. This would be a dystopia even if it were possible to extract massive income taxes from the remaining 1% (which seems impossible unless you deny that money is power).
We are not labour. We are people: People who have or do not have jobs.
My first issue with this is the abstract treatment of "labour".
The interim scenario where "labour" still has value is that a tiny minority of people have some value and the vast majority have none. This would be a dystopia even if it were possible to extract massive income taxes from the remaining 1% (which seems impossible unless you deny that money is power).
We are not labour. We are people: People who have or do not have jobs.
Exceptional breakdown of the knife-edge conditions needed for zero labor share. The obscolescence point is critical and often missed - if AI progress is fast enough to flatten demand curves, it's also raising depreciation rates through obsolescence at the same time. I've thought alot about capital substitution in past automation waves, but the simultaneous supply/demand curve effects here make it way more nuanced than just saying substitution gets easier.
The difference between 'capital share rises' and 'labor share goes to zero' is huge, and I appreciate that you focused on the transition path.
The idea of obsolescence as depreciation seems under-discussed in AI scenarios, since rapid progress raises the hurdle rate.
I also liked your reminder about incidence: if capital is as mobile and flexible as the 'robots build robots' story suggests, capital taxes might be reflected in lower wages or output well before reaching any endpoint.
Thanks for putting this together.
If the labor share of income goes to zero, who will consume the output of machines? Without broad income distribution—whether through wages or capital ownership—wouldn’t returns on capital eventually collapse?
The capital owners consumer in this model.
That assumes capital owners can absorb all output. If the top 1% owns most capital (which is more realistic), their consumption simply can’t scale with production—so where does demand come from, and why wouldn’t returns collapse?
This is a strong and careful piece, and I agree with your central warning about knife-edge endpoints. The jump from “labor share falls” to “labor share goes to zero” does require much stronger assumptions than are often acknowledged, and your emphasis on transition paths rather than endpoints is exactly right.
That said, I think your argument leans heavily on treating capital as primarily reproducible physical capital subject to rapid obsolescence. In an AI-driven economy, a growing share of capital income may come less from MPK in the traditional sense and more from rents — model IP, data advantages, compute chokepoints, ecosystem lock-in, and market power. These returns are not obviously disciplined by depreciation in the same way as hardware.
If capital income increasingly reflects rents rather than reproducible capital returns, the “high depreciation as a stabilizer” mechanism may be much weaker than your framework suggests. In that world, the r > δ + ρ condition can remain satisfied not because capital is endlessly productive, but because it is scarce, protected, or strategically bottlenecked.
So I’m largely with you on the dangers of importing endpoint logic directly into current policy debates. But I’m less convinced that depreciation alone does the disciplining work once capital income shifts from machines to control. I’d be curious how you’d extend this framework to explicitly distinguish reproducible capital from rent-generating AI capital — because that distinction seems central to both the inequality dynamics and the policy implications.
Have you happened to read or at least heard about a few economics papers or reviews of Piketty's big book that claim to show that most of the increase in the returna gap is due to the increases in housing prices? If so, what do you think of the quality of the evidence?
I think I heard about it from Bryan Caplan, but who knows, maybe it was from you. Anyway, I asked ChatGPT 5 about it a few days ago, and this was the beginning of its response:
"Rognlie (2014) A note on Piketty and diminishing returns to capital
Rognlie explicitly frames his note as a critique of Piketty’s predictions about capital’s share and the gap r − g, and then argues that the measured rise in wealth/capital relative to income is dominated by housing."
"I’m going to hold the number of workers fixed."
Really? Demographic decline is a thing, now, even without AI. How are we supposed to take anything seriously with that prior?
My first issue with this is the abstract treatment of "labour".
The interim scenario where "labour" still has value is that a tiny minority of people have some value and the vast majority have none. This would be a dystopia even if it were possible to extract massive income taxes from the remaining 1% (which seems impossible unless you deny that money is power).
We are not labour. We are people: People who have or do not have jobs.
My first issue with this is the abstract treatment of "labour".
The interim scenario where "labour" still has value is that a tiny minority of people have some value and the vast majority have none. This would be a dystopia even if it were possible to extract massive income taxes from the remaining 1% (which seems impossible unless you deny that money is power).
We are not labour. We are people: People who have or do not have jobs.
No NO NO. Do not tax capital or income from capital. Tax consumption.
No. a prgressve consumption tax would work as well to transfer consumption and interfere less with investment and growth.
Exceptional breakdown of the knife-edge conditions needed for zero labor share. The obscolescence point is critical and often missed - if AI progress is fast enough to flatten demand curves, it's also raising depreciation rates through obsolescence at the same time. I've thought alot about capital substitution in past automation waves, but the simultaneous supply/demand curve effects here make it way more nuanced than just saying substitution gets easier.