Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: reevaluating the labor share of income, COVID-19 vaccine approval in the U.K., Chinese investments in U.S. tech, and Walter Williams, R.I.P.BEA Accounting Rules & the Labor Share of IncomeOn Monday, the New York Times editorial board put out its latest condemnation of American capitalism, claiming that federal tax policy and growing corporate power have decreased workers’ incomes. “Wages are influenced by a tug of war between employers and workers, and employers have been winning,” they argue. Though GDP and productivity continue to grow, the spoils accrue to business owners, evidenced by “the yawning divergence between productivity growth and wage growth since roughly 1970.”The editorial takes for granted that the labor share of income -- the amount of national output that goes to worker compensation -- has decreased while the earnings of shareholders and landowners have grown. It’s not a new argument: The celebrated French economist Thomas Piketty rose to fame arguing that the returns to capital always outpace the returns to labor.This claim, though, is likely the result of faulty accounting. In a recent paper, economists Dongya Koh, Raül Santaeulàlia‐Llopis, and Yu Zheng argue that changes in national accounting practices obfuscate the relative earnings of employers and employees.In the 20th century, private-sector spending on intellectual property counted as an expense rather than an investment. Funding for the development or purchase of software was recorded as an operational cost, similar to spending on rent, wages, and insurance.In any given year, this practice would understate both the profits and asset values of businesses making investments in information technology. And it would show up in national data: The money spent by Microsoft to develop its Windows operating system, for example, counted as a reduction in private-sector output rather than an increase in aggregate investment (and therefore GDP).In 1999, the Bureau of Economic Analysis (BEA) revised its definition of investment to include spending on software, a revision expanded in 2013 to include all research and development spending, as well as spending on the creation of entertainment property (e.g. films and books). By that time, intellectual property comprised 26 percent of aggregate investment in the U.S., more than triple the portion in 1947. Now, R&D counts as an investment and any value generated by IP counts as capital income.These revisions added $140 billion to private-sector profits in 2018; in other words, a new accounting rule caused a sudden increase in income inequality. Academic work that doesn’t account for the BEA rule change (anything before 2013, including most of Piketty’s work) shows a steady decline in the labor share of income beginning in the 1970s. But the only real change has been an increase in IP investment, and the inclusion of IP almost certainly overstates the returns to capital because: 1. A portion of returns on IP go to labor. 1. The BEA counts all income from IP as a “dividend” paid to capital owners, but a sizeable portion of that income goes to workers in the form of stock-based compensation, commonly used in the tech industry. 2. Companies do not own all their IP. 1. A great deal of Google’s value comes from “organizational capital,” its unique blend of human and physical capital. Because workers can go to another company, Google does not own this intangible asset.Some economists estimate that well over half the returns to IP go to workers, which would mean that the labor share has actually increased over time.That doesn’t necessarily mean that income inequality isn’t a problem. One could argue that increased income for high-skilled workers is a problem irrespective of whether it goes to capital owners. But it is hard to see how higher taxes or minimum wages solve this problem.Around the WebVaccine for thee but not for me: U.K. Authorizes Pfizer, BioNTech’s Covid-19 Vaccine for Emergency Use.China’s state investment funds expand their footprint in U.S. tech:> Pixelworks, Black Sesame Technologies and LightIC Technologies, three companies in the sensitive US semiconductor sector, have attracted investment in recent months from some of China’s so-called government-guided funds.> > The strategic investment funds, which number more than 1,600, are estimated to control more than Rmb4tn ($610bn) in capital, according to Chinese consultancy Zero2IPO.Tyler Cowen and Zach Carter shared an interesting exchange on Keynes:> COWEN: [Keynes is] sympathetic to his own ideas and wants to promote them. But to me, there’s a discord. Milton Friedman spends, what, 45 minutes talking to Pinochet, has a very long record of insisting economic and political freedom come together - maybe even too simplistically - writes against the system of apartheid in South Africa and Rhodesia, calls for free markets there. And people give Friedman hell over that.> > Keynes writes the preface for the Nazis and favors eugenics his whole life, and that’s hardly ever mentioned.> > CARTER: I don’t know that the way that Keynes talks about eugenics is as salient as you suggest. The best article that I came across on Keynes and eugenics is by this guy - I think David Singerman. It’s in the Journal of British Studies. It’s a pretty in-depth look at the way Keynes came to eugenics and what he did and did not support. It’s very clear that Keynes didn’t support eugenics in the way that Americans sterilizing poor Black workers in the South were interested in eugenics…> > COWEN: But he is chair of the British Eugenics Society for eight years late in his career.Walter Williams, R.I.P.From the Economic Policy Journal:> The great free market economist Walter E. Williams has died. He was 84.> > Williams was the John M. Olin Distinguished Professor of Economics at George Mason University.> > He was the author of over 150 publications which have appeared in scholarly journals such as Economic Inquiry, American Economic Review, Georgia Law Review, Journal of Labor Economics, Social Science Quarterly, and Cornell Journal of Law and Public Policy and popular publications such as Newsweek, Ideas on Liberty, National Review, Reader's Digest, Cato Journal, and Policy Review. He authored ten books:America: A Minority Viewpoint, The State Against Blacks, which was later made into the PBS documentary "Good Intentions," All It Takes Is Guts, South Africa's War Against Capitalism, which was later revised for South African publication, Do the Right Thing: The People's Economist Speaks, More Liberty Means Less Government,Liberty vs. the Tyranny of Socialism, Up From The Projects: An Autobiography, Race and Economics: How Much Can Be Blamed On Discrimination? and American Contempt for Liberty.-- D.T.To sign up for the Capital Note, follow this link.