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portfolios are chosen for returns no higher and riskier than the year before. They will tend in fact to be lower, judging from logic and evidence for a decline in risk tolerance with age. Then what besides work is recovered in pay? The two possibilities I was weighing were maintenance consumption and human depreciation. The winner was obvious. The higher-paid usually consume more, but not always and not in proportion. The fact that we must generally be paid enough to cover consumption does not imply that we are paid to consume. We are motivated to do that anyhow. We are paid to apply skills, and are paid in proportion to skills applied. Human capital is skill sets. Pay measures its transfer to products, whether in realized work currently created or from capital in place through human depreciation. That’s how! came to the pay rule. We see why it ought to startle economists. Macroeconomic tradition teaches the doctrine that wage measures work, and teaches it so confidently that it uses the notation W for either. Human capital tradition recognizes that some work is self-invested, but effectively treats human depreciation as deadweight loss. That’s why I use “pay” in place of the more usual “wage”. Refuting a Piketty Argument There are practical uses for the pay rule aside from solution of the age-wage problem. These are the impact on tax laws and public policy that I promised. Piketty has shown correctly that the ratio of pay to net profit rose substantially during the world wars, world depression and welfare state period following, and has declined since. Piketty argues for higher capital taxes in consequence. His argument follows tradition in comparing pay and net profit as the shares of workers and investors in income. But tradition is wrong. Pay is the worker’s gross realized income, meaning gross of human depreciation. Depreciation, for either factor, is a steadier flow. This makes gross output for either less responsive to upturns and downturns. It is a particularly high share of realized income or output in hard times when dislocation Chapter 2: Fast Forward 1/06/16 19 HOUSE_OVERSIGHT_010959