[Epistemic status: I am not an economist. Many people who are economists have reviewed this book already. I review it only because if I had to slog through reading this thing I at least want to get a blog post out of it. If anything in my review contradicts that of real economists, trust them instead of me.]
Thomas Piketty’s Capital In The Twenty-First Century isn’t just a book on inequality. It’s a book about quantitative macroeconomic history. This is much more interesting than it sounds.
Piketty spent decades combing through primary sources trying to get good statistics for what the economies of various Western countries have been doing over the past 250 years. Armed with these data, he tries to put together a theory of the very-long-term forces at work in economic change. His results touch on almost every big question in politics and economics, and are able to propose sweeping theories where other people resort to parochial speculation. While more knowledgeable people than I are probably already familiar with much of this, I used him as an Econ History 101 textbook and was not at all disappointed in the results.
The most important thing I learned from Piketty is that since the Industrial Revolution, normal economic growth has always been (and maybe always will be) between 1% and 1.5% per year. This came as news to me, since I often hear about countries and eras with much higher growth rates. But Piketty says all such situations are abnormal in one of a few ways.
First, they can have high population growth. Population growth will increase GDP, and it will look like a high economic growth rate. But it doesn’t increase GDP per capita and it shouldn’t be considered the same as normal economic growth, which is always between 1% and 1.5% per year.
Second, they can have temporary bubbles. This definitely happens, but after the inevitable bust, the whole period will eventually average out to 1% to 1.5% per year.
Third, they can have “catch-up growth”. This is a broad category covering any period when a country that was previously underperforming its fundamentals gets a chance to catch up. This can happen after a long war in which a devastated country gets a chance to rebuild. Or it can happen after dropping communism or some other inefficient economic system, as the country transitions to a more practical form of production. Or it can happen when a Third World country globalizes and gets the benefits of First World technology and organization. But if a country is at peace and on the “technological frontier” (ie one of the highest-tech countries that has to invent its own advances and can’t get them by osmosis from somewhere else), it will always have growth of 1% to 1.5% per year.
For most of the 20th century, one or another of those conditions has been true in most places. Whether it was the Baby Boom in the US causing high population growth, or the dot-com boom, or Germany and Japan’s decades of miraculous economic recovery after World War II, or China’s catch-up growth after Deng Xiaoping’s liberalization, people have gotten growth of more than 1% to 1.5% per year and learned to expect it. In the Third World, which continues to experience good catch-up growth, their expectations will probably be met. In developed countries, they are bound to be disappointed.
Piketty uses this point to construct a super-ambitious zoomed-out version of 20th century history. Everything was going normally until the two World Wars, which devastated Europe and Japan, but set the US back only slightly. The US and Britain had the Baby Boom and minor catch-up growth, meaning a pretty great 1950s. Continental Europe had the whole process of rebuilding their economy from the (sometimes literal) ashes, a period the French called the Trente Glorieuses (Thirty Glorious Years) of near-constant economic boom. Around the 1970s, the US and Britain realized that Continental Europe and Japan were doing much better than they were, what with their near-constant economic boom, freaked out, and decided their economies were somehow rotten; this led to Thatcher and Reagan getting elected on a platform of cleaning up the economy. Around the same time, Europe recovered fully from its devastation and went back to normal economic growth; Japan, which had been a bit more devastated, took another few years but then had its own bust and went back to normal (or subnormal) growth. The US and Britain, seeing that they were now “caught up” to their Continental and Japanese competitors, declared “mission accomplished” and gave Thatcher and Reagan the credit. Since then it’s mostly been smooth sailing, with the normal 1%-1.5% + population growth (which works out to a little bit more in the US and a little bit less in Japan, given these countries’ high and low fertility rates respectively).
I don’t fully understand this theory. It proposes a very long time for Europe to get over World War II, which doesn’t really match graphs that show the GDP rebounding basically immediately even in the hardest-hit countries (maybe it would be more revealing if I had a log graph like the US one above, so I could do more than try to eyeball the trend). It also suggests that Americans judge the state of their economy by comparing it to Europe (or at least did in the 1970s), which doesn’t really match how most people I know think. In particular, in 1990 they would have had to have said “Our economy is now equal or better to the Europeans, we’re happy now” when this was entirely a function of Europe cooling down and didn’t involve any improvement in the US economy at all. Still, this is a persuasive model and one of the only ones I know that makes sense of the straight line graph above.
All this is just exposition. Piketty’s main focus is inequality between labor and capital, and he starts with the idea of the rentier.
A rentier – an old word I’m surprised we don’t have a better-known modern equivalent for – is something like the strict sense of “capitalist”: a person who lives off the interest on savings instead of working. Trust-fund kids who live off dividends from investments, landlords who live off literal rents from their properties, and aristocrats who lived off the profits from their estates are all rentiers.
It’s fitting that Piketty uses an old word, because rentiers were more common and more important in the old world than they are today. Although he presents tables of statistics proving this is the case, Piketty also urges us to consider Jane Austen novels for a more intuitive sense of the situation. Few of her characters work honest jobs besides occasionally some sort of vague “managing investments”. They’re all obsessed with their dowries and their families’ endowments. That’s because they live off the interest of their principal, which usually stays the same throughout their life and which often comes from a dowry. Some of these people are titled aristocrats, others are “gentry”, others might not have qualified for either role – but they all live off interest.
Piketty (himself a Frenchman) also cites this passage on 19th-century French novelist Honore de Balzac’s Pere Goriot:
The darkest moment in the novel, when the social and moral dilemmas [Eugène de] Rastignac faces are rawest and clearest, comes at the midpoint, when the shady character Vautrin offers him a lesson about his future prospects. Vautrin, who resides in the same shabby boardinghouse as Rastignac and Goriot, is a glib talker and seducer who is concealing a dark past as a convict, much like Edmond Dantès in Le Comte de Monte-Cristo or Jean Valjean in Les Misérables. In contrast to those two characters, who are on the whole worthy fellows, Vautrin is deeply wicked and cynical. He attempts to lure Rastignac into committing a murder in order to lay hands on a large legacy. Before that, Vautrin offers Rastignac an extremely lurid, detailed lesson about the different fates that might befall a young man in the French society of the day.
In substance, Vautrin explains to Rastignac that it is illusory to think that social success can be achieved through study, talent, and effort. He paints a detailed portrait of the various possible careers that await his young friend if he pursues studies in law or medicine, fields in which professional competence counts more than inherited wealth. In particular, Vautrin explains very clearly to Rastignac what yearly income he can aspire to in each of these professions. The verdict is clear: even if he ranks at the top of his class and quickly achieves a brilliant career in law, which will require many compromises, he will still have to get by on a mediocre income and give up all hope of becoming truly wealthy:
“By the age of thirty, you will be a judge making 1,200 francs a year, if you haven’t yet tossed away your robes. When you reach forty, you will marry a miller’s daughter with an income of around 6,000 livres. Thank you very much. If you’re lucky enough to find a patron, you will become a royal prosecutor at thirty, with compensation of a thousand écus [5,000 francs], and you will marry the mayor’s daughter. If you’re willing to do a little political dirty work, you will be a prosecutor-general by the time you’re forty.… It is my privilege to point out to you, however, that there are only twenty prosecutors-general in France, while 20,000 of you aspire to the position, and among them are a few clowns who would sell their families to move up a rung. If this profession disgusts you, consider another. Would Baron de Rastignac like to be a lawyer? Very well then! You will need to suffer ten years of misery, spend a thousand francs a month, acquire a library and an office, frequent society, kiss the hem of a clerk to get cases, and lick the courthouse floor with your tongue. If the profession led anywhere, I wouldn’t advise you against it. But can you name five lawyers in Paris who earn more than 50,000 francs a year at the age of fifty?”
By contrast, the strategy for social success that Vautrin proposes to Rastignac is quite a bit more efficient. By marrying Mademoiselle Victorine, a shy young woman who lives in the boardinghouse and has eyes only for the handsome Eugène, he will immediately lay hands on a fortune of a million francs. This will enable him to draw at age twenty an annual income of 50,000 francs (5 percent of the capital) and thus immediately achieve ten times the level of comfort to which he could hope to aspire only years later on a royal prosecutor’s salary (and as much as the most prosperous Parisian lawyers of the day earned at age fifty after years of effort and intrigue).
The conclusion is clear: he must lose no time in marrying young Victorine, ignoring the fact that she is neither very pretty nor very appealing. Eugène eagerly heeds Vautrin’s lesson right up to the ultimate coup de grâce: if the illegitimate child Victorine is to be recognized by her wealthy father and become the heiress of the million francs Vautrin has mentioned, her brother must first be killed. The ex-convict is ready to take on this task in exchange for a commission. This is too much for Rastignac: although he is quite amenable to Vautrin’s arguments concerning the merits of inheritance over study, he is not prepared to commit murder.
What is most frightening about Vautrin’s lecture is that his brisk portrait of Restoration society contains such precise figures. As I will soon show, the structure of the income and wealth hierarchies in nineteenth-century France was such that the standard of living the wealthiest French people could attain greatly exceeded that to which one could aspire on the basis of income from labor alone. Under such conditions, why work? And why behave morally at all? Since social inequality was in itself immoral and unjustified, why not be thoroughly immoral and appropriate capital by whatever means are available?
Piketty’s figures show that rentiers became more and more powerful from the 1700s all the way until the Belle Epoque (early 1900s), then declined precipitously around the period of the World Wars. What happened?
This is where he brings in his famous inequality (no pun intended) r > g – that is, the rate of return from capital is greater than the growth rate.
Rentiers’ money grows with the rate of return on capital. As they get profits/dividends/rent/interest on their capital, they consume some fixed fraction of it and add the rest back to their principal. As their principal grows, so does their yearly income. If they have enough money (and most of them do), the amount they consume even in a very luxurious lifestyle will be trivial, so we can approximate this by saying their income grows at the rate of return.
(One of the few checks on this process is population growth among the rentier class – if a rentier has five children, he may have to consider splitting his fortune five ways, which would mean that the fortune of each individual rentier decreases by a factor of five each generation. This means the growth of rentier power is strongly influenced by population growth, which will become important later.)
Laborers are assumed to have few savings and live a hand-to-mouth existence. Their income grows whenever they get a raise. So the growth of their income is approximated by the GDP per capita growth rate.
In ordinary times, the rate of return on capital always averages about 4% – 5% per year, and the GDP per capita growth rate always averages about 1% to 1.5% per year. So in ordinary times, rentiers’ yearly incomes should always be pushing further and further ahead of laborers’, and inequality should always increase. This is exactly what happened between the 1700s and 1914.
During crises – especially wars and economic busts – the situation reverses. If a rentier invests all his money in a factory, and the enemy bombs that factory, the rentier is broke. The laborers in the factory are also pretty unhappy, but they have the opportunity to get a job in a new factory when the war ends, in a way that the rentier – whose family might have spent several generations accumulating their capital – might not. The same is true of hyperinflation: laborers will get paid hyperinflated wages to spend on hyperinflated goods – but rentiers, who might have their money in currency-denominated investments like government bonds, can lose decades of careful fortune-gathering. Finally, if the government decides to respond to the crisis with confiscation of resources, or wealth taxes, or any interference in the economy, it’s likely to be the rentiers who are hardest-hit. Because rentiers’ wealth takes decades or generations to accumulate, but laborers live hand-to-mouth, a crisis lasting five years will give laborers a bad five years (after which they’re in the same position as pre-crisis), but can ruin rentiers completely. The period 1914 to 1945 – containing two World Wars and the Great Depression – was an unprecedented prolonged multi-crisis that caused “the collapse of the rentier world”.
On the other hand, since World War II the First World has had fifty-plus years of relative peace and prosperity. The last few decades have seen decreasing population growth and tax cuts for the upper class. These are the perfect conditions for the rentier class to make a return, and this is exactly what the data show.
…sort of. If you measure in capital/income ratio, rentiers are doing pretty well. If you look at inequality, it’s pretty high. If you look at various comparisons of share given to capital vs. labor, capital is coming out on top. But then where are the rentiers? Aside from occasional jokes about trust-fund kids, you rarely hear about them. And Piketty’s own data confirm that only the top 0.1% of the population makes most of their income from capital, compared to the entire top 1% back during the Belle Epoque.
I’m not sure about this, and for a point which is kind of the center of his entire argument, Piketty doesn’t seem too sure either:
We need to understand the reasons for this long-term change, which are not obvious at first glance, since I showed in Part Two that the capital / income ratio has lately returned to Belle Epoque levels. The collapse of the rentier between 1914 and 1945 is the obvious part of the story. Exactly why rentiers have not come back is the more complex and in some ways more important and interesting part. Among the structural factors that may have limited the concentration of wealth since World War II and to to this day have helped prevent the resurrection of a society of rentiers as extreme as that which existed on the eve of World War I, we can obviously cite the creation of highly progressive taxes on income and inheritances (which for the most part did not exist prior to 1920). But other factors may also have played a significant and important role.
If I understand Piketty right – and reading a bit between the lines – I think there are at least three things going on.
First, there’s more of a middle class these days. The middle class doesn’t entirely live off capital, but they have some savings and investment. Instead of 1% of people making all their money off capital, we have 30% of people saving for retirement and living off the profits of their nest egg.
Second, there are more super-rich “laborers”, for a broad definition of laborer that includes CEOs of big corporations. If we’re talking about how far in the income distribution you have to go before you get to rentiers, having a bunch of super-rich laborers screws up that statistic. I don’t think Piketty presents the more interesting statistic of what percent of people are rentiers, and I’m not sure why not. These people not only muddle the statistics, they also get much more media attention. When we talk about rich people, we talk about Bill Gates and Jeff Bezos, not the nth-generation scion of the Rockefeller family.
Third, capital is increasingly owned by institutions. There are hundreds of billions of dollars tied up in the endowments of top universities, and trillions tied up in the sovereign wealth funds of oil countries like Norway and Saudi Arabia. These don’t look like a particular individual walking around in a top hat and monocle, but they still distort the flow of money away from people who work for it and toward the people lucky enough to be part of the relevant institutions.
But if Piketty is right, if there’s no crisis then rentiers’ share of the pie will continue to increase. Either it will eventually overwhelm these considerations, and we’ll wake up one morning and notice we have an idle hereditary nobility again. Or it won’t overwhelm these considerations, and more and more of the pie will go invisibly to people other than average laborers, without any conspicuous signs of what’s happening.
Along with rentier-vs-laborer inequality, Piketty touches on income inequality among labor (remember, “labor” includes anyone who works a job, including CEOs).
He confirms what everyone already knows: the share of the top 10% (especially top 1%) has been increasing for decades now. This is most pronounced in the Anglosphere, but still happening somewhat in Continental Europe and Japan.
He addresses an argument made by supporters of high CEO salaries: might there not be a good economic justification for paying these people a lot? Suppose that having the best candidate (rather than the second-best candidate) as CEO increases your company’s profits by 1% – surely a plausible number. And suppose your company makes $10 billion/year. Then having the best CEO would increase your profits by $100 million. So two companies in a bidding war for the best CEO ought to be willing to offer them a salary of up to $100 million/year to join.
Piketty isn’t buying it. This isn’t really his area of interest, so he doesn’t throw the same overwhelming level of statistical artillery at it that he does at some other things, and I don’t consider him to have proven it beyond doubt in the same way as some of his other conclusions – but he makes a few strong arguments. First, there are no signs that this situation is more true in the past few decades or in the Anglophone world, but these are the only places where CEOs get paid so much. Second, with appropriate caveats and controls there are no signs that good CEOs get paid more than bad CEOs. Third, CEO pay seems to clearly increase because of some factors outside of CEOs’ control, for example in an economic boom (though wouldn’t this increase company profits, and so be consistent with the 1% scenario above?)
He thinks that executive salaries have increased because – basically – corporate governance isn’t good enough to prevent executives from giving themselves very high salaries. Why didn’t executives give themselves such high salaries before? Because before the 1980s the US had a top tax rate of 80% to 90%. As theory predicts, people become less interested in making money when the government’s going to take 90% of it, so executives didn’t bother pulling the strings it would take to have stratospheric salaries. Once the top tax rate was decreased, it became worth executives’ time to figure out how to game the system, so they did. This is less common outside the Anglosphere because other countries have different forms of corporate governance and taxation that discourage this kind of thing.
This matters not just because it produces income inequality, but because today’s income inequality is tomorrow’s rentier-vs-laborer inequality. A CEO who earns $5 million per year can make $50 million, retire, invest the money, and pass the fortune on to their children. The more giant fortunes like this are around, the more rentiers there are in the next generation and the more inequality perpetuates itself.
Piketty is especially afraid of very large fortunes because of his fascinating data showing that these grow more quickly than other fortunes. Using the Forbes rich list, he calculates that Bill Gates et al must have grown their fortunes at rates approaching 8% – 10% per year – far higher than the 4% – 5% rate of return on capital Piketty usually uses. Forbes is a pretty sketchy data set, but he finds the same thing with the largest college endowments. The richest colleges, like Harvard and Yale, see their endowments grow at 10.2% yearly. Somewhat rich colleges (= $1 billion) grow at 8.8%, medium-rich colleges (= $500 million) at 7.8%, middling colleges (= $100 million) at 7.1%, and the poorest colleges (= $100 million) at 6.2%. And all of these do better than the average person saving for retirement, who – again – gets about 4% to 5%.
Piketty suggests this is because the richer you are, the more economy of scale you have in hiring really good financial planners. I am a little confused how this interacts with the conventional wisdom that experts are crap and you should invest in index funds, but I think the financial planners Piketty talks about aren’t people who are very good at picking which stocks will go up, but more like people who know a guy who knows a guy in Singapore who can use your money to fund an unlisted Burmese mining project nobody else in the West has ever heard of.
I’m still confused why there isn’t a mutual fund that lets retirees pool together their money to give it to one of these people. Part of the answer must be “there are only so many unlisted Burmese mining projects”, but then how do economies of scale help exactly? Piketty doesn’t answer, almost as if he is more interested in explaining the dynamics of inequality than in providing me personally with investment advice.
Taken together, all of this suggests a gloomy conclusion.
Income inequality can be expected to remain high. This will produce further rentier-vs-labor inequality, which conditions are already right to exacerbate. Not only will rich people separate from poor people, but the super-rich will separate much faster from poor people and even from other rich people. As more and more fortunes accumulate, we will get either the sort of rentier society typical of Europe in the 19th century, or a covert version of the same where the profits of rent go invisibly to various people connected to rentier institutions.
Piketty suggests the obvious direct solution: a global tax on wealth. He is okay with having this be merely nominal on fortunes up to hundreds of thousands of dollars, but he wants it to be significant on larger fortunes, and punitive on the largest fortunes. This will help prevent these from growing exponentially at the rate of return and prevent the rebirth of rentier society.
He is pessimistic about this ever working, because if any country does it unilaterally, rentiers can just move their wealth to another country. He suggest an EU-wide tax, but I do not entirely understand his reasoning for why Europeans wouldn’t then just move their wealth to the Cayman Islands or one of the many other perfectly good banking systems that are not in Europe.
He does give measured praise to the US system, including the FATCA laws, which place penalties on any country that don’t report the details the US needs to tax American citizens’ holdings in those countries. I think he hopes Europe could pass a law like this, but stronger.
I agree with his pessimism. Absent a World War level crisis that would make for a cure worse than the disease, it’s hard to imagine everyone coming together to solve the sorts of problems Piketty brings up. I believe his predictions are likely to come true, with little chance of governments having the will to push a solution.
If a wealth tax itself is impossible, there are other things that might help a little. I can’t help but note that solving the housing crisis would be a big help here. Rents go directly out of the pockets of laborers and into the pockets of landlords, and are probably the biggest such transfer in today’s economy. Anything that lowers them has a big effect on the rentier-vs-laborer balance.
College is another big way that laborers get into debt. Although much of the debt is low-interest and government-owned, not all of it is, and even when it is this is scant consolation to the people who have to pay it.
Finally, one of the historically most important ways to decrease the power of rentiers is to increase birth rates, so they are forced to split their fortunes many ways every generation. Right now the birth rate of the rich is at historic lows. This might offer a point of agreement between rentier-fighting liberals and conservatives, who are already concerned about declining birth rates. Unfortunately, the main proposed solution to low population growth – giving workers better maternity leave – is likely to miss the rentier class entirely. I’m not sure what kind of policies might better target them.
So as not to end on a completely pessimistic note, I want to mention three causes for optimism I found in Piketty.
First, if we believe Piketty’s data, there is no Great Stagnation, at least not in economic growth. Piketty argues that (outside of special circumstances) economies always grow at 1% – 1.5% per year, and First World economies are currently growing at 1% – 1.5% per year. If we expected them to grow more, it’s because we’re not adjusting for falling birth rates, or getting too excited by passing booms and busts, or comparing them to catch-up-growth like in China. Whatever our sins in terms of decreased innovation and efficiency, they have not yet hit the economic growth rate.
Second, catch-up growth provides a powerful force for reducing inequality between nations. Given enough time, the US economy will keep growing at 1% to 1.5% per year, and sub-Saharan African economies will keep growing at 3% to 8% per year. Will this continue until the latter have caught up entirely? Unclear. Reviewers of this post have mentioned Acemoglu’s theory of entrenched inequality due to poor institutions, Sachs’ theory of entrenched inequality due to disease burden, and Jones’ theory of “hive mind” style entrenched inequality, as reasons why full catch-up might be hard. But all of these factors can potentially be improved with a growing economy, so they are not causes for total defeatism. Capital In The Twenty-First Century has overall made me more optimistic about the prospects for Third World catch-up.
The third thing that impressed me about the book is that we can talk about these kinds of things at all. Reading Piketty feels closer to reading real science – the type where there are universal laws that make clear predictions – than most economics or social science I’ve read. Marx liked to say he had discovered the universal laws that govern history; Piketty’s claims are only slightly more modest, but much more believable. They make the actions of individuals seem very small – one recurring theme is some faction taking credit for improving the economy or fighting inequality when economic fundamentals meant things had to change then regardless of what anybody did.
But they also suggest points of leverage. I don’t know if good economists knew all this stuff already. But I didn’t, and learning it makes me more optimistic that we might one day find a way to solve the problems Piketty talks about. Even if his wealth tax doesn’t work, he has good explanations of all the other factors that contribute to inequality and what would happen if we changed each. Now it’s just a matter of political will.
And although that’s a pretty big “just”, I hope that maybe the move to a society of rentiers will change the political calculus enough to make people take these problems more seriously. I complain about attacks on “meritocracy”; maybe we can see how much people like hereditary rent-seeking, and whether getting rid of that makes a better rallying cry. Maybe “everyone productive vs the idle rich” will make for less toxic politics than “people who earn more vs. people who earn less”. I can always dream.
It’s important to note the major statistical corrections that have been made to Piketty. The first one – which more or less kills Piketty’s thesis – is that the primary driver of r > g is housing wealth. The big problem here is middle class NIMBYs, not upper class rentiers.
Strangely, on a few occasions, Piketty explicitly supports middle class rent seekers (such as taxi drivers and occupational licensing).
It’s also worth reflecting on a point which Piketty makes mathematically, but literally never says in words. If rich people are the best investors, then the best way to create economic growth is to ensure that rich people are the ones controlling investment decisions. Intuitively this makes a lot of sense; Travis Kalanick (and now Dara “the D” Khosrowshahi) are a lot better at transportation than the average autowale. Bezos is a lot better at logistics than my local cell phone store.
The conclusion of this is that if we take Piketty’s suggestions, we will all be poorer.
I can’t figure out why he never spells this out in words that reporters could understand.
Does he claim rich people are the best investors? I thought he claimed there were economies of scale to investment which rich people (who have large-scale money) take advantage of. As I mentioned above, I’m very confused how this could be, and I can’t have an opinion on it until I figure it out.
Thanks for the link; do you know if Piketty accepts the criticism?
I did hear something about the criticism and that Piketty had some kind of answer to it, i.e. he didn’t accept the conclusion. I don’t remember having a sense of who was right. I’m not an economist either so what do I know anyway.
It doesn’t matter. Whether it’s due to intrinsic skill on the part of rich people or merely due to economies of scale, the best way to grow the economy (according to Piketty) is to have wealthy individuals controlling large investments.
The only other way one might gain the economic growth without large inequality is if there existed a “mutual fund that lets retirees pool together their money to give it to one of these people [the guys with secret mines in Burma]”. But if such a fund existed, then most of the concerns Piketty raises would be mitigated – middle class people would be the people receiving capital income.
(As a person who’s peripherally connected to the financial sector, I can tell you the main reason this mutual fund doesn’t exist. A fund manager who can do this would prefer to invest as much of their own money as possible and as little of others. This fund manager then becomes a wealthy person who’s intrinsically good at directing investments.)
I don’t know of any response by Piketty.
Another good critique is by Nassim Taleb: https://medium.com/incerto/inequality-and-skin-in-the-game-d8f00bc0cb46
Piketty seems to have captured the Zeitgeist very well. But it’s unclear to me which specific claims of his I should take seriously. Everyone says this work is super important. But I kind of wish the people saying this would state specifically which claims they find important, and which specific claims must be refuted in order to make Piketty unimportant.
R > g seems to be caused mostly by housing wealth accruing to the middle class, so Piketty’s claims that this drives inequality must be false. His narrative about Jane Austen style rentiers is refuted by examining the Forbes 400. Taleb also has solid critiques of his stats correctness.
As an American living in India, I also consider Milanovic (the guy who created the “Elephant graph”) far more relevant on the topic of inequality than Piketty. Words like “China”, “India” and “immigration” seem far more relevant to the topic of inequality than “Balzac” and “Jane Austen”. Milanovic shows in various works that the primary driver of inequality is location (compare an upper middle class professional Indian to an American non-worker, the latter is far wealthier), and that global inequality has gone down drastically.
I very much wish some proponents of Piketty’s narrative would tell me exactly what I’m supposed to take away from it.
“It doesn’t matter. Whether it’s due to intrinsic skill on the part of rich people or merely due to economies of scale, the best way to grow the economy (according to Piketty) is to have wealthy individuals controlling large investments.”
Or there are a fixed number of good investments, everyone competes for access to them, and rich people win. I don’t have any reason to prefer this model to yours, but I don’t have any reason to disprefer it either.
The most important things I took away from Piketty are that economic growth is always 1% – 1.5%, rate of return on capital is usually always 4% to 5% but higher for the richest, there used to be a rentier society that was destroyed by the World Wars, inequality (both income and labor-vs-rentier) is increasing, and conditions are good for them to continue increasing.
I think most of these (though possibly not the last) survive Ronglie’s criticism, though I haven’t gotten a chance to read it fully yet.
If there are a fixed number of good investments then inequality is self limiting. As you note:
This is the more standard economic theory, which claims that a few very good investors might beat the market and go from $1M to $1B, but someone with $100B will not be able to do the same.
(Unless of course they are Jeff Bezos and create $100B by building things that have never been built before.)
This claim is tautologically true – to become rich you need to achieve a high rate of return. As a result, rich people consist of a) people with a high rate of return or b) people who started rich. Poor people consist of a) people who started rich but had a negative rate of return and b) people with a low rate of return. This latter group tautologically has a lower rate of return.
(Similarly, if you backtest a trading algo over 10 years, you need to include companies that existing in 2008 but no longer exist today. Otherwise your algo will appear to beat the market simply because it uses hindsight to exclude Bear Stearns and WaMu.)
This claim is tautologically true
Your claim of tautology breaks at two points. Firstly, you can be rich without a high ROR and secondly because your typification is incomplete. You are missing poor people who have a (theoretically) high ROR but stay poor because they are missing the assets to make (meaningful) investements.
The “fixed number of good investments” model doesn’t really make sense.
Suppose I’m a company trying to borrow money. If people are competing to lend me money, then I just lower the interest rate. Now I get a better deal, and the market clears.
Similarly, if rich people are competing for access to hedge funds, then those funds take a larger cut. If the hedge funds give deals to rich people because they like them, then that’s not return on capital, it’s “hedge fund managers effectively have more income then it looks like on paper, and they choose to sacrifice some of that income to benefit rich people.” This might then be offset by reciprocal favors from rich people, with informal trade replacing explicit trade for tax reasons, but that still doesn’t change the basic problem with your proposed model.
Yes, but the point is that Picketty’s number that capital is always outperforming the normal growth rate (aka R>g) has been pretty rigorously debunked.
What makes you trust his numbers? Other sources I’ve read claim that historically the rate of return on capital was highly variable (see this graph, for example, which shows the nominal interest rates). Moreover, when the risk of bankruptcy is taken into account the real rate of return before XIXth century was close to zero. If “4% to 5% but higher for the richest” rate of return were the real thing would not everything on our planet be now owned by Fuggers or Medicis?
Sure you do. It’s obviously possible to make bad investments–spend capital on something not worth spending it on. So if people who are good at spotting good investments are the ones controlling the capital, less of it will get wasted. Why would one assume that what investments get made is independent of the people allocating the capital–which is what you seem to be suggesting.
Not always. According to figure 10.11, it didn’t reach 1% until the 19th century and it was 2-3% through most of the 20th century. His scientific law looks distinctly fragile–the result of taking a limited time period and then explaining away all the deviations.
As I already commented, I don’t believe that’s true. Historically speaking, 4% is unusually high for the real interest rate.
This is a super common problem with hedge fund size. On the one hand, there are a lot of economies of scale like any company – more people pick up your phone, you need compliance people, big endowments prefer larger funds, it costs money to build systems and set up legal entities. But there is a natural push and pull on size at the portfolio level.
Bigger size means that when you find a good idea you can max out the benefit by buying as much of the asset as possible. However, fund managers only have so many good ideas a year. If you’re too big, it becomes difficult to scale your good ideas. So either a bunch of money doesn’t get put to work (dragging down returns) or they chase bad trades/push their good trades until they are unprofitable.
You can see this with different hedge fund sizes. Those with big macro themes (like interest rates around the globe, or stocks vs bonds) tend to be much larger. Those are deep, liquid markets, and if you think of a good idea you can put it on in massive size. However, if your fund is oriented towards deep credit analysis they tend to be much smaller because each trade is smaller. Credit markets are thinner, less liquid, and more difficult to trade in, although good ideas tend to be more consistently profitable, even if in smaller size.
This, by the way, is a natural result you’d expect from Grossman-Stiglitz . In more liquid markets you can put on bigger trades for smaller alpha, or in illiquid markets you put on smaller trades for bigger alpha. Either way the (marginal) returns to producing information about financial assets is about the same.
If that were true that the rich getting better investment returns actually increased the total level of economic growth, then you would expect to see much higher growth rate in time periods when the rentier class controlled a lot more of the wealth, and much lower growth rates in time periods (like the 1950’s) when they controlled much less of the wealth.
I don’t see evidence for that that in the data at all.
If that is the case, then Piketty’s claims about wealthy people being better investors must be incorrect. I agree that this theory is likely wrong.
I personally subscribe to the more standard theory, that it’s harder to invest $1B than $1M.
“Wealthy people tend to on average get better personal return on investment” doesn’t necessarally imply “if wealthy people make more investments then the average rate of return will improve”, and it certainly doesn’t imply that “if wealthy people make more investments that will drive faster economic growth.” It’s just as possible that either there are a limited number of really good investment opportunities that someone would invest in in any society (but that in a more stratified society the rich get access to most of the best them), or even that the wealthy are better at rent-seeking or monopolizing behavior that improves their own personal investment returns while reducing overall economic growth.
The total amount of money controlled by the very wealthy people is low enough, and other sources of variation in growth rates are large enough, that there is no way you could detect this in the data.
According to the one chart Scott posted here, in 1900 the “inheritance flow” was 24% of France’s national income in 1900 and only about 5% in 1950, and it sounds like there was a similar pattern in most first world countries and by most other measures. That should be more then enough of a change to see it in the national growth rates, if in fact it is true that the rich investing more of the money actually produces more faster economic growth.
This is the standard theory, and in contradiction to Piketty’s math. If this is true, then it directly implies that you’ll get a lower return on $1B than on $1M.
Proof: Suppose I’m the richest person and because of my preferential investing powers I can perfectly choose investment opportunities before anyone else.
Let r[i] be the rate of return on the i’th investment opportunity, and c[i] be the amount of capital that this opportunity can take. Lets reorder these so that r > r > etc. (I’m also clubbing together opportunities with equal rates of return.)
Suppose I’ve invested Sum(c[0:N]) dollars in the first N opportunities, and epsilon < c[N+1] in the N+1'th. My rate of return is:
(dot(c[0:N], r[0:N] + epsilon r[N+1]) / (Sum(c[0:N] + epsilon)
The derivative of this is (Sum(C[0:N])(r[N+1] – mean(r[0:N])) / (Sum(c[0:N])+epsilon)^2.
Since r[N+1] – mean(r[0:N]) < 0, this is strictly decreasing. If you want to see a graph of why this happens, take a look at the “diminishing returns” section of this blog post: https://www.chrisstucchio.com/blog/2017/cobbs_douglas.html
In this world the best possible investor has a rate of return which diminishes with his wealth.
In the real world, most of the richest people have become rich by putting all their wealth and human capital into investment i=0 (where i=0 represents Facebook, Google, Amazon, etc) and close to nothing into i=1, i=2, etc.
This is theoretically possible. The only explicit examples of rent seeking Piketty gives are by the middle class (occupational licensing, taxi guilds). And the most important rent seeking activities I can think of (NIMBYs, occupational licensing, educational credentialing, the regulatory state) are again mostly middle class people harming each other.
Rognlie has shown that the main driver of r > g is again middle class rent seeking NIMBYs rather than wealthy people.
I know Piketty speculates that the rich somehow have secret fortunes and do evil unspecified rent seeking, but I’m not aware of him making any specific allegations.
Investors with large fortunes are playing a different game. They can put enough money into the market to shift the market price. They can do things like buy out entire companies and merge them together to reduce competition, changing the entire nature of the markets.
But also you guys are over-thinking this. It’s easier to play No Limit Texas Hold’em when you have a larger stack of chips. Yet it doesn’t make the game any less zero-sum when the best players have the most chips.
@stuchio I’m not sure what you’re saying about `i=0` when you talk about Facebook. Facebook definitely had the opportunity to buy WhatsApp before anybody else, right?
You sound like you’re implying that these companies don’t buy other companies, yet they spend more money on buying other companies than on anything else.
That’s a disadvantage, not an advantage. It means that if you buy your buying is pushing the price up, which costs you money. If you sell, your selling is pushing the price down, costing you money.
Andrew Cady, my comment about i=0 means that the vast majority of Zuckerberg’s fortune comes from a single high return investment.
Whenever a company builds a portfolio of multiple other investments, they face the diminishing returns issue I’ve described.
This is 100% false. It is way easier to play with a short stack. That is why there are minimum buy-ins and rat-holing (taking chips off the table, taking your money off the table and buying back in at the minimum) is frowned on or prohibited. Early in online poker there were min buy-in bots that were profitable.
For those of us that know little about poker, mind expanding on how the advantage works? I naively would have expected it to be very useful to have a reserve that can sustain losing a high-risk-high-reward hand or three.
Part of it is the ability to go all-in as an option. If you and your opponent both have very large stacks, if you bet high to protect your hand, your opponent will have to match that bet if he can. That match may not have positive expected value. If your opponent has very little left, however, he can simply push all-in for less than matching the bet. This obviously has a high variance, as it either works and you double your stack (you can’t ever win more than you put into the pot) or it wipes you out, but it gives you some options to stay in.
Forgive me, I’ve literally never played poker for stakes so I’m a little slow.
I’m not seeing how that is a better situation to be in than having enough chips to not have to go all in? If you go all in and lose, you’re out. If you have to bet higher to stay in and lose, you have a chance to recover. And, if I’m understanding the rules correctly, if I bet $100 and you go all-in at $10, your expected value is still lower than if you had $200?
I suppose with less money there’s less potential loss from continuing to play, but that’s practically tautological.
There are versions of the game where the only winner is the last-man-standing who wipes out all other players. In this case, having a big stack is an obvious advantage, because you can take better risks, or even bluff.
There are also version of the game where you can walk up to the table and walk away at any point. It’s easier to grow a small stack than a large stack, in percentage terms.
The advantage of the small stack is that you reduce the number of options to two for every hand. Either fold or go all in, so it is very easy to devise a low mistake strategy. At the same time it complicates strategy for the normal stacks at a table (to a degree, if there are a bunch of small stacks adding one doesn’t matter much). The larger your stack is the more likely you have to make multiple decisions, increasing the number of situations you have to recognize making it harder to play well.
In a tournament, you are obviously more likely to win if you have a larger stack. Nevertheless, it is EASIER to play (correctly) with a short stack because your options are much more limited. Basically, you either go all-in or you don’t. Your stack is small relative to the other players, so they will typically ignore you (to a greater extent the smaller stack you have) in their strategic decisions, making it easy for you to get all your money in when you have a good edge.
In a cash game, where if you bust you can just buy back in, not only are your decisions easier but, all things being equal, you have a better chance of winning money. You have the same edge in getting your money all in when you have an advantage, plus if you bust you can just take more money out and buy a new stack. So it’s quite easy to profit.
Now if you are a really good player, you want to be a deep stack because you have an advantage over everyone else due to your skill and you want to have them covered so that when you crush them, you can take all their money. But it’s MUCH more difficult strategically to play a deep stack. If you have nothing else to go on, at a live poker game, the deepest stack is generally the best player, ESPECIALLY if they’ve just bought in and the depth is not a result of winning hands.
Its also easier to lose! The percentage of stack is (mostly) immaterial as you care about $ per hour not % of your stack for ROI. Short stacking was (and maybe still is) popular in part because it was so simple that you could play 16 tables simultaneously online (and also find a new game easy every time you made it a large enough stack) and the lower return per table was overcome by the larger number of total tables.
The key reason why playing with a short stack is an advantage is that stack size is an important variable in decision making. For example, there are certain starting hands (e.g. low pairs) which offer a low chance of developing into a very strong hand on the flop but a high risk of being duds. Such hands are fairly strong if everyone is playing with a deep stack as there is a big payoff if your hand develops well; if it doesn’t, you’ll find out early and can cut your losses. If everyone is playing with a short stack, such hands are far less valuable since there can’t be a huge payoff due to stack limitations.
Now consider a table with some short stacks and some deep stacks. The short stacks are just playing their short stack game and can value their hands accordingly. They prefer hands that have a high probability of being reasonably strong over hands that have a low probability of being very strong and play accordingly. The deep stacks, on the other hand, have to play the short stack game agains the short stacks and the deep stack game against the other deep stacks, which means they have to compromise and are forced into sub-optimal decisions.
“Whether it’s due to intrinsic skill on the part of rich people or merely due to economies of scale, the best way to grow the economy (according to Piketty) is to have wealthy individuals controlling large investments.”
Uh, does Piketty actually write this, or is this a Bizarro Steelman version of him? It doesn’t seem like anything he’d have actually suggested, seeing as how one of his theses is that wealth gained by capital returns tends to concentrate rather than distribute.
Yes, but the text has different mood affiliation. He explicitly says rich people’s fortunes will grow faster because they have a greater ability to choose good investments.
This does not contradict the former claim. Capital can concentrate and simultaneously increase growth.
Concrete example: Bezos builds Amazon, Glenn Beck buys gold. Capital stock / income has increased (i.e. r > g), since Amazon would take many years worth of income to rebuild.
Wealth has concentrated dramatically, since Bezos is now far richer than Glenn Beck.
The main difference between what I described and what Piketty describes is that Piketty uses math (rather than words) to explain this, and then talks about rentiers in the age of Balzac and drops vague hints that maybe the modern world is like Balzac’s world.
stucchio nails it 100% for me. If, after some historical chart-fitting, Piketty confidently advances as an axiom that real economic growth is “always 1-1.5% per year” (a HUGE range!) no matter what anti-capitalist measures you add (but he has “catch up growth”?) then I guess we should all be pretty unconvinced. Or he should drop the axiom that accusation that rich people reliably produce an investment edge or explain how the edge is somehow parasitic and we won’t miss it when it’s gone (I guess it’s in excess of the growth of the “real” economy so it must be, in his mind? But that’s not a tautology).
Here’s how investing large scale money works. (Source: I’m on the investment committee of a multibillion dollar foundation.)
We have the theory/philosophy that it is possible to beat the market on an ongoing basis, but that very few people can do it. The techniques are easy to understand at an abstract level but hard to replicate: gain an informational edge over the market (I know of one manager that wanted an estimate of how a chain of bakeries was doing, and he noticed that they number their receipts in order starting at 1 every day — so he hired a bunch of minions to go buy something every day at the end of the day at every location, and now he knew how many customers they had every day). This is referred to as “proprietary research”, and most of the best funds do it.
The very few people that can consistently beat the market in a particular domain (us public equities or silicon valley venture or private equity or whatever) command very high fees (typically 1-2.5% of the investment every year plus 10-30% of profits) and are very selective about who they allow to invest. They want a small number of large investors so that they don’t have to deal with too many clients, and want assurances that if they have a down year their investors won’t walk away or pressure them to change their strategy. They also often require long lockups, where you can’t get your money back out for years. Digression: this led some institutions to have real problems during the financial crisis when they had too much money locked up and couldn’t get it back to pay bills.
So investing a large endowment or fortune is really selecting investors (called managers) and paying them to invest in their area of expertise. This is a game you can’t even play if you don’t have enough money, because you aren’t worth spending time on. Investing with a manager is a multidecade relationship and all parties take it very seriously, lots of diligence and reference checking in both directions.
The second piece to the puzzle is diversification. Not in the sense of investing broadly in the stock market, but on the sense of betting on lots of different approaches. Equities, distressed debt, real estate, energy, timber, mining, venture, private equity, all kinds of things. Usually even if something goes down like in a stock market crash, other things will do fine (or even well if capital moves from one place to another).
Aside: one of the things that made the financial crisis so brutal was that everything went down, which is very unusual. Nowhere to hide. However unlike the real economy, several markets bounced back hard, so as usual the competent super rich did just fine.
So there’s your answer about why this is different. You need access to top funds, because the average fund (even the 80th percentile fund) is worse than buying the index. To get access you need money: minimums are often $10-$100M. You need enough money that you aren’t making just one of these bets, because even the best sometimes lose; you need to invest in 50 or 100 of these across different asset classes. And you need someone who can make these investment decisions, because it’s very hard to tell the true experts from the managers who got lucky.
None of this is a secret, though for various reasons it’s hard to pull off. The guy who basically invented the latest incarnation of this approach is named Dave Swenson. He runs the endowment at Yale, and wrote a book in 2000 about exactly to how execute this strategy. Here’s a brief profile of him: http://archive.fortune.com/magazines/fortune/fortune_archive/2005/10/03/8356742/index.htm
And even he thinks that this doesn’t apply to regular folks. He wrote another book about personal investing, which concluded like everyone else that you should buy index funds and avoid fees as much as possible.
One final comment: this is not how Bill Gates or Jeff Bezos do so well. They do that by having a very concentrated position in a company that has become insanely valuable. You can’t do that either.
Hope that clears up some of the mystery about how endowments and billionaires invest.
Agree 100% except for the last part about Gates & Bezos. I thought the claim was that their investments apart from MS/Amazon did better than yours or mine.
That is to say, I understood the claim as saying, “Independent of how you got your money, the more you have the higher return you will receive by investing it”.
You sure? It’s all TL;DR to me, but it seems B&MG foundation invests mostly in Berkshire Hathaway (Warren Buffets fund), which in turn invests a lot in Microsoft.
If 80% of hedge funds are worse than investing in index funds (which I understand is true), and if hedge funds are only available to the super rich, what explains the supposed out-performance of rich people? That top 10 or 20% of hedge funds has the majority of all the money?
Hedge funds are available to the merely rich, who invest in them because that’s what the super rich do so successfully.
You can access hedge funds as a qualified or even accredited investor, it’s just that almost all the ones you have access to are worse than index investing.
How do the really rich know whether their money manager is *really* an elite money manager, rather than just someone who got lucky for a while taking risks, or a shyster trying to milk them for fees?
Especially if the top money managers can lose money for years on end and justify it by saying “yeah we know our strategy has risks, you just have to trust us and stick with it. and btw you’re not allowed to take your money out now.”
It seems like you wouldn’t be able to reliably pick the elite money managers without being one yourself- it’s the principal agent problem.
From reading the post you’re replying to, the answer would appear to be “with extreme difficulty, intensive study, and the utmost care taken to exclude manipulative shysters from the process.”
As in, this takes orders of magnitude more effort than any ordinary wage-earner puts into investment management, or picking out an investment manager.
Wally Wage-Earner might spend, at most, tens of hours a year, maybe a few hundred, figuring out where to put his investment income. And consequently, he can’t beat the market.
Bob Billionaire spends several hundreds of hours a year, or even thousands, on this task, starting from a position of greater information through having more contacts and general knowledge of the investment world than Wally Wage-Earner. Moreover, he can delegate even more of this task to a team of high-trustworthiness, high-conscientiousness experts who collectively spend tens of thousands of hours a year on it. He can beat the market.
The conclusion that no one can beat he market is based on the premise that no one can have a strategy better than anyone else, or it’d be duplicated. That is at best a simplification of reality; in reality “the market rate” must be something that someone can beat, because it’s an average of what a bunch of above-average people are doing combined with a bunch of below-average people. The market doesn’t converge on everyone doing literally exactly the same thing, and the margin between high and low performers is still something you can exploit if you work hard enough at picking performers.
The only way that wouldn’t work is if the market were a totally random process comparable to playing slot machines. Which it’s not- or if it was, it wouldn’t optimize anything, any more than we could get economic growth out of having a magic 8-ball make the decisions for wealth-holders.
I don’t see any difference between that and stock picking. A lot of people devote vast amounts of time and effort to pouring over financial data, judging management teams and annual reports, trying to pick out the best stocks. But the general consensus is that most, if not all of those people are wasting their time- they’d do just as well picking the stocks at random. Putting more time and effort into it won’t help.
It might be even worse with respect to picking a financial manager. Stock data is at least *honest* since it’s regulated to hell and back. But plenty of wanna-be hedge fund managers would probably just lie to you. Or bullshit themselves and you, or maybe they once had the touch and lost it, or whatever.
It seems like this basically comes down to “actually the EMH is wrong, you *CAN* beat it if you’re good enough”. The rich elites know that, they know other people who know it, and they all connect with each other to make sure they get access to the best investments but the general public doesn’t.
EMH is wrong, but most people don’t have the time, skill and computational resources to find and exploit an inefficiency before it vanishes. This is consistent with even the average person on Wall Street not being one of those people. Even a successful algorithm might only be profitable for a few months or weeks, e.g. “Berman thinks two or three months might be the limit now, and he expects it to drop.” back in 2007 (https://www.technologyreview.com/s/408854/the-blow-up/).
I always understood EMH to mean that the work required to identify profitable investment strategies will get competed to the point where it’s comparable to similar investments.
In other words, EMH doesn’t say that there aren’t any lost $20 bills to be found on the street, just that once we factor in the time and the risk, we would expect looking for lost money not to be any more profitable on average than getting a similar job.
“Somewhat rich colleges (= $1 billion) grow at 8.8%, medium-rich colleges (= $500 million) at 7.8%, middling colleges (= $100 million) at 7.1%, and the poorest colleges (= $100 million) at 6.2%. And all of these do better than the average person saving for retirement, who – again – gets about 4% to 5%.”
Back before the 2008 crash, I noticed that there was a close correlation between how prestigious is was to have your kid admitted to an Ivy League school (Harvard #1, Cornell #8) and the ROIs on their investments. This might suggest that rich people are trading insider trading information for admission for their scions. E.g., rather than the Kushners donating money, other people could be getting their kids in by mentioning investment opportunities.
But I haven’t checked this in a decade or so, so it could have just been a fluke.
Did you really review this without being aware of the devastating criticisms of his: methodologies, false histories, manipulated/corrupted databases, etc? Criticisms levied even by his defenders?
This is why you should stay away from Econ.
Hey, I think your criticism here isn’t entirely fair; Scott is an extraordinarily prolific and entertaining writer, and writes on a wide variety of topics; the price for that is that he doesn’t have the time to be an expert on all of them. It’s incredible he has the time to write as much as he does at all. He doesn’t hide the fact that he’s no expert at Econ, and he’s diligent about drawing attention to things he may have missed (like this, for example) after the fact. This post will still have taught me a lot about something I didn’t know even if it turns out Piketty’s work has problems that the post didn’t talk about the first time around.
I guess another way of saying it is—I could read econblogs by reputable economists instead of or in addition to Scott’s blog, but the fact is that I don’t do that, for one reason or another. I suspect the reason is that I place a very high value on being entertained by the stuff I write, and Scott’s writing is more entertaining than most econblogs (indeed more entertaining than any other blog I can think of). The fact that I place such a high value on entertainment over edification may not say flattering things about me, but at the end of the day it’s how I seem to work, and I think I would learn fewer things overall if Scott restricted his writing to areas in which he is an expert. I believe Scott is sufficiently diligent about listening to commenters and giving his epistemic status on things that my net learning isn’t negative from reading him, in any case.
If I reviewed a book on psychiatry I would sure as shit make myself aware of any (in this case utterly devastating) criticisms. Seems like a very standard part of a review process for a book that’s years old.
I would do it to save my own time (in the case of criticisms like those leveled at Piketty), to help me understand the work and the context as I read it, and to make sure I don’t mislead the people I’m trying to inform.
You make a fair point, but the book has no thesis when you take out the lies and fudges.
I think when he wrote this review he was intentionally trying to ignore the criticisms to Piketty, and I think this was a good approach for him. Not being an economist, it would be hard for Scott to separate the good criticism from the bad on the spot, so why not to try a trusting reading at first? Assuming the author’s data / methods are good enough allows him to think if the whole thesis makes sense in the first place, and if it does, then go around and look for criticism that undermines it. Or, given his position, he can just wait for the commenters here to bring it, as they indeed are doing.
You don’t understand. It wasn’t like, “Oh, some economists think A model best represents blah, yet others think B; I choose B for reasons…”
No, the criticisms are of the variety: “Piketty claims Republicans are bad because Republican President did X.” Upon further examination, it was a Dem president. Or not missing by a decimal point, but getting the DIRECTION wrong in simple math. Using false, utterly made up data points for regressions. And on.
And every single mistake goes in the direction of his (utterly non-sensical and historically debunked) “theory” that just so happens to be a redux of Marx and advocates for taxing the rich…
So it’s not like there were “criticisms,” there were devastating findings of lies and incompetence.
This is the type of case where “the whole thesis makes sense” because people instinctively want to tax the “rich” and, if you make up data lie about it, you can show that you HAVE to tax the rich or we’ll end up on Elysium.
So sometimes you have to check to see if the work you’re reviewing has been destroyed, and I use that term advisedly. Honestly, if you want to see a true academic takedown, read the reviews. Even read the later reviews by his defenders that went from “What an intuitive theory backed by data!” to “Sure, his theory is wrong, but his data set is amazing!” to “Sure he fudged the data, but screw the rich” to crickets.
What page was that on?
I think the terms “capture” and “vertical integration” point nicely at the sort of thing extremely wealthy rentiers are good at, and what merely wealthy people are not good at.
Any other industry you suspect of achieving regulatory capture has, somewhere behind that capture, an investor or set of investors whose incentives are driving that capture.
E.g., I am not so rich/powerful/devoid-of-empathy/otherwise-insulated-from-the-humans-who-are-hurt-by-corrupt-officials that I can rationalize to myself or my close friends my being corrupt. I am also not so well-placed that I have much incentive to be corrupt–for one, I cannot charge a tax on whole nations for the privilege of doing business with FIFA. For both these reasons, I am not a corrupt FIFA official. If we credit that FIFA has a corruption problem, then somewhere out there is someone who is both these things.
Labor and capital are imperfect complements. When you are in the business of providing something, you want to commoditize its complement. Therefore, at the limit anyway, (and ignoring that you also need to treat your creative professionals well) anyone with a lot of capital will have a very large incentive to commoditize labor.
Tyler Cowen has also made this point. In his book “Stubborn Attachments,” in the chapter called “Should money be redistributed to the rich?”
The same logic would apply if you swap ‘stock market’ with ‘poker game’; the card sharks will take the money of the old ladies. That gives them a high ROI, but doesn’t increase the number of chips on the table.
The distinction between a stock market and a poker game needs to be a bit more obvious before you can start giving credence to the theory that clever investors are pushing growth into the economy.
Poker is a zero or negative sum game where every dollar you make has to be from another player losing it. Investing is a positive sum game where you make money by giving money to businesses that create value.
So you fully buy into the causal chain smarter investors -> more value created?
So like, you take the little old lady, giver her a good course in how to invest, and additional businesses will arise to create the extra value required to reward her for her improved skills?
The first one.
Well, it’s not zero-sum. But see, saying that isn’t enough to conclude that any particular difference in outcomes isn’t zero sum.
It is very obviously possible for someone to make money in the stock market at the expense of someone else. (E.g. you buy some gold from me at $10, and then sell it back to me for only $5.) People talk about how life isn’t a zero sum game as if it disproves the existence of that kind of scenario, but obviously it doesn’t.
The casino can take a percentage from the pot (rake) or charge a fee. That makes it a negative sum game.
Investing is a positive sum game where you make money by giving money to businesses that create value.
This is true for the appropriate definition of “investing”, but unfortunately many people understand “investing” to have a broader meaning, so that it includes trading in the stock market, not based on wanting to get your money into the stock of businesses creating more value, but based on wanting to profit from market trends. Trading stocks, by its very nature, has to be zero sum, because the actual net present value of any given share of stock is the same no matter who owns it. So in any given stock trade, one of the two parties must be making what will turn out to be a bad deal. The parties just don’t know which one of them that is (if they did, the trade wouldn’t happen).
As I understand it, one of the issues that led to the crash in 2008 was that the amount of money involved in stock trading of this sort (and other more creative versions of the same thing, like derivatives) was much larger than the amount of money involved in actual investing by your more correct narrow definition (giving money to businesses that create value).
All the money currently sitting on poker tables around the world is accomplishing absolutely nothing productive. It just sits there and gets shuffled around between people and sometimes drops in a hole.
Money that is invested at least has a chance at being productive because people are using it for things, which is why people will pay you to borrow your money.
The difference is fairly obvious. So much so, that I would believe that Cowen implicitly assumed everyone was on the same page rather than going through the explanation. Unlike poker games, the point of the stock market is to allocate credit efficiently to high-value underlying economic behavior – i.e., produce things that people want. Which is why when you say:
You have the causality backwards. More value created->more money to the smarter investors who correctly allocated credit to said high-value behavior.
Yes, that’s the way it works. The thing is, in order for it to be a good idea for money to be given to the rich, as Tyler Cowen suggests, then it would need to be the other way round.
I may have been a bit hasty. I thought you were going for something else. And in hindsight, the reword I made should have made it obvious. In any event, you actually were right. Smarter investors -> more value created -> more money to the smarter investors who correctly allocated credit to said high-value behavior. (That is, we were both right.) Let’s look at your example.
In a sense, yes. Consider two potential investments, A and B. It turns out that A has higher-value underlying economic behavior. If investors are less skilled, they might pick B. But if they are more skilled, they will pick A. The result of picking A will be that higher-value transactions will occur. Some of that additional value will be captured by consumers; some of that additional value will be captured by the employees of the company; some of that additional value will be captured by the investor.
Now, additional businesses may arise, because folks who gained from those trades may choose to use their gains to create a business. Furthermore, better businesses will arise. Entrepreneurs will learn that if they have a business plan more like B than A, they are less likely to get investment, so they’ll work to create better businesses that are more likely to create value which can be captured. The sum of these effects are new and better businesses which arise to create extra value to reward the next generation of smart investors.
(Of course, there are some bloody stupid investors out there, but most people agree that a fool and his money will soon be parted, and that these ventures aren’t good for anyone. That’s why the incentives to be good are so important.)
The “corrections,” of course, come from arch conservatives
1) You were hoping for dour conservatives?
2) I’d rather test the merits of Piketty vs the arch conservatives. Otherwise, I can dismiss Piketty because he’s liberal and you can dismiss Rognlie because he’s an arch conservative.
3) Is Rognlie an arch conservative? I just spent 15 minutes trying to determine his political affiliation and if he has one, it’s subtle. Would your settle for putative crypto-conservative? A lot of economists seem to take his work seriously though, including Brad Delong.
(I didn’t pick Rognlie specifically – I just looked at the first contra source Scott listed.)
Oh man, I’m totally stealing this.
I don’t know if he would qualify himself as a georgist, but Rognlie’s work has a lot in common with georgist theory (and has definitely been picked up and carried by them).
Anyway, this sort of outlook defies normal categorization as per ideology: it can go hand-in-hand with socialist thought, neoliberalism, or libertarianism.
There are no arch conservative economists. The best you can get is vaguely conservative pseudo-libertarian. Of course that’s way more balanced than any other academic field. Just imagine the consensus opinions of economists if economists were balanced politically like the general public.
And “criticism” to the “corrections”, of course, comes from extreme Lefties. See, two can play this game of stating the obvious in an unfair, reductionist, and mind-killing way.
It would be better, however, if we tried to evaluate the arguments themselves instead of tossing them in the bin because we don’t like the messenger. Or do you think your arch-conservatives could never make a valuable criticism of Piketty?
Would you be comfortable being described as an arch leftist?
I so wish that there was a variant to phrenology, where they measure people’s arch of the foot to determine their political beliefs.
My husband is an arch-conservative with flat feet, and my father was another. (I’m conservative, with arched feet.)
Speaking as a pro-free market economist, I am curious about the defining features of an arch conservative economist. What views would you expect him to hold on:
To put it differently, is an arch conservative economist someone who almost always agrees with political conservatives or is he someone who has a conservative view of economics–thinks that Marshall got things mostly right, is skeptical of unorthodox economic ideas, left or right?
Oh wow. An actual, literal, ad-hominem argument. You don’t see that often. Most of the things people call “ad hominem” are just insults without and not attempts at argument, but this here is an actual ad-hominem argument.
Housing wealth is important, but it’s worth remembering that huge chunks of housing wealth are tied up in mortgages or mortgage-backed securities, which are held by some combination of banks, governments, and rentiers. Mortgage liability in the US is 10.14 trillion $; around 40% of that is held by private banks (rather than Fannie/Freddie/Ginnie), making up about 25% of all commercial bank assets in the US.
Mortgage liabilities don’t typically appreciate substantially over their lives. If they appreciate too much, the debtor refinances. Mortgage assets on the other hand can appreciate quite substantially.
The funniest part of Piketty’s book is when he suggests that criticisms of Carlos Slim, the Mexican telecom monopolist, are racist. Piketty is offended by how Slim
“… is often described in the Western press as one who owes his great wealth to monopoly rents obtained through (implicitly corrupt) government favors…
(Actually, Slim, himself, has been proactive about improving his press coverage: in 2008 he financially bailed out the New York Times and later became the newspaper of record’s second-biggest owner. Not surprisingly, Slim, who profits lavishly off long distance calls between illegal immigrants in America and their loved ones in Mexico, doesn’t get mentioned much in the Times’ vociferous denunciations of immigration skeptics.)
Piketty, in his inimitable prose style, explains that criticizing Slim is a mistake, if not downright racist:
“Rather than indulge in constructing a moral hierarchy of wealth, which in practice often amounts to an exercise in Western ethnocentrism, I think it is more useful to try to understand the general laws that govern the dynamics of wealth—leaving individuals aside and thinking instead about modes of regulation, and in particular taxation, that apply equally to everyone, regardless of nationality.”
In reality, Slim bought the Mexican phone monopoly from his close personal friend, President Salinas. When Salinas in turn invited Slim and 29 other privatizers to the 1993 Billionaires Banquet and asked each for $25 million dollars in campaign contributions, Slim quickly spoke up in favor of the President’s proposal.
An even funnier thing about Slim that never got mentioned in the NYT is that his six kids are surnamed Slim Gemayel because his late wife was a member of the Lebanese fascist warlord clan, the Gemayels. When Mrs. Slim’s cousin Bashir Gemayel was blown up during the 1982 Israel invasion of Lebanon, his followers ran amok slaughtering Palestinians. The NYT had an all-time great headline for Bashir’s obituary:
“Bashir Gemayel: He Lived by the Sword”
You don’t think there would be even more long distance calls if immigration was easier, hence more families sent some members to the U.S. to make money and send some of it home?
Yet the fact that their owner would profit handsomely from refusing to enforce immigration laws goes unmentioned by the paper of record. Which I think is part of Steve’s point.
My impression is that the hereditary rich tend to be more ambitious about making money than average middle class people. For example, I had a young fellow working for me who came from an Old Money family — his grandfather belonged to the National Golf Links of America and had lots of scandalous stories about his old college roommate Adlai Stevenson. But in 1986 he quit our company and started at a Seattle firm called Microsoft.
When my wife and I visited him and his wife in Seattle in 1988, my wife asked my friend’s wife, “What should we do tomorrow?” The poor woman broke into tears and replied, memorably, “We can’t do anything with you tomorrow because we have to jump out of an airplane with Bill Gates and we’re going to die!”
It turned out that Bill Gates had decided to test his current girlfriend’s fitness as marriage material by insisting she go skydiving with him. She in turn countered that she would, but only if another woman went with her. Bill pored over the company roster for an ambitious young married man and settled on our friends.
They didn’t die and my friend did very well at Microsoft, becoming head of the New York office. Unfortunately, he worked himself to death at Microsoft and died before 40, although not in a skydiving accident.
Elizabeth Holmes of Theranos saw herself as descended from the Flieschman Yeast fortune, but was only upper middle class because, her father emphasized to her that her great-grandfather had wasted money on indolence in Hawaii and her grandfather had lost the rest in the Texas oil business. But Elizabeth saw herself as inheriting the yeasty Right Stuff to make herself a billionaire.
Like I said, the rich or formerly rich tend to be more driven to make money than normal people.
“Marx liked to say he had discovered the universal laws that govern history; Piketty’s claims are only slightly more modest, but much more believable.”
Any evidence or reasoning here? And believable for who? Indian factory workers or the Californian upper middle-class?
See eg the section titled “Marx” on page 8 of Piketty, the section entitled “Back To Marx” on page 285, and the entire history of the 20th century.
Those sections are somewhat un-satisfactory to anyone who has studied Marx in detail, as I’m sure you have. For example, Piketty says at one point that Marx “lacked the statistical data needed to refine his predictions” (page 10 of Piketty in the edition I have). Capital Vol.1-3 is filled with statistical data from the time, so I’m not really sure why Piketty would say this. If he feels that Marx missed some data which would “refine” his predictions then he should actually expand on what data and how that would refine things. Piketty also says Marx neglected technological progress… which is completely wrongheaded, Part IV of Vol.1 is entirely about technological change. Notice that Piketty doesn’t seem to ever cite Marx in context, he simply makes sweeping pronouncements. That might be acceptable at an undergrad level, but I think serious economists should work a little bit harder. Let’s say we’re taking Piketty seriously when he says economic theory should be “rooted in historical sources that are as complete as possible” – well then we should actually address Marx’s criticisms with evidence rather than hand-waving nonsense about “totalitarianism”.
If you want to read Marxist responses to Piketty’s book I suggest the two following articles written by David Harvey and Andrew Kliman respectively who have both been involved in very productive debates about the nature of capital:
You can glibly refer to the “entire history of the 20th century”, but that history might just bite you in the ass one day, so I suggest you start taking Marxists intellectuals more seriously. Read what they’re saying in good faith and actually engage with their arguments.
I interpreted Piketty in those sections as saying that Marx’s claim that capitalists would dig their own grave only works in an economy without structural growth; structural growth was discovered after Marx’s time and this is not his fault. The history of the 20th century shows that capitalists did not dig their own graves and aren’t even showing a trend toward doing so, so I thought Piketty’s claim about was as charitable to Marx as one can get given his failed prediction.
I’ll look at the critiques, thanks.
“I interpreted Piketty in those sections as saying that Marx’s claim that capitalists would dig their own grave only works in an economy without structural growth; structural growth was discovered after Marx’s time and this is not his fault”
I’m unsure where you’re getting this from in Marx, so if you could find the part that Piketty is referring to that would be useful. Can you quote a section for me? Here’s the grave-diggers part in context:
If anything Marx seems to be talking about structural growth here (“development of Modern Industry” and “formation and augmentation of capital”), which directly contradicts what you think Piketty is saying.
The 20th century was filled with communist revolutions and Marx was writing in the 19th century, so I’m unsure what you’re referring to when you say “his failed prediction”. Can you point to another another 19th century economist that predicted the ubiquity of communist revolutions in a capitalist world?
My impression was that Marx believed sufficiently developed capitalism led inevitably to communism, and so in developed countries like Germany capitalists would dig their own graves most quickly, and so they would become communist first. Neither underdeveloped countries like Russia becoming communist, nor well-developed countries like in Western Europe and North America maintaining capitalism for another century and a half, seem to fit that prediction.
I’m sorry, impressions aren’t particularly useful when we’re discussing the concrete intellectual output of a person. Can you find an actual quote by Marx regarding this?
If we look at what he actually said and wrote he took a fairly large interest in Russia (and other semi-developed areas like Ireland) and considered them a possibility for revolution:
For example in this 1877 letter to the editor at Otecestvenniye Zapisky.
Where did you get your impressions from?
My impression is that Marx started out by seeing a capitalist phase as necessary and then changed his mind to believe that there was a faster and less destructive path, by bypassing capitalism.
Capital Vol. III Ch. 13, Marx is crystal clear on this point.
Can you quote the relevant part from Marx?
I think it came mostly from our resident Marxist. Maybe you should talk to him about how he misinterpretated Marx (like 99,9% of the people, including most Marxists and probably Marx himself, if I am to believe every self-styled Marxist that shows up)?
(He was banished for one day, but will return soon)
Marx had access to data, but there isn’t any in his works. Rather, he fabricates things that look like data.
I’m sure they feel like that. But here is the thing: a sufficiently motivated specialist (as you seem to be) can aways find representations by everyone else to be “unsatisfactory”. That’s double true for works by a figure that became a sort of prophet.
Given that Marx’s works are numerous, verbose, span a long time, were written in German, and were commented and extended by a myriad of followers, I’m pretty sure that for most specific details, someone can point to Marx saying X in a certain text, someone else can point at him saying 1/X to mean in another text, and a third guy can point to an obscure disciple of Marx who Actually Understood what Marx was Trying to Mean.
It’s the same thing we see with theologists when they talk about the homoousion or similar stuff. Nothing said by others (let alone by opponents) is ever good enough. Everyone else is always unsatisfactory, always misleading, always too blunt to deal with the subtleties.
My, slightly stronger, claim is that
Could accurately be affixed as a warning label to almost every statement of historical fact and can, therefore, reasonably left unsaid.
But you do you, Marxbro.
A guy I knew who worked in a bank explained it to me. There’s no mutual fund investing in the Burmese mining company because Burmese mining companies are not where the money is coming from. It’s coming from the top floor of the bank, generated by very old, very rich guys who don’t use computers at all, and when techies like my buddy wonder what’s going on, management just shushes them and tells them to get back to coding.
My buddy figured out that the top floor is the bond department and the old guys are engaging in illegal insider trading. They all go way back and know each other and won’t get caught (plus they have infinite blackmail goods on each other), but THAT’S why there can’t be a mutual fund joining in.
(Note: above story is from the 1990s).
Back in 2012, there was some question of whether hedge fund returns were driven by insider trading (in the wake of prominent arrests for insider trading, and worse hedge fund performance). The verdict doesn’t seem to be in yet (at least as far as I can tell), but signs are pointing to ‘yes.’
Not just insider trading. Legitimate companies can’t give bribes, even in countries where bribes are essential to doing business or not having your shit wrecked. Legitimate companies can’t keep their financials a secret to have an edge on companies they are bidding on.
Corporate governance is itself expensive.
I’ve read that in US law, insider trading in bonds is not illegal. This gets to be really interesting with junk bonds, whose price can go up and down substantially depending on the prospects of the company, i.e., insider information about the company is really valuable when trading junk bonds.
It seems like this is testable, because if it’s individuals/small groups making the difference, you’d expect wide scatter where some wealthy institutions get unlucky with their hiring and some small ones get lucky with their hiring. How tight is the correlation between wealth and return?
I think these days, the financial adviser thing is being crushed by machine learning bots.
I’m going to be pedantic here, because Jane Austen! Most of her male characters don’t work, or are clergymen which was basically a give-away back then, or were in the Navy so we won’t count prize-money as honest work. But one of her heroes, George Knightley in Emma is actively developing his farm and his younger brother is an up-and-coming lawyer. In Pride & Prejudice Mr Bingley’s money was earned by his father from trade, and Jane Austen even has a woman who earned her own money – the owner of a girls’ boarding school, in Emma.
So it seems that one way to get rich in those times was to go into business, much like Bill Gates or Jeff Bezos now.
Edward Gardiner in P&P is also self-made, no?
Good memory! Or selt-making.
One important thing I always think about when we discuss wealth inequality is that it’s not necessarily a *bad* thing. As in, wealth and economics aren’t necessarily zero-sum games and therefore an outcome being unequal doesn’t automatically imply that it’s a worse outcome than an equal one.
If a genie offered both of us a windfall: $10,000 to you and $100,000,000 to me, OR we could reject it. Either we both get the money or neither of us do. Accepting the offer creates inequality, but is obviously better than the alternative. The genie has created significant inequality, but we’ve both ended up better off.
Inequality, therefore, isn’t a *good* outcome, but it’s not necessarily a *bad* outcome either. It’s just simply not the utilitarian metric we should be using to evaluate economic utility of a policy. If inequality has been on the rise as the result of various policies, but so has infant mortality, literacy rates, nutrition, employment, education, and basically every other quality of life metric that indicates positive human outcomes, then it’s pretty clear that policy is a good thing.
It seems to me like discussions of the terrible results of various policies that increase inequality and the impending harms of inequality always simply assume that inequality is an indicator of poverty and therefore the central metric to use to judge economic success, but to me it seems like those discussions are just intrinsically misdirected from the beginning. Especially because in practice the most unequal societies also tend (up to a point) to trend towards having the most of all those other good metrics in practice.
Jeff Bezos has millions as times my net worth, so I’m not super pleased about that in an inequality sense. It has bad optics and feels bad to know that some people have 4 houses and I don’t. But if the policies that facilitated that are responsible for the fact that are also responsible for the fact that almost nobody starves, most people an read, and even homeless people can afford a supercomputer in their pocket for the price of 1-4 nights out, then that’s probably a totally fair trade. From a utilitarian perspective of what I get it’s better for the genie to give him billions and me thousands versus both of us eating bark.
Evolutionary game theory suggests that rejecting the inequality (if the short-ended player can reject it unilaterally) can be an advantageous choice.
Your comment is conflating the question of what is fundamentally good with the question of what is a useful strategy.
Well existentially speaking there is no fundamental good or bad. The strategy is evolutionarily useful probably because nobody believes anything is really a one-time event.
I think this is missing the point. It’s a useful strategy because it leads to a distribution of player-behaviors and outcomes that are ‘good’.
His comment is still making the conflation I stated. Steve132 says, it’s a good thing to gain, even as others gain more. Clipmaker replies, but it can be strategically useful to veto this. But the second of these does not contradict the first.
That’s in a bilateral monopoly bargaining game of some sort, which doesn’t describe much of the economy.
Unfortunately, it does describe the way a lot of people imagine the economy.
That depends on whether the value of money is fixed. That unequal windfall can result in prices increasing, so the poorer person is priced out of being able to afford certain goods.
Another issue is that various outcomes may depend on relative wealth. Perhaps politicians will stop listening to the poorer person, creating laws that harm her, to the benefit of the rich people. Perhaps Jane the Attractive will no longer want to marry the poorer person, preferring the Boring McRich. Perhaps polygyny or increased standards for men means that not even Mary the Less Attractive wants to marry the poorer person. If Bob can now afford a Playstation, but prefers being in a relationship with Jane or Mary over having a Playstation, he may logically consider himself worse off.
This feels like a strawman to me. We are not talking about starving vs having food. We are talking about accepting reduced growth, so the poorer people have a better life.
Do we have any evidence that the bad scenarios you’re describing are actually happening on a wide scale and could be prevented/improved on the long term with anti-inequality policy.
Because an alternative scenario is “Bob can’t buy a Playstation because the massive interleaved structures of investment needed to develop the Playstation and the games that run on it don’t exist”.
I was responding to the hypothetical:
To make a point about other mechanisms at play. I didn’t speak to the extent to which these other mechanisms play a role in the current Western world or how big they are relative to the mechanisms that help the poor(er).
Redistiribution doesn’t happen by magic. To get universal literacy, for instance, you have to force some people into schools, and force other people to pay for them.
Logically that is not true. You will never achieve truly universal literacy because not everyone can learn to read. Forcing people into schools and forcing others to pay for them might increase the literacy rate relative to another system where we rely on philanthropy for those too destitute to afford school tuition, but this is not a logical certainty.
It isn’t clear, as an empirical matter, that public compulsory schooling results in an increase in literacy. For a discussion of the English history, see Education and the Industrial Revolution by E.G. West. For a discussion of public schooling in the third world now, see The Beautiful Tree by James Tooley.
Life isn’t a single-round game.
You accept the $10,000 to you and $100,000,000 to me because “why not? Everyone wins!”
And a few years later you find that I’ve used by 100,000,000 to corner a number of markets relevant to your life in order for me to extract higher rents. 20 years later you’re down a lot more than 10K vs the alternate world version of you which rejected the windfall in exchange for not putting me in an overwhelmingly dominant position over you.
Harking back to scotts post on Conflict Vs. Mistake… it’s important to remember that while not everything in the universe is conflicts… the conflict people aren’t entirely wrong in their worldview.
There are a lot of very real conflicts, including class conflicts and accepting a deal where you get a popgun while your opponent gets a main battle tank… can lead to them having a tank while you don’t which can lead to them using that position to create much more advantageous situations for themselves that cost you long term more than you gained.
Is this pedantry or are you really saying you would refuse the deal because that one additional $100M guy in the world would create more than $10k of damage to you?
Can we show any such rent-extracting market-cornering in the real world, though?
Are The Super Rich actually extracting any rents at all? It seems like they mostly just coast on interest and either buy mansions or play at philanthropy (Gates) or politics (Soros).
(I mean, if there are rents to seek, there are other super-richies to compete for them – or to aim the State at the other super-richies.
Short of getting the State to back them up, I’m not at all sure how they’d manage to corner any markets at all, especially for any length of time.
Monopoly without force behind it is an unstable equilibirium, and trying to form one is a great way to throw away tons of cash.)
Good question. Isn’t it more structural rentiership through control of institutions and the culture that gives those institutions gatekeper roles? Higher education would be a great example. It’s nigh on impossible now to ‘amount to anything’ in any serious profession or even in entrepreneurship (just look at Shark Tank, US version) if one doesn’t have a degree from one of a dozen or so elite institutions in the US – and this is more true today than 60 years ago in this country.
The enormous wealth of endowments must be part of the reason for that structural power, unless one naively supposes that those institutions have become relatively so much better at education and more necessary to the public good than they were previously. Hence we have a causal mechanism.
It could just be that people have a Dunbar’s Number equivalent for institutions such that in a society where it is the norm to assign people’s status based on college pedigree, employers and investors maps of the landscape only include a dozen elites + everything else.
‘Coasting on interest’ comes under the definition of extracting a rent; you are having people pay you money for access to your capital.
True, but I’d expect more capital being made available for rental would reduce the cost of renting any particular chunk of capital. To invest a new chunk of capital in rent-generating assets means either creating new assets that compete with similar existing assets (which bids down the cost to rent the asset) or buying existing assets from their current owners (which bids up the price without increasing the rental income). And in the latter case, the seller presumably does something with the money they get from selling the asset.
The same is true for housing; that doesn’t mean that payments you make for access to housing are not ‘rent’, and someone who lives off them is not a ‘rentier’.
I mean, given that someone owns 10 houses and 9 families are homeless, the owner renting to the non-owners is a pareto improvement on them keeping the 10 to themseleves. And maybe in the set of all possible economic systems, there is not one that works in any way better.
That’s still what the words mean.
True, but the context was Murphy’s comment about rent-extracting market-cornering, with Sigivald expressing skepticism of the concept. “Rent” here is overloaded: Piketty is using it to refer to any kind of passive income, and you sound like you’re also using it in that respect, but “rent” also has a narrower meaning which is highly relevant to discussions of market-cornering. The super-rich are clearly enjoying rent in the broad sense of returns on capital, but it’s debatable to what extent they’re collecting an Economic Rent in the narrower sense, and to what extent their returns on capital represent Normal Profit or simple Producer Surplus. It’s also not clear that adding more rentiers would increase their Economic Rent, decrease it, or leave it the same.
Short of getting the State to back them up
Which is exactly how the super-rich stay super-rich. Bill Gates and Jeff Bezos are outliers. The super-rich you should be looking at are in the financial sector, particularly investment banking. Banking, in a regime of fiat money and fractional reserve banking, is basically a State-granted license to transfer wealth from other people’s pockets into your own.
“Short of getting the State to back them up”
It isn’t a game where everyone plays fair. If getting state support works then it gets used. Wealth is just another fungible form of power that can be traded.
Rent seeking is not a hypothetical, it’s just a reality of everyday life.
It isn’t a game of “government good libertarianism bad.” Its observing that real people don’t stick to philosophical ideals when the chance to gain more wealth and power comes up.
In other words, inequality as a target is a big fat case of Goodhart’s law. This is most evident when Scott hopes to increase birth rates so the rich becomes less rich, with no reason this would make the poor less poor.
Of course, a more realistic example would be someone proposed $20,000 to you and $100,000,000 to me, and I vetoed it because why should I let you have $20,000 when having $100,000,000 gives me the power to decide how much you should have?
I would most certainly reject a 10,000 windfall to prevent someone else from getting a 100 million unearned windfall, and would consider it a positive good that I had the opportunity to block you from getting that unequal leg up on me.
Humans are spiteful that way.
I am generally less concerned about inequality than other rentier-leftists in my social circle, but your example pushes me, at least, pretty hard the other direction from where you seem to think it pushes.
The only thing that makes severe inequality reasonably bearable to me is that I have frequently interacted with hyper-paid executives, and they are clearly extremely smart and work way harder than I have any desire to, so I begrudge them their 1-2 order of magnitude better pay much less than if I thought their wage premium was truly unearned.
That may well be a correct description of both your attitudes and those of other people, but I wonder if one can narrow it down a little more precisely. What if the large benefit someone else gets is in a form other than money?
Someone you know gets engaged to a woman who you believe is very well suited to him. You were not interested in her, are not doing as well in your love life. Do you wish she had rejected him?
Both you and someone you know suffer from an annoying but non-lethal disease. A new medical breakthrough results in reducing the effect of the disease for you, completely curing him. Do you feel a spiteful wish that he hadn’t been cured?
Your “leg up on me” implies that you and the other person are somehow competitors. In what? Do you feel the same way if the person who gets rich is already happily and monogamously married, so not competing with you for mates? Lives in a distant country, so not competing with you for status? Is it pure “competition to have the better life” or is there something more direct implicit in your view?
To make the situations more analogous to the huge disparity in the hypothetical, wouldn’t that other person have to be engaged to 10 women, while you get a peck of the cheek that you otherwise wouldn’t get?
If that leaves you as the only person with a disability and society becomes less accommodating & sympathetic as a result, I can see legitimate reasons for spite. Especially if the medical breakthrough is not merely a matter of luck, but also a matter of research priorities.
I think in reality there is usually a form of competition or externality, which damages the person who gets nothing or less.
The hypothetical doesn’t include this, but perhaps people are smarter than to believe a proffered hypothetical that mismatches with typical reality and that is used as an argument to push for policy.
And a form of externality which benefits him. After you win the lottery, you are willing to pay me a price to mow your lawn that you would not have offered before–high enough so I am willing to accept it.
The only predictable negative externality that occurs to me is your improved position in the competition for mates, which suggests that the reaction should apply more strongly when the person getting a large benefit is of the same sex as yours. I conjecture that the reaction may be a result of evolutionary pressure in a past where the relevant groups were much smaller, hence the cost to one person of gains to a competitor in the mating market much larger. Evolution, after all, only cares about one maximand–the one affected.
What other reason is there why someone should care about changes in relative wealth rather than in absolute wealth?
Perhaps, echoing the spirit of your final sentence, because it lets people complain that the poor are getting poorer when they aren’t.
There are more forms of competition than just for mates. Politics in general is a competition and rich people get their way more in politics than poor people.
Another example is gentrification, where other people getting wealthier can result them in pushing poorer people to less desirable housing.
If we assume a relatively fixed distribution of abilities, then increased wealth by some groups causes talented people to use their talents more on making those people happy. Gentrification processes generally involve entrepreneurs catering to the old community being replaced with entrepreneurs who cater to the incoming and richer community. This same thing happens on a larger scale when some groups get richer, while others don’t.
Whether trickle down economics is enough to offset these things is debatable, but it seems non-obvious to me that it always does.
The negotiated price is not necessarily dependent on the ability of the buyer to pay. If it’s a buyers market, because mowing lawns is so easy that the competition is fierce, there may be no increase.
Instead, it seems likely to me that the pay will go up for some jobs, like the very talented artisan who helps produce Bugatti Veyrons, while not changing much for others.
This sucks if you are the person whose skills are a commodity and especially if you then (used to) buy things from people whose skills are not a commodity. Their prices will go up, while your own salary doesn’t.
‘Humans are spiteful that way.’
Let us not generalise from limited data points.
For myself, I would definitely accept the 10,000 windfall provided that my counterparts windfall comes as actual value rather than simply money tokens*.
*Somebody receiving a 100 million money tokens is simply a theft that has nothing to do with spite.
Yeah, some of the answers in that thread are putting a chill up my spine.
I’d take the money and hope really hard the other guy wasn’t going to use his new fortune to buy all real estate everywhere just to screw me over for no reason. Call me idealistic if you want.
Would you take a penny while the other guy gets $1 billion? It’s still an absolute gain for you!
I’d accept the deal even without the penny for myself (subject to the caveat about it being actual new wealth, not just inflation). I’m not a utilitarian, precisely, but still happy to see other people doing well.
(1) Let’s assume we’re talking about wealth here and not money, so that we don’t have to work through the inflationary effects of money donations.
(2) Unless I believe that someone is going to use their wealth to harm me, I would probably take nothing and assume that the net effect of wealth gain is positive.
My hypothetical. You accidentally summon a quirky genie who explains that before she returns to her home dimension, she will give a random resident of neighboring town a gift or not, at your choice. There will be no other contact with the genie or repercussions, and no one will ever know you made the choice. You can also choose the gift, which is any of:
(1) The cure for all cancer, which the recipient will receive an internationally enforceable patent for.
(2) The world’s 20 greatest currently unwritten books, with international copyright.
(3) 100,000 cars (or their equivalent in public transportation equipment at your choice) per year in perpetuity, created with no environmental or resource costs.
(4) 1,000,000 tons of any metal, deliverable at any times and places the recipient chooses. (But not deliverable in such a way as to physically harm people – no dropping it from orbit or smothering people in a Midas pile.)
I think I would be better off if any of these were created and given to the recipient, even though they would increase total economic inequality. They would increase the total stock of world wealth, drive down prices, etc. (1, 3, and 4 would also be disruptive to people who make their livings in those industries, but IMHO still net beneficial overall).
The counter argument is that the recipient would use her new found wealth to lobby for things that would harm me, but I think the amount of harm would be minimal and offset by the value of the new wealth to everyone.
ETA: Paul ninjaed me!
Which requires more money than the wealthiest human has.
I thought about it a bit, and (given the assumption that the genie is creating wealth, not just dollar bills) I’d absolutely accept for the sake of creating an enormous quantity of wealth, even if I don’t get any of it at all. I think I’d even be willing to spend a non-trivial amount of money (on the order of a percent or two of my annual income) to create hundreds of millions of dollars worth of wealth. It’s not just about me and the recipient of the windfall: it’s also about all the potential for gains through trade for the broader economy as the windfall recipient starts trying to invest or consume his wealth.
It’s more complex than it first appears. Money is only a tool for acquiring social status. So if you receive a million dollars and I receive a thousand dollars, I’m still lifted above thousands of others I was previously below.
But if we’re the only two people on an island, the deal makes me worse off.
Consider now not a business teal that involves two people out of a population of millions, but a political question that involves everybody. If the left-handers receive a thousand dollars but the right-handers receive a million dollars, all the left-handers are left worse off. If the left-handers lose a thousand dollars but the right-handers lose a million dollars, the left-handers are better off…
You don’t value any of the other things one can get with money, such as food, health care, housing, transportation? That is what you appear to be claiming.
It’s better for those two. But that’s just as true if you substitute in some other things, like what if instead of a $10k payoff to create a 100x millionaire, it’s a $100M payoff to create a dictator? You’re in a position to help some warlord secure a monarchial throne, he offers you $100M. You both win if you take the money.
It’s supposed to be a question of principle right, so it should work for any amount of money. So what if the genie offered $100M to you, and the rest — i.e., all the titles to all the wealth in the world — to one other person? Then it sounds absurd. It becomes more obvious that someone owning resources represents other people having an effective obligation to perform labor on that person’s behalf.
In that sense, all wealth is debt imposed on others, and it’s supposed to be justified ideologically by the claim (which I avoid addressing here) that the debt is repayment for services rendered. If the money comes “from nowhere” as in this example, then all other people in the world are losing some of their consumptive power (although probably less than $10k worth each).
This model assumes that the genie gives you and the other person banknotes, or it transfers property owned by others to you. But if the genie gives you $x worth of newly created goods, and $10000x worth of newly created goods to the other person, then the rest of the world is not worse off (unless perhaps if $10000x is enough to allow the other person become dictator of the world).
Some people may end up better off and others worse off if the two of you sell the goods the genie gave you, altering the market price of some goods. The existence of a rich capitalist, for example, increases the supply of capital, so it reduces the price of capital (i.e. profit rates), making other capitalists worse off, and workers better off.
If we can predict solid 1% to 1.5% growth in per capita GDP over the long term, does this mean we can estimate when the economy will be sufficiently large that Universal Basic Income becomes financially viable? Though if Picketty’s thesis is correct, actually implementing might create an situation in which the only people actually working for a living would be the middle class. The poor would take UBI, the rich would live off their capital.
Currently, a 50% income tax rate put entirely towards redistribution would give everyone in America around $10K a year of UBI. If we assume 1.25% growth, it should be about 130 years before it takes less than a 10% tax rate to sustain a UBI of $10K a year. This suggests that a without a large-scale wealth tax, a government-run UBI would be drastically less sustainable than a private one capable of taking advantage of the stock market.
Can we though? All Picketty’s data seems to suggest is that this is what has been measured as the average up to now. Perhaps that’s just what humans are capable of.
It seems to me though that the purpose of a UBI or a BIG is to tackle technological unemployment, and if machines eventually happen to be more productive than humans, whether through being more capable or simply through working 24/7 with similar capability, then the normal rate of growth, empirically measured for the past though it may be, will not indefinitely apply in the future.
If machines become even just equivalent to humans in terms of capability and maintenance cost, then their four times longer work week and greater scalability should turbo-charge economies, and allow prices for goods to be a lot lower, allowing a UBI/BIG to go further. I think automation might prevent income inequality being as much of a problem by churning out more stuff and for cheaper prices without any major sacrifice in quality.
The problem with that is the same problem that we see in our current economy: if you make part of the economy much more efficient, the parts that fail to become more efficient become a much larger part of the pie.
For example, when farming becomes much more efficient, but healthcare not so much, while people want both better food and better healthcare roughly equally, then people will end up spending more and more on healthcare and less on food. Then over time, food becomes so small a part of the budget and healthcare so large a part, that efficiency improvements in food production benefit consumers relatively little, while the relatively limited efficiency improvements in healthcare have a large impact on people’s budgets.
I expect that in a ‘post-scarcity’ (of labor) world, other things will simply become scarce.
Obviously the idea of a natural law of 1-1.5% growth is absurd. Certainly we have not experienced such a level of growth for the vast majority of human existence. Somewhere in the last few hundred years we jumped from a much lower rate of growth to a higher one.
There is absolutely no reason why growth should be 1-1.5% in the future just because it averaged out to that level for two or three hundred years. I don’t think I’m being uncharitable in saying that would be an incredibly stupid belief. There’s not even any attempt to provide any kind of logical underpinning for such a law.
This doesn’t work because in a capitalist society as more people have more money, particularly money they didn’t earn and when they aren’t being given a quality education about sound financial decisions, prices rise. Further we also deal with the issue of what constitutes a fair baseline.
Reducing inequality under our current system is a permanent political conflict which can never be eliminated and likely not even ameliorated.
This seems like gratuitous “Late-Stage Capitalism”-ism.
What is is about the least productive and most uninformed people making poor consumption decisions that you believe is unique to capitalism?
Never. People who want UBI aren’t worried that the poor is starving; they are worried that the poor are much poorer than what they (the worriers) consider a decent living. As the economy grows, what people consider a decent income grows too. When the middle class has a (say) $100k salary, a (say) $10k UBI will seem irrelevant.
That’s a pretty over the top and uncharitable take on UBI proponents.
I want a UBI that will provide for:
C) Primary and secondary education
D) Shelter in a low-land-value region
E) [Edit] High deductible + annual checkup health care
$10k per human would be plenty. The important thing is that it be truly unconditional, and predictable. To make it predictable, it would need to be indexed to an inflation measure of just those goods.
I would be perfectly happy if this encouraged the population to migrate to depopulated regions of the US. Even if said population spent their days playing video games and smoking pot, which seems to be the plausible outcome that infuriates people the most, for some reason.
I don’t think it is uncharitable or over the top at all. It may not be quite correct, but certainly if a 10k UBI was implemented it would not take long for the campaigns for a living* UBI to begin.
*Regular nights out in London
You appear to be making a slippery slope argument.
I have never heard or read anyone who’s familiar with the concept of UBI and serious about campaigning for it argue for any other human goods than health care (which I left off my list, I added it), and telecommunications (which I think is cheap enough it can be considered a consumption good, not a necessity) on the list of “what a UBI ought to be enough to provide for”.
Certainly some people argue that a UBI ought to provide for housing in NIMBY-riddled housing markets, so I’ll buy that if those UBI-proponents can’t be talked off the ledge, we’re talking about an unimplementably-high basic level.
Similarly, if catastrophic health care insurance is considered part of basic income (in countries that don’t implement universal health care), that’ll push the minimum up quite a bit, likely into unimplementable regions (so I retract my point that 10k is enough in non-universal-healthcare regimes).
But arguing that the moment we get a UBI political power will thereafter forever be shifted towards forever increasing does not bear any relationship to the political power struggles I’ve seen.
‘But arguing that the moment we get a UBI political power will thereafter forever be shifted towards forever increasing does not bear any relationship to the political power struggles I’ve seen.’
Can you give an example of a benefit given that did not have people campaigning for the benefit to be greater (if monetary) or better quality (if service)?
If the bare minimum of your proposal does not allow for ‘human dignity’, then I cannot see that being uncommented on by the living wage lot if it were implemented.
Example: minimum wage.
The real minimum wage has steadily grown smaller ever since it’s introduction. So I think it’s actually an example in my column.
But just to be clear, I am not making the argument you appear to be refuting: The beneficiaries of new policies do frequently lobby to expand their benefits (and even more frequently to avoid the benefits being steadily diminished in real terms, which is a different thing, but certainly common).
But the people who lobby for new progressive policies are rarely the people who are the beneficiaries of those policies; I expect a UBI would slice my after-tax income quite dramatically, for instance.
I am arguing that the people in favor of instituting a UBI are not, themselves, those specific people, going to turn around and lobby for an ever expanding UBI. And I think the power of a minority of rich people to fight against expanding income redistribution is alive and well, showing no signs of accepting an ever expanding specific policy.
A) Don’t think people given a UBI will suddenly develop a class consciousness that will then make them a powerful enough force for collective action that they can then move the needle on arguments to expand an entitlement
B) Don’t think the people themselves (who, again, I think are a group of people with tiny overlap with the present and future group A) who currently lobby for and write think pieces about UBI, will immediately turn around and repudiate the logic they currently use to argue for a modest UBI, and start lobbying for an ever expanding UBI
I am arguing against the stated argument that I interpreted as “progressive people arguing for UBI are, individually, hypocritical and arguing in bad faith, they will individually turn around and make different arguments for ever more redistribution the moment they win this one, and thus we should ignore their arguments.”
That argument is, I think, is largely untrue. If it was rephrased as “it’s hard to take away entitlements, and sometimes recipients of entitlements have the temerity to lobby for those entitlements to be inflation adjusted”, that is a very different argument, one which I agree with, but consider largely irrelevant to whether it’s a good idea to institute a UBI.
Even the Federal minimum wages certainly have not, and the current largely-successful attempts to raise state and local minimum wages to $15.00 bring it to new all-time highs in real terms.
Like many popular factoids, that one is false. The federal minimum wage was introduced in 1938 at 25 cents/hour, corresponding to about $4/hour at present prices. It rose, inflation adjusted, from then until about 1968 ($10.75/hr), declined from then until 1990 ($6.82/hr), up a little since then ($7.80 in 2009, the last year my source gives).
I stand corrected on the 80 year trajectory of the minimum wage, thank you!
I think the factoid which I was mis-remembering is that it has steadily shrunk for the last 50 years, but 50 years is certainly a cherry-picked range to measure over.
Can you think of any reason to believe that, if average real incomes went up a lot, the cost of the list of things that someone like you would then make would not also rise?
Note that your minimum is about six times what the per capita real income of the world was through most of history.
I’m not sure I understand your question, are you asking why I think a UBI (or some other large scale redistribution) wouldn’t cause an inflationary spiral?
If so, my belief is that most of the things in the categories I listed (with the notable exception of health care, health care is really hard) would represent a shift of society’s resources from investment in the wealthy and very wealthy, towards people and problems of the poor *that we already have the technology, resources, and expertise to solve*, capitalism is just singularly bad at prioritizing investment in people who don’t have capital.
So I think producers of PlayStations and iPhones and clothes and cars and construction materials for new, modestly sized apartment blocks far away from the current overpriced economic hot spots would do a booming, high margin business selling goods we already know how to make in very large volumes. Zero-marginal-cost goods like software would get a gargantuan windfall as their consumer base expanded dramatically, but I don’t think their direct labor costs would change (although the tax wedge would increase, obviously, unless we can switch to a Georgist taxation regime, which, given that this is all fantasy anyway, why not).
The low skill labor supply would likely get significantly tighter at the margin. Wages for pleasant low skill work would drop dramatically. Wages for unpleasant low skilled work would sharply increase, as the best alternative to cleaning my toilet would be significantly better than the status quo ante. Of course, the point from my perspective is that I think low skilled work is getting harder to find, and this impact on the low wage market is what I want to see anyway, so I may be begging the question with this analysis.
I don’t think hunger is in practice a significant factor in the US economy, currently, so we might see the typical move up the scale from beans and rice to meat products that comes with increased prosperity, but generally speaking poor people in the US have more than enough financial resources to cook luxurious home cooked meals, they mainly lack time to do so, so I’m unclear what the impact here would be.
No. I am saying nothing about an inflationary spiral. I was describing a change not in the price of the items on your list but on what would be on future lists made by people like you.
My point was that your view of what an appropriate minimum was is a result of living in a very rich society, that if the society became richer people’s view of what a UBI should be would increase accordingly, hence if there was a UBI and economic growth continued, its level would increase.
If you lived in 1900, the minimum food you consider acceptable would have been much more basic, and the minimum acceptable housing much more crowded, than today.
I wonder what the political appetite there would be for UBI if it was pegged to the minimum standards of 100 years ago, with the understanding that it would maintain that lag-time. It would explicitly build in a raising of the standard, but would also peg it far below unreasonable amounts. A rough way of keeping it to actually be a basic income, I mean if people 100 years ago do live on it, why can’t you?
And if piketty’s rates are roughly accurate into the future, that means a UBI of half the average wage would only need to be (1.0125^100 ~ 3.46) between 1/6 and 1/8 of the current average wage.
It’s financially viable today–at a level that would have seemed adequate a few centuries back.
Per capita income in the developed world today is at least twenty times the global average through most of history. So about $1500/year would be a basic income at the average level of income and consumption through most of history.
It doesn’t seem adequate today. I see no reason to expect that the pattern–the view of what constitutes an acceptable minimal income rising along with average incomes–will change in the future.
I work in financial planning, and I might have some valuable context for a few of these points.
For one thing, the traditional style of financial planning firm works by charging a fee based upon how much money you have. Somewhere between 0.5% and 1.5%, generally. Additionally, they take commissions on sales of various investments, which is where most of the money comes in. This sort of advisor is generally considered worse than useless, since even if they can manage to outperform index funds, they probably can’t manage to outperform index funds by more than their fees. They are by far the most common sort of advisor, and are presumably the reason why hiring a financial advisor is becoming less standard.
I know of a bunch of firms that claim to be fixed-fee, and a few which really are. Fixed-fee advisors are generally considered to have a better incentive structure. Despite the fact that a ratio fee would seem to encourage maximizing client wealth, the difference the planner can make on the margin is sufficiently low that it actually just encourages spending as little time on each client as possible so you can maximize the number of clients. And then commissions incentivize making a large number of trades, so you can take commission on every swap, which adds extra fees and just makes it harder to break even.
So fixed-fee firms are the ones which are actually incentivized to have good service, since they get charged more for being available to answer questions than for actually managing the assets. The few I know prefer not to have custody of the client’s money directly, to further reinforce that. The result is fixed-fee advisors don’t really give specific investment suggestions, and are more based around things like figuring out risk ratios based on life expectancy and charitable goals, and things like that. Asset class investing involves a little more than just saying index funds are good, but it does result in telling clients that they should just buy a handful of index funds. Most of the value of the planner to the client tends to be in providing advice on money-related things, since the actual portfolio design isn’t very difficult. I personally have worked on things like providing artistic representations of estate plans, handling business negotiations for a private vineyard, and finding out whether you can save money by gifting a house to someone solely for the purpose of them leaving it in their will to you. We’re a bit more full-service than many firms, but rich people who like their financial advisors tend to have people who advise on more than finance.
One of the things that having /any/ major financial planner does for you, though, is it opens up access to private equity funds that are only advertised to sufficiently high-net-worth individuals and businesses. The primary asset class that super high gains come from is private equity, generally meaning investments in angel funds and off-market startups. The way these funds operate involves you pledging a certain amount of money that they can invest as they choose, but they only call up parts of it periodically. This means that dealing with a few really rich people is much easier than dealing with a ton of poor people, in particular because it is really, really bad if they can’t manage to get all of the money. Their current business model requires only dealing with people who will definitely be able to make their payments when they need to, and since the funds are so large, that means they need to have a few very rich investors. Investment advisors known to advise large fortunes are where they go to find those people.
Also, any given private equity fund is still likely to make a negative return, which is a much bigger deal if you don’t have a lot of money in the first place, so very few people would recommend that you invest in a private equity fund instead of something safer if you aren’t already rich. Higher returns implies higher standard deviation. That’s also why a long time horizon is so significant. The basic activity of asset class investing is to diversify to balance out high variability without diminishing returns too much, but over a long enough time frame the variability matters much less and you can afford to make riskier investments.
Although, getting 10% returns doesn’t require any special connections. The stock market grows at 11% a year, it just has very high variability, so you need to be able to be in the market for several decades to ensure those gains with an all-stock portfolio. A 60/40 split of stocks and bonds will get around 8%, while not requiring more than a few dollars to invest. You can do it on Schwab with only a bit of research. The reason why super rich people and organizations /only/ get 10% returns is that despite private equity managing 20% or more, even they don’t have enough capital and long enough time horizons to stay fully invested in such risky markets. They diversify heavily too, cutting returns in favor of making those returns basically guaranteed.
My main point is that financial planners do things besides stock picking, but one of the things they do is get you into private equity funds, which are the main source of the better returns that rich people can get. However, for reasons of risk management, this isn’t something people who aren’t super rich necessarily ought to imitate. There are only slightly less effective strategies that anyone could imitate, but its not smart for everyone to have the same amount of risk. Realistically, most people ought to do something like the 60/40 split I mentioned, and the difference between that and what most people end up getting is due to people being bad at performing optimal strategies even when they know what they are.
As an aside, all sorts of people have trust funds. They are a recommended part of estate planning for everyone middle class on up, since they can be managed much more carefully than a will. It’s just that most trust funds are made by the person who originally earned the money, and these days it is culturally popular to make your kids earn their place in the upper class. So the trust funds tend to mostly help with college tuition and the down payment on your home, and most people who have them have less debt, but don’t live off of the fund directly.
tl;dr: Private equity funds are where bigger investment returns come from. Financial advisors can help you get into them, but for risk management reasons they aren’t a good choice for non-rich people anyway. Anyone can get 8% pre-tax/pre-inflation returns, people are just bad at investing. Including rich people, who theoretically can have good financial planners, but often don’t. Even actively detrimental advisors can make 10% if you have a hundred million dollars.
All of this is just my own perception, of course, but I work in the industry. I’m happy to answer questions if anyone has any.
“One of the things that having /any/ major financial planner does for you, though, is it opens up access to private equity funds that are only advertised to sufficiently high-net-worth individuals and businesses. The primary asset class that super high gains come from is private equity, generally meaning investments in angel funds and off-market startups. The way these funds operate involves you pledging a certain amount of money that they can invest as they choose, but they only call up parts of it periodically. This means that dealing with a few really rich people is much easier than dealing with a ton of poor people, in particular because it is really, really bad if they can’t manage to get all of the money. Their current business model requires only dealing with people who will definitely be able to make their payments when they need to, and since the funds are so large, that means they need to have a few very rich investors. Investment advisors known to advise large fortunes are where they go to find those people.”
I still don’t understand why I and a thousand other middle class people can’t pool our funds and give them to one person, who is then an effective simulation of a rich person and can do whatever rich people do. Sure, there’s high risk to every private equity investment, but over a large enough scale, doesn’t it all even out? Bill Gates never worries about losing all his money, and if enough middle class people come together to form a Bill Gates sized pool of money, surely they wouldn’t either?
Well, the most direct reason is that the private equity funds don’t allow that. They don’t allow that because it would be a giant pain for them to track everyone down and make sure they send in their commitments at the right times. Changing the way they take investments would make them expend costs against the inertia, and the easy answer of collecting all the money up front would make a private equity fund a worse investment than it is now. Not that much worse, but worse.
Also, I’m pretty sure it is currently illegal to give investments that risky to poor people. You have to be a registered investor, which isn’t hard, but means you proved to the government that you have a bunch of money and won’t end up dying in a gutter if this all falls through.
In practice, the way that non-rich people take advantage of those sorts of investments is through the benefit they provide to pension funds and school endowments. However, pension funds and school endowments are often really poorly managed, so they don’t get the benefits as directly as someone who is allowed to invest directly in the private equity fund would.
Sorry to harp on this point, but I’m still confused.
Say I collect money from a thousand middle-class people. Now the private equity sum only has to track down one person – me – which is no harder than tracking down any other rich person. I take 0.1% for my service of taking your money and putting it in a big pile, and everyone else still gets a good rate of return.
In fact, it sounds like you’re saying this happens, in the form of eg pensions. A bunch of employees are aggregating into some form that the private equity firms can deal with, and benefiting from it. But why do I have to wait for my employer to set up a pension fund before I can do this? Why doesn’t someone set up a pension fund for people who aren’t necessarily using it for retirement in the context of a large organization in exactly the prescribed way?
Honestly I thought this was kind of like what a mutual fund was supposed to be, which is why I’m surprised rich people do so much better than mutual funds do.
No worries, I’m happy to try to explain.
You are correct that this is basically what a mutual fund is, but mutual fund stats in general are brought down by managers trying to pick stocks. Index funds are mutual funds, but the average mutual fund is worse than them because the average mutual fund is run by someone who thinks they can consistently beat the market but is wrong.
I believe that publicly traded private equity funds do actually exist, in fact, but they definitely don’t get the same return that private equity investments normally do. I have a couple theories for why.
A possible reason why you wouldn’t see higher returns through such a fund is reactive price fluctuations. Warren Buffet, for example, can actually outperform the market, but you don’t always outperform by that much just through investing in him. Everyone knows he outperforms, so they raise the price of Berkshire Hathaway. That might also happen with a fund investing in private equity, so you would lose some of the gains if you didn’t own shares in the fund before it even bought anything.
There is also the fact that you have to give the mutual fund your money up front, so the returns can never be quite as good as for people who don’t need to do that.
Finally, there aren’t that many publicly traded funds investing in private equity, so it’s actually possible that they might just have bad managers. They don’t need to be good managers to make their own money, after all, and opening up the world of super high return private equity to YOU TODAY might be a good enough advertisement that people join the low quality ones as much as the higher quality ones.
I can check with some people who might know better tomorrow, though.
Thanks. This makes sense and is convincing, except that I’m confused about the Warren Buffett point. What is the limiting factor to everyone in the world giving Warren their money? Is it just that Buffett can only identify $100B worth of good investment opportunities per year, so the price of getting your money into that $100B gets bid up until the rate of return for investing with Buffett (minus the bidding fees) is the same as investing with a mere mortal? And if that’s true, why don’t the private equity people who serve the rich end up inspiring the same bidding wars?
The returns of private equity funds are very much disputed. There’s a big conflict going on right now about CalPERS (the California state pension fund with $100B’s) trying to get involved in them through some shady maneuvers.
Let me give you a slightly different take on why what you proposed doesn’t exist: governments around the world have made it illegal. See, e.g. the United States Investment Company Act of 1940.
Why would governments do such a thing? That is a harder question, involving substantial issues of history, politics and ideology, but a good one-word summary is paternalism.
How do I know this? I am a partner in a top-50 law firm that specializes in the formation of private equity funds.
If I understand correctly, another issue is regulations. Generally, you and your thousand friends have more protections than Warren Buffet or Mark Cuban. You get more disclosures and generally have more opportunity to sue. The government figures Buffet and Cuban can take care of themselves, so they can invest in riskier and more lightly regulated investments.
For one thing, that one person everyone gave their money to could be Bernie Madoff.
Basically what you’d need is a closed-ended not-for-profit public investment vehicle where the investors had little to no say in the management of the vehicle and agreed to remain in the investment for a long period. Such a vehicle does exist, in the form of Industry Superannuation Funds here in Australia, and the private equity portion of their portfolios does indeed get the sort of returns Piketty talks about the super-wealthy being able to obtain, but trying to replicate that model without compulsory savings backing it up has proven insurmountable so far. https://en.wikipedia.org/wiki/Industry_superannuation
Is it not the problem, then, that you now have to “track down” 1,000 random people the same way they would?
That actually sounds okay if 1,000 people is enough, but maybe it isn’t; maybe, considering that a certain fraction of your clients aren’t going to be able to pay up when you need them to, it takes more like a hundred thousand people. Then you need a vast bureaucracy to handle that and that eats up all the profits.
It seems like the conversation boils down to
“We can’t do this because the cost of administrating it would be greater than the profit from doing it.”
“I’ll do the administration for you, and then skim off the top!”
Put that way it makes no sense; why does the fact that you’re doing it instead of them make it less expensive, not more?
Since Warren Buffet is investing in common stocks, he should be able to just maintain the same ratios of investment. You might just end up with inflation in the stock market, but I don’t think his returns would go down just as a result of having more money. However, even if Warren Buffet is significantly better than average, he’s not perfect, which means his own prices will be less accurate than his guesses plus also everyone else’s guesses. So, the more money everyone puts into Warren Buffet, the more of an advantage you give to anyone who is better than Warren Buffet at guessing about any single stock. If you knew what Warren Buffet would do, you could always perform better than market average, but when Warren Buffet actually exists in the market, he creates a price distortion that drastically increases the value of not being Warren Buffet if you can do better than him in any single way.
The same thing could happen with private equity, but private equity has more of a problem with actually running out of good investments. There are only so many startups that actually have good ideas, and there are only so many people capable of consistently identifying them. Successful private equity investments end up turning into common stock investments, too, so you can’t just maintain the same returns after a single investment in the way an index fund can. When someone decides that Microsoft is actually a serious and influential corporation, you can make a ton of money as it transitions out of being a tiny boutique. Once it has made that transition, though, it becomes a standard US Large Cap Stock, and becomes a piece of the 11% a year that the US stock market sustains. Even if you can sustain an arbitrary number of successful corporations, you can’t sustain them all in that transitional period, and new prospects are generated at a limited rate.
Also, I checked with some more experienced finance people, and they think that the biggest part of why larger portfolios have higher returns is really just trading fees and greater leverage. There are private equity funds which are traded on the open market and available for anyone to buy, but the most successful funds are simply not able to deploy that much capital, so they have to be more exclusive. The funds which make ~15% and are publicly traded have a risk ratio that makes them best combined with a lot of stocks and bonds anyway, while the funds which can consistently make 30% are small enough that they all get snatched up by Stanford and Bill Gates, and only a few smaller investors or pooled groups are able to get in. Due to the laws banning risky investments for poor people, even smaller investors here have to have a million or two. If you have the opportunity to invest in Sequoia or Greylock or another really high end fund, you should probably take it, but they want to retain their reputation as being really high end, so they can’t take in more money than they need to actually make the very best investments.
So I think my current conclusion is that the really good funds can’t scale very well, so their ratios are good but they can only supply so much of the economy. The ones that can scale are a good part of a healthy portfolio, but if you use them well you will still only be getting 8-12% returns. The reason why most people don’t get 8-12% returns is because they are not ideal investors. The longer your time horizon, the closer you can get to optimal, so endowment funds do better. The less you care about liquidity, the closer you can get, so people whose spending is a smaller percentage of their net worth do better. The less you care about fees, the closer you can get, so portfolios large enough to make any fixed fees negligible do better. The less taxes you pay, the closer you can get, so portfolios optimized by a professional for tax reduction do better. The less your own guesses about how the market is probably going to turn factor into your investments, the closer you can get, so people who have a professional advisor to discourage them from making silly mistakes do better. All of these things combine to make rich people and organizations capable of investing more effectively, even if the optimal strategy is well known.
The advantage that poor people have is that there is some low hanging fruit which can be very effective for building wealth. 401k contributions cap out quite low if you are worth millions of dollars, but the only thing superior to a Roth IRA is a normal IRA with employer matching. Anyone who can make their 401k contributions and do a little bit of research on asset class investing should be able to make more than 5%. If you always need to spend your savings, then no technique can make you get high returns. You’ll just be swamped in fees. If you can save money, though, getting 8% is really just a matter of a little bit of research.
CalPERS isn’t exactly known for being perfectly managed, and I would not expect them to be great at picking good funds from bad. It is definitely true that there are good and bad private equity funds, though.
@synecdoche, @J Mann
It is very true that the law bans small investors and requires enough inconveniences that funds would prefer to work with larger and safer individuals. The limits are low enough and the inconveniences well understood, though, so I personally suspect that if it weren’t for the fact that Stanford/Bill Gates are happy to supply all the capital they can use, singlehandedly, there would have been some solutions by now. Private equity is not the only field of investments that has to follow such regulations, after all.
I still don’t understand why I and a thousand other middle class people can’t pool our funds and give them to one person…
Because you and I and a thousand other middle class people don’t have enough money to matter. Like, middle class people coming together to form a Bill Gates-sized pool of money would take every middle class person in the USA and then some.
This is just clearly not true. There are about 200M adults in the US. Say 100M of them are middle-class. Bill Gates’ net worth is around $100B. So we would need $1000 per middle-class person. Admittedly a lot of people haven’t actually invested this much of their money themselves, but if you include their pension funds (which you should) then they have more than this many times over.
$100B at 4% rate of return divided by 100M people
and sure, “many times over”, but it takes an awful lot of many-times-over-ing to get to never-work-again rentier-class money.
Um, okay, but that’s not relevant. The question was why big investors can get a better return (like 8%) than small investors (like 4%). Scott’s thought experiment purports to show how a lot of small investors could get the 8%, not how a lot of small investors could each become as rich as Bill Gates.
“Scott’s thought experiment purports to show how a lot of small investors could get the 8%, not how a lot of small investors could each become as rich as Bill Gates.”
Scott ACTUALLY WROTE:
“Bill Gates never worries about losing all his money, and if enough middle class people come together to form a Bill Gates sized pool of money, surely they wouldn’t either?”
And the answer to the question is that if Bill Gates lost 90% of his money he’d still have enough for him to spend a million dollars a year for the next two or three centuries. Members of the middle class cannot accept losing 90% of their money, which means they cannot accept the same risk as a single large investor.
Ah, you’re quite right. But I took Scott to mean that any small investor would have some amount of money that he is willing to risk 90% of for the sake of the Bill-Gates-level returns, and enough of them pooling these amounts would sum up to what Gates invests. I think the first claim is true, but that nuance makes it rather less obvious that the second claim is true.
Still, it’s not ridiculous to suppose that a middle-class citizen would be willing to invest $1000 in something with a 90% chance of 19% return but 10% chance of 90% loss (which computes out to an expected 8% return) over an investment with a guaranteed 4% gain. None of them would be betting the farm.
I think the real obstacle is underestimating the amount of work it is simply to administer a mutual fund with 100M members. It’s obviously not impossible, but it can’t help but eat into the returns, compared to what happens when one guy invests $100B.
While it’s true that you would need a lot of middle class people to make Bill Gates, you don’t need nearly that many to make an average rich person. A thousand people with $10K in savings is $10M, which is plenty to get started on the strategies most rich people actually use. He’s right that absent any administrative costs, poor people can assemble into normal sized rich people. Exclusive private equity funds exist, but they are not where the majority of capital is stored.
We aren’t talking “average rich person”, we’re talking “Bill Gates”.
And the kind of self-sustaining-chain-reaction wealth that’s being discussed here doesn’t happen at $10 million.
$10M seems like a lot to you and me. $10M at a 4% rate of return is $40,000. Divided by a thousand people, that’s $400 each. Not exactly never-work-again money there.
The 0.1% starts at like $20M, so while I agree that $10M isn’t enough that no one in your family needs to work ever again, it’s pretty close to what was meant by rich people in the article. But that does create a point of confusion, since the math seems to imply that even the 0.1% still needs their kids to get good jobs and work for at least a decade or two in order to result in the fortune growing with each generation. Which is in fact what I see in the world. Rich people help their kids get good jobs and the kids don’t get their inheritance until they are 40 or 60, so they still spend a while working. That keeps the fortune growing modestly with each generation. Only a few people actually seem capable of sustaining more than a generation or two without any need for additional income.
4% of $10 million is $400,000, not $40,000.
“4% of $10 million is $400,000, not $40,000.”
Final answer wasn’t wrong; still $400 a person.
Why are you expecting never-work-again returns from a sum that’s barely even “not work for a year” money?
There’s a mutual fund called the Magellan Fund, which was famous for its extreme performance (I believe it was annual growth of 15-20% per year) for about 20 years.
At the end of that streak, someone ran the numbers and discovered that most of the people who had invested in the fund had lost money, because they bought in when the market was high and sold when the market was low.
The problem that mutual funds have is that they don’t know how much money they’re going to have tomorrow, because there are thousands upon thousands of customers who might want some of their money back, or might want to add in some more money, and as a result there are lots of unplanned trades they’ll have to make that only benefit their customers, not them. Many of the best managers insist on terms of the form “you give me money and then can’t take it out for N years” so that they don’t have to deal with this kind of thing (in the short term, at least).
For private equity servicing one large customer, there are far fewer moves of that form, and they’re much easier to predict, and you averaging across many small customers still doesn’t duplicate that effect.
What if you added a “lockout” period, so joe shmo public can only buy/sell at certain times when it’s convenient for the fund? Or add a waiting list so they can buy/sell only when someone else wants to do the opposite, so the fund stays the same overall? This seems like it would be easier to balance than one rich guy suddenly moving billions all at once.
Because Joe Shmo doesn’t have enough savings to have the luxury of putting 50% (or 90%) of his life savings into such arrangements. Joe Shmo may need those savings next month if his house burns down or he loses his job. At that point his spectacular interest rate on his investments doesn’t matter, because he can’t live off his investment income interest yet, and he needs to dig into those savings to make a mortgage payment (i.e., to pay money to some rentier).
Bob Billionaire can stick 90% of his money in a magic hole in the ground that causes it to grow by 8% a year, even if that means he has to pour concrete over the pit and not take the money out for five years. Because the remaining tenth of his life savings is more than enough to live on.
Joe Shmo can’t do that.
And if a million Joe Shmoes combine together, Voltron-style, into a single uber-Shmo, this is still equally true of each individual Shmo. At which point the uber-Shmo is just another mutual fund company, running into exactly the problems Vaniver described.
That’s just how 401(k)s/IRAs work- you put in money for retirement, which you *can’t* withdraw for a long time without paying a substantial penalty. Pretty much every personal finance guide says you should use those for retirement, while keeping a separate emergency fund in case you need money immediately. Granted, a lot of people misuse 401k’s by taking money out early for spurious reasons, but a lot of middle class people can, and do, save 10% or more of their income for 30+ years without touching it.
I strongly suspect that if you examined the returns of people who leave their 401k invested until retirement versus people who don’t use their 401k to invest or who take money out of it early, you would find that the poor average returns of both groups together are almost solely caused by the latter group. The former group probably does slightly worse than rich people, and they probably don’t have great investment habits even if they leave their money invested, but eliminating rapid turnover of the portfolio and keeping a dedicated piece of capital for investing is a large portion of the difference.
Indeed. As a thought exercise… If you look at the Vanguard Target Retirement 20XX series of funds’ returns, the 10-year returns amount to 7.5-8% per year, depending on how far away “20XX” is. Note that this would mean buying a lump sum of shares immediately before the 2008 market crash (i.e. really bad luck in timing), and then doing nothing whatsoever– neither adding to nor withdrawing from the fund in the meantime, the ultimate in no-thinking passivity. If that lump sum in 2008 was $10,000, you’d have about $19,000 today. If you kept up with a monthly allotment into the fund, your returns would be significantly higher than that, especially if you had a match from your employer.
So, yeah. Even quite modest financial planning can achieve returns well above the rate of inflation… provided that you actually do invest systematically.
Responding because I’m surprised no one pointed this out yet – you do! This is how most retirement funds, both public and private (but especially public) work. Problems arise when they’re mismanaged or inadequately funded, but, for example, the CalPERS pension fund for California public employees holds a total of over $353B in assets, and has an averaged historical rate of return over the last 20 years of 7%/year. In the private sector, your 401(k) investments go into a pool managed by some big investment bank (in my case, Fidelity) whose employees have the time and incentive to act like a rich person.
I think it is worth pointing out, with respect to private equity and investment, that the UK has allowed people to pool their money and invest into private equity since 1995, when Venture Captial Trusts were allowed by an act of government. (Also note that there is technically a distinction between ‘private equity’ and ‘venture capital’ whereby Venture capital is normally used to refer to early stage investing, whereas private equity can be used to talk of any stage investment, but i am not aware of any restrictions that VCTs have on the investment stage)
I’m not aware of other countries that have this specific form of investment in private equity, but I understand there are possiblities elsewhere for ‘public’ investment in private equity.
The stock market does not have real returns anywhere near 11%. It has nominal returns in that vicinity (if you restrict yourself to the USA in the 20th century), but real returns on the order of 4-5% in the US in the 20th century.
My dad has suggested that giving the rich a tax break for each child, as a percent, might help promote the rich and super rich to have more children. Instead of a flat tax deduction for each child, how about a 1% off your tax rate for each child. If it actually would induce the rich to have more children to spit up their wealth, it could be a better way to keep the inequality down than war or revolution.
Another thing the State could do is have the inheritance tax be per person so that the rate is say, 50%, but you can give up to $1 million to an unlimited number of people tax free. I think some rich people would make certain to spread all their wealth around this way just to spite the government and this should be seen as a good thing.
Also, eliminate tax free creations of foundations.
Give those rich people some tax incentives. Rich people love tax incentives.
One factor that discussions of inequality never seem to take into account is the marginal utility of money. In times and places where the majority are starving, the gap between people who merely have a steady, healthy food supply and everyone else is arguably greater than the gap between the very richest families in America today and, say, the 20th percentile, even if the income or wealth ratios are comparable. More generally, as per capita wealth increases, keeping inequality constant as measured in ratios of wealth or income would actually produce a qualitative *decrease* in inequality, as the ratios would be measured in dollars with steadily decreasing marginal utility. A private plane may be a lot nicer than flying coach, for example, but the difference is nowhere near as great as, say, the difference between, say, eating one vs. three meals a day.
I’m not sure you can take the wealth management thing at face value. The stock market since 1980 has 10% annualized returns. Instead of trying to replicate whatever Harvard and Yale are doing, why don’t you just put your money in the stock market?
That makes sense, but then how did every college other than Harvard and Yale, presumably managed by some of the top wealth managers in the world, manage to get less than this? Were they just all overly conservative / too time-sensitive?
Yeah, I’m being a little bit dumb.
Endowment investments are different from the stock market in (at least) two important ways: (1) less volatile, at least over their observed history, and (2) less liquid. So when you ask why there’s no investment vehicle similar to Harvard’s endowment that regular people can buy into, that’s still valid.
My guess at some factors:
(1) the oversight provided by Harvard’s president and board of directors is worth something and cannot be easily replicated
(2) demand for such a vehicle is less than you expect, because of illiquidity
(3) it would be very hard to bootstrap such a fund, since there’s no good way to certify that one fund is better than another over a short time horizon; the differences in returns only become apparent over years, and even a small risk of ruin, which cannot be easily observed, is the difference between Renaissance and Bernie Madoff
That said — I guess I’m thinking this could all just be luck, the same way the stock market doing so well over the last 40 years is in some sense just luck. Big endowments have different investment behaviors than small ones — maybe those behaviors just so happen to have been profitable over the last N years. That doesn’t mean it will continue being so over the next N.
Note that this return is completely unsupported by fundamentals–it’s nothing but a forty-year slow-motion bubble, sustained solely by the astonishing resiliency of the fairy-like belief that index investing is a magical way to guarantee a better return than actual guaranteed investments. (Okay, preferential tax treatment of capital gains has also contributed.)
When it bursts–and it will, inevitably, at some point–it will be very, very ugly.
Regarding splitting up of large fortunes between heirs: actually the British feudal system (still operating in Jane Austen’s world) went out of its way to prevent that, through primogeniture and the fee tail. Basically the entire estate went to the oldest son: the rest were on their own, joined the clergy or whatever. That kept the estate in one piece. When the oldest son passed on, it would go to *his* oldest son etc. He had no choice about this and couldn’t sell the estate outright, because of the fee tail created N generations earlier. The most he could do (say if he lost it in a bet) would be turn it over to someone as a “life estate”, i.e. that person would get to use the estate for the rest of their life, but when they died, it would revert back to the originally owning family.
The life estate was a plot feature in Pride and Prejudice: Elizabeth Bennet’s father apparently had one in the house where the Bennet family lived, so the pressure facing the family was that when the old guy died, the house was due to revert to the owner who would then make the Bennets homeless, iirc.
The fee tail was sort of a forerunner of corporations, in that it became impossible for someone with a big enough fortune to permanently lose the whole thing.
A person or a family line? From your description it sounds like an individual could indeed permanently lose the whole thing, it’s just the family line that couldn’t.
Yes, correct, it’s the family line that was protected. That’s the whole evolutionary thing, to look after one’s genes, not after the walking individual organisms. The idea of the fee tail was to pass the estate through centuries, so the individual beneficiaries were generations away from being even conceived at the time the will with the fee tail was written.
We can also say that the person couldn’t lose the whole thing, since part of its value to him was that it meant that his descendants would be wealthy. And that part couldn’t be lost.
That part is not done by corporations. A corporation is controlled by whoever owns it, which an shift to a completely different person if the owner goes bankrupts. Fee tail had the problem that you could not borrow money secured against a property that you cannot sell. In general fee tails were stopped by law and the courts, such as the “Rule against perpetuities”.
That wasn’t til the 19th century or so though, 100s of years after Jane Austen’s novels.
https://en.wikipedia.org/wiki/De_donis_conditionalibus is of interest.
That wasn’t til the 19th century or so though, 100s of years after Jane Austen’s novels.
Austen’s novels are set in the Regency, contemporary to her life, so maybe 1810.
So maybe not “hundreds of years”, since they’re set in the 19th century.
(Sources suggest no more than 50, and others suggest the Rule dates to the 18th century, but English jurisprudence of the era is complicated by modern standards, so…)
I don’t think Mr Bennet had a life estate in Longbourn; the problem was simply that he had only daughters, which made Collins, a distant cousin, his male heir.
Indeed. Mr Bennet didn’t have a life estate, but he did have life interest: the mere right to draw income from the estate, but not to sell it or bequeath it as he wanted.
The fee tail required the estate to be passed on to the next male heir.
The article I semi-remembered where I got the info about Mr Bennet’s situation is here:
Obviously I can’t attest to the article’s correctness but it is interesting and seems well-informed. It discusses the history of the fee tail and mentions there was a method (“common recovery”) to get rid of (“bar”) a fee tail, involving collusive lawsuits, that was very difficult and presumably could not be done involuntarily because of the legal fictions involved.
There’s a whole book “The Fee Tail and the Common Recovery in Medieval England” about the machinery of common recoveries. I didn’t read it but looked at some reviews of it a few years back and it looked interesting.
That is indeed interesting, and the author is certainly far better informed than me.
Am I reading her correctly as saying that Austen’s implication is that Mr Bennet had a misspent youth which is the reason he is not in fact tenant-in-tail?
I don’t think this works like you think it does.
Suppose that this future comes to pass — a return to the dominance of the rentier class. So, as you say, now you’ve got yourself a clear villain, one that liberals and leftists can unite against. OK. But when that fight is won, that condition is done. That is to say, you’re not going to teach leftists liberalism that way (nor vice versa). They’ll oppose the idle rich for their reasons and you for their reasons but neither of you is going to convert the other much. The rhetoric used against the idle rich will likely conflate various issues and the two sides will merge somewhat for the time, but once it’s over the two ideologies will separate out once again. Once things are more merocratic again (hopefully that’s the way such a thing ends!) the leftists will go back to their arguments against meritocracy. Nothing will have improved there.
At least we’ll have sat down and talked to each-other for a couple years, which seems to me like it’d do a lot of good. I think a lot of the polarization problems we see today would disappear if both sides just sat down and compared notes – not even exchanging values, or changing the accepted facts, but even just realizing that the other side accepts different facts and what those facts are.
You mentioned one of the options for resetting wealth inequality is a short bout of hyper-inflation. Why wouldn’t the mass of poor people vote for that once things get sufficiently bad? No wars required. Those with a bit of mortgaged property and a steady job remain relatively unscathed, and those with savings lose.
From the first research paper I found on the topic –
Why is everybody assuming wages and welfare are automatically tied to inflation, as opposed to having to fight every raise, as is the case in the real world?
Why is everybody assuming loans, debt, credit, mortgages are NOT tied to inflation?
If your bank was smart enough to give you an inflation-indexed mortgage but your income is not, and you have to argue every raise (white collar) or strike (blue collar) while the managers are moaning about global competitiveness, inflation does not help you.
I believe a small rate of deflation (fixed money supply while technological progress makes things cheaper to make, cost less, hence in a competitive market have a lower price) would help workers because their employers cutting their wages would violate all kinds of Schelling points. And if their nominal wages stay the same while things get constantly cheaper, that would be good for them.
Did Japan already try that experiment?
Because they often aren’t. Inflation expectations are baked into interest rates, but if there’s a sudden, unexpected increase in inflation, then that will benefit anyone who owes money at the old fixed rates. Before the inflation of the 1970s, fixed-rate mortgages were almost universal in the US, and they’re still more common than not.
This is a valid criticism for the mid-20th century, but before the 1930s and after the 1970s, a lot of personal income is automatically tied to inflation.
In the late 19th and early 20th centuries, something like half the population was employed in agriculture, and a lot of them were small, family farms. Farmers make money by selling their produce, and agricultural commodities are affected pretty directly by general price inflation.
And since the 1970s, it’s became common for union contracts to insist on cost-of-living adjustments, and there’s developed a Schnelling point norm for annual raises for salaried white-collar employees unless the company is really struggling. These don’t help non-unionized blue-collar employees, but economic theory suggests that increased prices would increase their employers’ demand for labor.
You just described the Greenback and Free Silver movements of late 19th-century America. The former advocated a return to Civil War era fiat money, and the latter advocated issuing silver coins at a face value of about 75% of their value as bullion. Both movements were aimed at generating inflation for the purpose of generating a wealth transfer from investors to owners of mortgaged land.
The movements got a lot of political traction, especially the Free Silver movement, which captured the national Democratic Party for a couple election cycles. But the Silverites failed to win enough elections to push through their policies (losing the 1896 Presidential election by about 5% of the popular vote), in part because their “sound money” opponents got a lot of traction by arguing that devaluing the currency would hurt trade and impoverish laborers being paid fixed wages. Electoral maps of the period show a very strong urban vs rural split, with the Silverite candidate (William Jennings Bryan) strongest in farming regions (inflation was expected to benefit farmers by raising agricultural prices without raising their mortgage payments) and weakest in cities (where the economy was dominated by trade and manufacture, and where most of the money the farmers owed was borrowed from).
The movement was driven in part by deflation over the course of the late 19th century causing transfers in the other direction: fiat currency issued to finance the Civil War was gradually retired (or very abruptly retired, in the case of Confederate Dollars), and the US followed the international trend of standardizing on gold-based currency during a period where the economy was growing a significantly faster than the amount of gold in circulation. The issue went away in the early 20th century, when the invention of the Cyanide Process for refining gold and the development of new major gold mines in Alaska, the Yukon, and South Africa increased the gold supply enough to end the deflationary period and cause some inflation without leaving the gold standard.
Knowing nothing about economics, this might be a stupid question, but where does the value come from that drives 5% investment return, if the economy only grows by 1.5%?
Part or all of it would be growth in the number of people, I guess…
Plus you can invest overseas, in places with higher growth due to economic catchup.
Libya had _55%_ economic growth last year (finally recovering from the war), presumably anyone with investments in the right companies made out like gangbusters. The widespread theory that that is largely what caused the war in the first place would be hard to conclusively disprove.
The 5% investment return is based on how much you invested. E.g. if you invested $100 million dollars and got $5 million (plus your initial stake), that’s a 5% return. The 1.5% is the whole economy’s growth rate against the previous year. The percentages have very different denominators i.e. one is wealth, one is GDP.
I’m also fairly sure that capital gains don’t show up in GDP but presumably are (or can be?) included in wealth increases – someone who knows a bit more about it may be able to clarify.
Labor. r > g implies that the inequality between return to investment and return to labor is increasing.
If you multiply that 1-1.5% by population growth say 2-3% and then multiply that by inflation of 1-2%, you get roughly 5%. That would represent the total GDP growing by a small, real amount per capita, the number of capitas increasing, and the nominal amount per capita increasing as well.
Piketty’s data should not be taken at face value, particularly as it concerns the claimed century long inequality U-curve at the center of his historical narrative. See the following article by myself & Robert Murphy for a discussion of replication problems with Piketty’s curve for the U.S., along with several other data irregularities throughout the book.
The replication issue we found was also independently confirmed by Richard Sutch here:
The Journal of Private Enterprise
It’s like a fucking parody
Freddie, this kind of ad hominem can also be used to dismiss Piketty and thus serves little purpose. Do you have any reasons to dismiss the criticisms based on their content, rather than who is the messenger?
Does the fact that Magness claims his work was replicated in Social Science History indicate that:
1) Social Science History is also a suspect journal?
2) Magness can be assumed to be lying about the SSH results?
3) In this case, maybe his work is worth considering?
ETA: Freddie, I should say that I really enjoy your contributions and hope you stick around, and I do hope you add some substance to your criticisms because I would be interested in weighing the issue in more depth. Sorry if this came across as unreasonably arch.
@Freddie: I remember when you used to write things that were interesting and usefully informative. Any hope of ever seeing that Freddie deBoer again?
It’s dispiriting to know that someone like Freddie can write under his real name and spit vitriol like this but it’s Scott Alexander who’s forced to write under a fake moniker.
Freddie gets a lot of grief too, and a lot of his posts are great.
Freddie, when you come back, I’d be interested in your thoughts about whether there is a skills-based inequality emerging in the US (as I’ve read Piketty may have said), and if so, if you think educational reform is likely to be helpful.
You mention hyperinflation in passing as a black-swan event which can be devastating to the rentier class but less so to laborers. An engineered one-off bout of hyperinflation might, in that case, be a way to reduce inequality without the physical destruction and human cost of a world war. I don’t think anybody has advocated for temporary hyperinflation as a cure for inequality–William Jennings Bryan and the silverbugs were similar, but they just wanted the free coinage of silver as a way to create consistent lowish inflation rather than the wildly vacillating cycles of hyperinflation and hyperdeflation that the gold standard created in the 19th century; in the long run the Bryanites won, because fiat currency does more or less the same thing they hoped silver would.
What would happen to inequality tomorrow if the Fed were to send a hundred-thousand- (or, if we really want to throw a wrench in the spokes, million-) dollar check to every man, woman and child in the country? The most common criticism I’ve heard of the modern American economy is that it’s running on vast amounts of debt–mortgage debt, credit card debt, student loan debt, even increasing corporate debt. An engineered bout of high inflation would effectively wipe out much of that debt with less of the capriciousness and unpredictability that wealth confiscation entails.
I wonder if debt has a larger role to play in the zoomed-out picture of the 19th, 20th and 21st centuries that Piketty paints. In the Gilded Age (which was a golden age for rentiers) small farmers in the American Midwest were heavily in debt to Eastern banks; that’s why they backed silver as a method of engineering inflation to erode their debts. In the modern day, we have increasing inequality between normal workers and rentiers-slash-very-rich-workers, and student/credit-card/mortgage debt is again an albatross around the middle class’s neck in a way that it wasn’t in the postwar period.
Does high income/wealth inequality, as was the norm in the years before 1914 and may now be returning, necessitate or cause the non-rentier class to be saddled with crippling debt?
As part of this thought experiment of the Fed hyperinflating these debts away, please also consider why these debts exist (i.e. why people who owe them contract for them) and then the likely consequences of making it so that in the future (because you’ve wiped away the people making the loans and severely reduced the incentive to loan in the future if the Fed might act this way again) no one can ever get one of these loans again, at least not at any interest rate which doesn’t compensate for the effects of the hyperinflation.
Or, I guess you can just look at current Venezuela or other countries which have tried hyperinflation, or go do a Google search instead. What would happen to inequality in that case is very similar to what happens to it when many of the other “solutions” are proposed. Inequality is typically a result of societal wealth growth and the processes which make that happen. The easy way to make everyone equal in wealth is to just make everyone poor together. That does reverse things, but that’s also one reason why many people consider inequality of wealth to be a net benefit rather than a net harm. We’d rather all be wealthier than all be poorer, to put it bluntly.
I’d also urge you to look more skeptically on his income distribution stats (the figure 1.1 above). Several economists, myself included, have been working on the measurement problems that arise from attempting to determine income shares from tax data in recent years. The aforementioned figure comes from a 2003 study by Piketty and his coauthor Emmanuel Saez. While it represented an innovative contribution to the literature, this paper gives generally insufficient treatment to the effect of changes to the tax code itself upon data that derive from income tax reporting.
To put it another way, taxpayers – both wealthy and poor – respond to the way that income tax laws are structured so as to minimize their own tax burdens. They take advantage of incentives and loopholes to lower what they owe. They engage in wealth planning strategies to legally shelter income from high rates of taxation. And some even illegally evade their obligations by misreporting income.
Tax avoidance and evasion rates vary substantially over time and in response to tax code changes, and so do the statistics they generate with the IRS. A major problem in Piketty-Saez is that they do very little to account for this issue over time, and instead simply treat tax-generated stats as if they are representative. Doing so yields a relatively sound measurement of income distributions, provided that the tax code remains relatively stable over long periods of time (e.g. what the U.S. experienced between roughly 1946 and 1980). When the tax code undergoes frequent and major changes though, tax-generated stats become less reliable. And it just so happens that the two periods of “high” inequality on the Piketty-Saez U-curve are also periods of volatility in the tax code: 1913-1945 and 1980-present.
The 1913-45 period is marred by both frequent tax rate swings and an initially small tax base that was rapidly expanded during WWII, combined with the introduction of automatic payroll withholding in 1943. When you account for these and related issues, the extreme inequality of the early 20th century and especially the severe drop it undergoes between 1941-45 become much more subdued. The period from 1980-present is similarly marred by Piketty and Saez’s failure to fully account for the effects of the Tax Reform Act of 1986, which induced substantial income shifting at the top of the distribution to take advantage of differences between the personal and corporate tax rates. Adjusting for that has a similar effect of lowering the depicted rebound.
Taken together, what we’re probably experiencing is a much flatter trend across the 20th century – one that resembles a tea saucer rather than a pronounced U. And that has profound implications for Piketty’s larger prescriptive argument in favor of highly progressive tax rates.
Thanks, I’ve added a link to this comment in the post.
I think people in the UK decided that their economy was rotten not by making some statistical comparison to the continent but because the Labour government had spent itself into needing an IMF rescue, electricity was available intermittently, unions refused to bury the dead, and trash was piling up in the streets. In fairness the Conservative party had worked with Labour on a highly statist form of government for the past few decades. Thatcher represented a genuine revolution and the country became far richer as a result. Look across Africa, as countries turn away from the 70s socialism towards market economies they suddenly start getting richer. Zoom out far enough and the world is a little blue dot. So what.
Piketty is highly political and fails some basic common sense checks. Assume r>g, hmm. Look at the worlds billionaires and a huge number are self made men. Gates didn’t get rich by growing some endowment at 10% p.a. , he became rich by building one of the most important software companies of the past 30 years.
I don’t know which Bill Gates you are talking about; the one who owns Microsoft got into that position by inheriting money from his parents, and growing that money at a high annual rate by investing it in the business he controlled. All the engineers involved in the early days worked similar hours, but only the ones who brought capital to the table got to be billionaires.
There is a key point here; compared to the idle rich, he was a hard worker. Had he gone skiing and checked his stocks once a month, he would not have ended up a billionaire, and quite likely not even been able to sustain a prosperous lifestyle to retirement age.
However, compared to similar workers, he received compensation massively disproportionate to his efforts; Microsoft and a few a few other companies from that period are historically unprecedented, in that it was possible to purely work there and become a millionaire. But Gates is to a millionaire as a general is to a private.
Now, arguably those disproportionate rewards are necessary to motivate the already-rich. The US is unusual in that it does get some work out of the rich. The idle rich are small and quiet; probably due to the famous Protestant work ethic, which Gates has in spades.
However, its not clear that solution is sustainable in the face of larger number of ever-wealthier rich requiring ever-greater rewards to show up at the office. The push for UBI is telling; the usual proposals seems primarily designed to legitimate living idly on accumulated capital.
Cite for that? I did a quick google search, and none of the retrospectives talk about this. In fact, I read an interview with his father from long after Microsoft was a massive success, so I don’t think he died and left an inheritance like you describe.
I think it’s a reference to Bill Gates and Paul Allen working without a salary in the very early days of Microsoft, with Gates’s parents paying his living expenses in the meantime (not sure about Allen, but presumably he had something similar). It definitely helped and was quite possibly necessary to get the company off the ground, but it doesn’t really strike me as anything like a central example of inherited wealth.
Steve Ballmer also became billionaire through his involvement with Microsoft. He joined a few years later, when Microsoft had a significant revenue stream and was in the process of lining up venture capital funding for expansion. Ballmer was hired with a $50k/year salary in addition to a percentage of the company, according to his wikipedia page.
None of the other early employees became billionaires, although several of them made tens of millions and at least one of them made around $100 million. (source)
I think his father is still alive, so certainly not.
As I understand it, he had a trust fund which he lived off in the early days of Microsoft, so not taking a salary, and so not requiring venture capital input.
I don’t see anything in there about a trust fund. Instead, I see this nugget:
Dat rentier mortgage.
My read on his wiki biography is (1) it looks like his father may have been largely self-made (Bill’s grandfather was an immigrant; his father went to public university on GI bill, etc); and (2) Bill’s major legs up were that he went to a private high school where he had access to a computer in the 1970s, and that he went to Harvard where he met Paul Allen and presumably set up a personal network. Also, he seems to be a legitimate computer genius.
…I’m really not sure what stage of that process we’re supposed to step in and outlaw.
@Controls Freak – well, if you think that Bill’s wealth was fortuitous or that his contributions wouldn’t be unduly discouraged by taxation, you can always tax his wealth or his legatees’ wealth. But that’s question.
That can potentially mitigate symptoms, but it doesn’t really get at any root causes. I thought the root cause we were concerned about was inter-generational wealth transfer, not fortuitousness.
> he went to Harvard where he met Paul Allen
@J Mann, Gates knew Paul Allen from high school. You might have been thinking about Ballmer, whom Gates did meet at Harvard. (Allen went to WSU.)
The biography is consistent with the grandparents having quite a bit of money (which doesn’t mean that he was rich, but it also doesn’t mean he wasn’t). AFAIK, the GI Bill didn’t have a poverty check, so why not take the money, even if you can afford college?
Note that my stereotype about Americans is that there is a tendency to define themselves as self-made, so I am suspicious of such claims.
@Aapje – generally in the US, kids who are smart, rich, and ambitious don’t usually attend public universities like the University of Washington. U-Dub is a fine school, but it doesn’t provide the credentials or network of Yale or Harvard.
I googled more, and Bill Gates III qualifies as first rung rich, IMHO. (Kind of like Trump). His paternal grandparents owned a Bremerton furniture store and don’t seem to qualify as crazy rich. His maternal grandparents are another story; his maternal grandfather J.W. Maxwell was a bank president and set up a million dollar trust fund for him. (Source: Hard Drive: Bill Gates and the Making of the Microsoft Empire, pages 8-10. On the other hand, J.W. Maxwell was self-made, born on a farm and working his way from bank teller to a national banking leader, FWIW.
Generally, the Gates’ seem to be a story of 3 generations of associational pairing and each generation helping the next. Bill Gates I was a small town store owner; JW Maxwell was a farm kid who worked his way up to a fortune. Bill Gates II worked his way to being a regionally prominent lawyer (marrying Mary Maxwell probably didn’t hurt), and they gave Bill Gates III a leg up to thrive.
You should update your priors, the article you link describes 3 people, only 1 of whom is self described as ‘self made’ where as 2 of them (at least) have a claim to be.
In general ‘self made’ isn’t something applied to yourself absent movie characters and those playing movie characters in real life (politicians).
I was merely pointing to Mitt Romney calling himself ‘self-made’ which I consider (weak and anecdotal) evidence that successful Americans are prone to calling themselves self-made when they didn’t get everything handed to them.
But what qualifies as self-made? The classic book-and-movie self-made millionaire started a business starting from a dime of initial investment when they were 12 or something, but that’s silly.
Do you have to be a founder to be self-made, or can you have made your money as compensation (including equity) for employment?
How much of a start disqualifies you? If you leave college with a net worth of zero and end up with $1,000,000, are you a self-made millionaire, or does the fact that someone else paid for most of your college disqualify you (as many socialists claim)? If your college was paid for by loans which you pay off, does the fact that the loans were subsidized disqualify you? If you didn’t go to college are you disqualified by having parents? Perhaps you’re only self-made if you grow up on the streets?
@baconbits – I’ll back Aapje on this one. He was suspicious of the self-made claim, and I looked closer and found that (a) Bill Gates II’s parents at least owned a Bremerton store, so they were at least petit-bourgeoisie, (b) Bill Gates II married Mary Maxwell, whose father was rich (albeit apparently legitimately self-made himself) and who set up a million dollar trust fund for Bill III back when a million was real money, so in this case his suspicions were productive.
Anyway, I suspect all three of us would agree that few people are entirely self-made; most of us have some cards to play when we start, and that it takes effort and good choices after that.
100 billion over 30 years at a high-end Piketty rentier rate of 10% means he must have inherited five billion dollars. While his parents were well off, I’m pretty sure it wasn’t at that level. So I think it is fair to say that Gates got rich by controlling the business he was invested in, rather than the other way around.
Which is the case of every single rich individual I can think of, they (mostly) got rich from their own efforts (or luck, or what have you), or (a few) from inheritance (which inevitably shrinks and dilutes over a generation or two), and never from interest.
And I highly question a 5% interest rate, nominally perhaps, but not after deducting income tax and inflation. Piketty is just full of it, IMO.
I guess Piketty’s model would be compatible with 7500 rentiers starting with a $1 million trust fund, and with one of them growing his fortune to $100 billion over 30 years and all the others getting 5% annually. In other words, in this model, you need a million just to have a chance at being the winner, overall rentier returns are 10%, and you can put together a model where the total rentier share of the economy keeps going up.
r > g has nothing to do with rich-getting-richer. That’s because they save a larger fraction of their income. The stock market could give returns of 30% but if you don’t save a dime it’s not going to help you. Conversely, you could start with a middle class salary, live frugally, invest a high fraction and see the snowball start rolling.
Why do people differ in their savings rates? My guess is genetics. Many Jewish families rose to riches after WW2 despite the Nazis confiscating their wealth. And from what I know of lottery studies, winners usually don’t keep staying rich. They have a temporary boost in consumption, and that’s it. In any case, it’s testable: give $$$ to a random set of people, see how much is left after a generation. My guess: ~0.
Also, I fail to see the social problem here. Rich people with good time preference invest their money (instead of consuming it), and get richer. What’s the problem? I would rather have Warren Buffet invest his fortune in companies that produce stuff, rather than saying ‘F-it, I’m gonna just buy a fleet of yachts and cruise the world for fun.’
Isn’t that exactly what “the rich getting richer” is?
I nice (but long) discussion is here: http://debrajray.blogspot.com/2014/05/nit-piketty.html
“The rate of return on capital tracks the level of capital income, and not its growth. If you have a million dollars in wealth, and the rate of return on capital is 5%, then your capital income is $50,000. Level, not growth. On the other hand, g tracks the growth of average income, not its level. For instance, if average income is $100,000 and the growth rate is 3%, then the increase in your income is $3000. Saying that r > g implies that capital income will grow faster than labor income is a bit like comparing apples and oranges.
To make the point clear, I’m going to expand upon this argument in two ways. First, let us look at a situation in which the argument apparently holds. Suppose that capital holders save all their income. Then r not only tracks the level of capital income, it truly tracks the rate of growth of that income as well, and then it is indeed the case that capital income will come to dominate overall income, whenever r > g. But the source of that domination isn’t r > g. It is the assumption that capital income owners save a higher fraction of their income!
Now, is there anything special about capital income that would make their owners save more of it? After all, a dollar is equally green no matter which where it grows. The answer is a measured “not really,” with the little hesitation added to imply: well, possibly, because the owners of capital income also happen to be richer than average, and richer people can afford to (and do) save more than poorer people. But that has to do with the savings propensities of the rich, and not the form in which they save their income. A poor subsistence farmer with a small plot of land (surely capital too) would consume all the income from that capital asset. It may well be that the return on that land asset exceeds the overall rate of growth, but that farmer’s capital income would not be growing at all.”
Krisztian, my observation is that managing inherited wealth is a skill, but not a very hard one. Most lottery winners have no experience handling large savings and playing the lottery itself correlates with being irresponsible with money, so it’s no surprise those guys squander their winnings. But if you can do some quick calculations and figure out how much you can spend responsibly (or hire a financial advisor to do this for you) and avoid transparently idiotic investment schemes (or hire a financial advisor to do this for you), you are in the clear and your wealth will grow. Getting rich is hard, staying rich is much easier.
The worry is that in 50 or a 100 years, most non-institutional wealth will be controlled by rich heirs whose only skill is that they are capable of staying within their allowances, and that even top CEOs, doctors, lawyers etc. will not be able to reach their wealth. In other words, the world Balzac describes. I’m ambivalent about how real a threat this is, but I don’t want to live in that world.
Re: Jews post-WWII, that was during the interval of high economic growth, when things were arguably more fluid.
Anyone who keeps their money invested is doing the world a service and benefiting themselves not at all. Only when the money is taken out and consumed is there potentially a problem as they compete for scarce resources with that money. The best way to address this would be a progressive consumption tax. Get rid of other taxes and certainly don’t implement a wealth tax which encourages conspicuous consumption.
That depends heavily on what they do with their control of the commanding heights of the economy, and the consequent control of politics.
France circa 1785 had plenty of rentiers- the entire aristocracy consisted largely of rentiers. It is far from obvious that the aristocracy was doing France a favor just by existing, or that the French Revolution somehow damaged the French economy by dragging a bunch of aristocrats to the guillotine.
The problem isn’t just the act of investment in and of itself. It’s that having that much concentrated money confers the power to decide what society will be shaped like, and to distort that shape to create more human misery and less human flourishing.
I don’t know anything about the politics of 1700’s France so I’m happy to concede that possibly what I said is not true for some time in the distant past and in a distant country. For the present time, the main corruption is large businesses being able to influence their regulators, which seems orthogonal to the question at hand. I see no evidence that Soros or Adelson or anyone of that ilk has any significant political influence. Heck the Koch brothers who everyone hates actively push for policies that hurt their business interests.
Don’t know why you would be sad about the growth of the rentiers class; as I see it, the goal is for us all to become rentiers, and to do this the rentier class must necessarily grow.
A universal basic income would let everyone become a rentier if they choose to.
Also, if greater concentration of wealth generates higher returns, won’t that also imply that greater concentration of wealth generates higher economic growth, since private wealth is better at discovering investment opportunities that would otherwise have been neglected/underfunded?
That’s what I was thinking as I read this. I wanted to say, “Come on, Scott. You favor a universal basic income. That means a 100% rentier class. So why don’t we solve the problem by increasing the number of rentiers, not decreasing it.”
I haven’t read Piketty’s book; but I remember it was given as an example of bad analysis of data in Taleb’s book Skin In The Game. I recommend the entire book, but just briefly,
Taleb’s issue is that Piketty (he claims) tacitly assumes that percentiles are cohorts — that is, roughly, 5% people this year are the same people (or family) as 5% people next year and that thus by looking at changes in the raw distribution he can talk about changes in individual wealth or inequality in general. And that this interpretation of the data means he is making statements about some weird parallel reality. I guess the comparison that occurs to me is looking at the Boltzmann distribution of energy in a gas that is heating up, and creating a physics based on the tacit assumption that it is always the same particles in the top x% throughout the duration of the experiment.
For example, he says that in the US there is a considerable amount of movement between the percentiles over the course of a single lifetime (both up and down) and even more over the generations; whereas, in Europe he claims it is much more static: that the most wealthy European families have been the same for a very long time (with variation across Europe) — and he claims that these dynamics are so different that clearly they warrant different treatment and interpretation.
Also, he says that when Piketty analyses the wealth dynamics of the top 1% or top 0.1% and shows that it grows at some very high percentage — the fact he assumes that it is always the same people is leading him to talk about growth of investments and so on; when actually Taleb claims that at that level of wealth there is a “winner-take-all” effect: some things take off amazingly well and for decades or so that catapults people to the 0.1% — but that isn’t about organic growth of investments as such.
Taleb has published various papers with others making these complaints in more rigorous and concrete form in Physica A: Statistical Mechanics and Applications.
Well if that’s what Taleb says, then he is also ignoring quite a bit of evidence that the US has somewhat lower intergenerational income mobility than European countries and around average social mobility:
(the evidence around this is all partial, but if you read 20 papers on the subject that’s not far from where the balance of evidence is).
It’s a consistent part of the American mythos that they have a uniquely mobile society. It’s just not supported by the evidence (which actually weakly supports a claim that America is less mobile).
This critique only applies to the specific claim about US mobility. His wider points about confusing cohorts and percentiles sounds reasonable but I haven’t looked into it in detail.
“intergenerational income mobility”
This is not relevant to the question of intergenerational aristocracy. There you are talking about the persistence of a small number of large fortunes. That persistence will not impact the intergenerational income measures one way or the other.
Talenb’s main point (iirc, been a few months at least) is that intragenerational differences throw Piketty way off, not intergenerational.
Example. You and I make up an economy, you make $100,000 in year 1, $50,000 in year 2, I make $50,000 in year 1, $100,000 in year two. According to everybody and their mother we have very similar incomes, Piketty’s method would make it appear as if there were two distinct classes, one with an annual income of $100,000 a year and one with an annual income of $50,000 a year.
I believe that intragenerational mobility, the moving between income levels, is much higher in the US than Europe.
When I looked at this, the quintiles of wealth pretty much match age quintiles. Most people 60+ are rich, most people in their twenties are poor. So talking about increasing inequalities – to a large extent it is about people paying off their mortgages over their lifetime (now and before) combined with increasing house values.
There are some interesting complexities in this discussed by Gregory Clark. Basically, the correlation between the incomes of person and grandson is much higher than would be calculated from the correlation of person and son and the correlation of son and grandson. There is some tendency to make more or less income that is quite strongly inherited, although it only moderately affects one’s income.
As for income cohorts from year to year, the situation is even messier. Income change from year to year is high, and gets higher the richer you are. In many cases, someone spends decades at a fairly low income building up a small business and then has an income of several million dollars in one year. How is that to be counted? Even very ordinay middle-class people can have years of no income between years of nicely paid professional work. The people with the stablest incomes are desperately poor people who have to make the minimum wage each week in order to eat…
It is well known that when it comes to investments, higher risk = higher returns. These sort of unlisted Burmese mining projects are naturally much riskier compared to listed companies, and their return on capital naturally comes with a premium. But because of their risk, most governments don’t want Joe Schmuck to lose his entire life savings through high risk ventures because they might get misled by fast-talking salesmen / fund managers (c.f. Lehman Brothers Minibonds). So they came up with the concept of Accreditted investors, which basically says you must have this much money to invest in certain kinds of investments, which excludes almost 99% of households.
Though 1% of the richest is still a lot, and more than enough demand to create a fund, and there are many funds which seek out unlisted companies in developing countries. As expected, their returns are generally higher and more volatile, but not near the levels of large fortunes because of the regulations governing such funds, which often limit what and where the fund can invest in, how much the fund can borrow, liquidity, maturity, diversification, and so on. Funds are also slower at changing investment objectives compared to private wealth since they typically have to invest according to the fund objectives which are slow/impossible to change, whereas Bill Gates can unilaterally tell his portfolio managers to do whatever. Private wealth also has much lower transnational cost needed for switching investment strategies compared to funds (which typically have a redemption period, a bid/ask spread, and so on).
This is similar to what I suggest below, except I think it’s more to do with risk-aversion than it is to do with being an accredited investor. Normal people still have access to plenty of high-risk investments (like low-cap stocks), it’s just complicated investments (like derivatives) for which you have to be accredited.
Also, you only need a net worth of $1 million to be accredited, so it can’t explain why Bill Gates does better that millionaires.
Not true. Pretty much anyone can trade options or futures if they self-identify as someone smart enough to understand the risks. Accredited status is required to buy into early-stage companies who have not publicly listed their stock. Such ventures are risky (high probabilty of the company going bankrupt before acquisition or IPO).
Also, accreditation means $200k/y income, and likelihood of making that next year, OR $1M in net worth EXCLUDING principal residence. That can be meaningful to many people who would meet the definition if their home equity were included.
For one thing: I don’t think increasing the population is a good solution for inequality.
I’m pretty convinced that short of near term economic issues like rising dependency ratios decreasing economic growth, there are already too many people on the planet. Mass consumption has caused huge environmental issues and while we could play the “Everybody could fit into Texas with room to spare overpopulation debunked!XD” game, in practice, there are issues to do with available arable land and other resource constraints.
If you’re going to play the role of Malthus or the Club of Rome, it might be helpful to detail what the constraints on agricultural land might be (the amount needed goes down if you modernise farming so this is an odd example to pick), and what the other resource constraints you refer to actually are. At the moment you’re making unsubstantiated statements to support a hypothetical problem, which could be because of a deep well of knowledge or because you’ve read to much Greenpeace publicity material, or anything in between. It’s a bit of a range of possible opinions with which to try and engage.
Forward Synthesis isn’t playing Malthus. The claim isn’t that overpopulation will get to a point of rat race, it’s skepticism of the claim that just because we can sustain more population, that we should. It’s skepticism of the claim that increasing the population is necessary to making everyone’s living situation better off.
No, we’re not in current danger of everyone starving because the planet doesn’t have enough resources. But given 1B less people and way more redistribution of wealth, there would be whole lot more to go around per person.
Or, the more people that exist to take UBI, the harder it gets to make the program politically feasible, even if it was financially feasible. But if inequality is decreased at a lower total number of people, then UBI ceases to even be necessary.
Human experience has been that more redistribution of wealth leads to lower wealth creation and that wealth creation scales very well with population.
So I don’t think your assumptions here actually hold, except for the special case where you immediately kill a billion rich people and then redistribute their wealth, then short term you’d have more per person who remains, but even in that extreme situation, long-term you’d end up with less as people now have an incentive to not be the next billion people killed in addition to the consume-other-people’s-wealth dependency created.
Instead, if you increase the potential number of trading partners and the returns to specialization (i.e. more people overall working to create and consume wealth for a good portion of their lives) and you incentivize behaviors which result in higher wealth growth (i.e. not redistribution), then with wealth growth compounding each year, it doesn’t take much time before you’ve exceeded the theoretical of less people and more redistribution, even for the poorest 20% of that society, for example.
Are you assuming that the main source of income is natural resources, of which there would be more per capita? I would have said that the main source is human effort, which goes down along with the population. There would be more land per person but not more of produced goods, services, anything produced by labor, except in the very short run where the survivors were sharing out stuff already produced.
I think worries about overpopulation are a probability thing.
Say what you will about arable land, it isn’t growing exponentially with a doubling time of 60 years like Earth’s population is. There’s a certain chance that new technologies will allow us to keep up with the growth rate, and a certain chance that human population growth will level off of its own accord. (Indeed, the doubling time is now slightly longer than it used to be.)
On the other hand, there’s also a non-zero chance, the way I see it, that technology won’t be able to keep up with population growth: To predict the capabilities of future technologies is an extremely difficult problem.
It’s a calculated risk: Make too many people, and if technological progress fails you then you’re stuck with a polluted environment and a shortage of resources. This probably wouldn’t lead to mass starvation, but life could also become a good deal less pleasant than it is currently. On the other hand, having too few people can also have drawbacks.
@phi and @AG responded better than I could have. There are certain problems with shortages right now (building quality sand shortages is a recent news story if you want a concrete example), and the amount of plastics put into the ocean is an example of a huge environmental issue that is exacerbated by population. Yes, we could use different materials to make up for shortages of others, use nuclear fusion to fund desalination of water, and use something more biodegradable than plastic to make all our gadgets out of, but the more people there are, the more work technology has to do.
Even with global warming, sure we could just use more green energy, providing it becomes ready for global replacement soon enough, but it’s not just greenhouse gasses, but the severe quantity that are emitted that have such a big effect on our planet. Almost any human activity when instigated on such huge scales is going to have an effect on the environment we live in, and even as we develop technology to help us tackle old problems, new ones will turn up. We are never going to get a completely waste free economy, or reach 100% efficiency with no losses in any power production technology, so huge numbers of people are always going to create huge amounts of waste.
As for land, the World Bank estimated in 2010 that 37.7% of the Earth is agricultural land (includes livestock) and 10.6% was considered arable (just farming). Now that might sound like we have a lot left, and that’s true, but it’s not all distributed evenly geographically, and Africa has a huge problem in this respect. There’s also the issue that Westerners eat a lot more than third worlders, so if they want to catch up (and they will), they will need to greatly increase their land use, which also increases their water use, and their power use, and the use of fertilizers, and so on.
The other issue is living space, which leads to the housing prices that may be the true story behind massive inequality if you look at the responses to Picketty. Sure, we could relax zoning laws, build more houses, and we’d have more than enough extra space in which to do that, thereby relaxing prices, but you have to remember that this is contingent on that happening, and homeowners want to keep their house prices up, creating a “class” conflict there between established home owners and would-be buyers of the next generation. We could easily succeed, but population growth is just another element in the mix that makes things more difficult. Even with relaxed zoning laws, what that means is that more blocks of flats or apartments can be built where they previously couldn’t have been, and more people can be squeezed into a tighter area. There’s a quality of life issue to think of here. I would expect more depression and more crime in such a world.
Thankfully, population in Western countries is declining, and other countries have declining birth rates, and as long as we work hard on getting automation to pick up the productive slack, we don’t need to be trying to increase it for the sake of tackling inequality. I very much doubt any efforts on that front could be solely targeted on the upper class anyway, and given the fertility drives that have failed previously in various rather strict countries (“communist” Romania comes to mind), I’d imagine you’d need to do things as severe as banning birth control and abortion to see modest effects in developed countries. It’s not the best avenue to reduce inequality (I see absolute poverty as the real issue anyway).
This is what I would have predicted, because richer people are more risk-neutral.
Among the investment opportunities that exist, riskier investments make more money on average than safer investments. They need to, because otherwise people would have no incentive to put their money at extra risk. This is why stocks make more money than bonds, which make more money than cash.
Now if I’m a millionaire I would be quite worried about losing 90% of my wealth. I’d be left with $100000, which isn’t enough to retire on; I’d have to go back to work. But if I’m a billionaire then losing 90% of my wealth is no big deal; I still have $100 million. So the more money I have, the more willing I am to put my money into risky (but on average more profitable) investments. So on average richer people will achieve a higher rate of return than poorer people (although some billionaires will lose a lot and return to millionaire status).
This explains why the middle-class can’t achieve the same results by pooling their money: the pooling doesn’t affect risk. If the pool loses 90% then each person in it has lost 90%, which for a middle-class person is very bad.
There are high risk investment funds in existence and such risky funds do have higher returns compared to safer funds, though they don’t match the performance of private wealth.
It’s easy to see why there is demand for risky funds. Consider two funds — one that invests in safe investments like investment grade bonds, and another that invests in high risk investments. This is desirable because this allows individuals to choose their level of exposure to risk.
Your hypothetical millionaire, for example, may invest the majority of his net worth in the safe investment fund, and invest the rest of it into the high risk fund. In this way, he can assume a level of risk appropriate to his risk appetite.
Nothing can really explain 4-5% unless we are talking about people “investing” in CDs and money markets which are essentially cash accounts.
I see some sleight of hand in the comparison: in the beginning, when talking about Rastignac’s situation, the author underlines how the impossibility of achieving a respectable income through work (a career in the liberal professions, in that case) is unfair and the main motivation for cynicism about the social order.
But then, in the second part, the author gives examples like Bill Gates (for me, John Edwards and Ben Carson also come to mind, as a direct answer to Vautrin’s speech), which run directly against the previous argument. In our society it is indeed possible to choose a career, excel at it, and, with enough ambition, become richer than the grandchildren of someone who made his fortune 50 years ago.
To me this shows that the two situations are completely different. But the difference is not openly acknowledged in the presented arguments. Indeed, it seems that many people, instead of being grateful for these social advancement opportunities, make no acknowledgment of the differences between current conditions and those prevalent under the Restauration or the Ancien Régime.
Vautrin’s point was that even someone endowed with all practical qualities, including intelligence, ambition, and ruthlessness, still had no chance to become rich unless through crime. The modern complaint is that someone endowed with such qualities, like Steve Jobs, will succeed too well and overshadow other people’s lack of accomplishment (or contribute to the growth of inequality, to put it in the left’s language).
What gives? Why the attempt at papering over the fundamental differences?
The explanation is simple: modern leftists see themselves as Rastignac, as brilliant people frustrated in their ambitions, whereas the modern-day equivalent of Rastignac is rather someone like Bezos and in fact there is no real barrier to ambition (if helped by effort and perseverance) in our society.
But this allows modern leftists to pretend that the only solution is a revolution (like the 1830 and the 1848 revolutions), which will put them, instead of Bill Gates’, Bezos’s, Walton’s, and Rockefeller’s descendants, on top where they belong.
Not exactly. The complaint is also that many people never get to develop their qualities.
Note that Bill Gates’s real name is William Henry Gates III, a name that hints at the fact that he comes from a 1% family. So he is not a very good counterexample to the narrative.
John Edwards and Ben Carson are better counter-example, as their parents were lower or lower-middle class.
Well, what opportunities do these modern people lack that Rastignac had.
Probably someone like Rastignac lived in an upper-level flat of indifferent cleanliness, cold in the winter and hot in the summer, with rare hot baths, no showers, and no toilet (since it hadn’t been invented yet), and no food preparation conditions. He didn’t have the Internet at the tip of his fingers and books were somewhat expensive and/or hard to access. Trains were rather expensive and still uncommon, cars and planes hadn’t been invented yet (edit: even middle-class people couldn’t afford to keep a chariot).
People will complain and pity themselves no matter what, but I think there’s no comparison.
And the qualities I mentioned are intelligence, ambition, and ruthlessness. Not sure what conditions modern leftists are lacking that would lead to their flourishing.
Edit: My point is that modern people have the following opportunities that Rastignac didn’t have: modern medicine and hygiene, abundant food, Internet, cheap books, easy and affordable access to education (EdX, Khan Academy; as opposed to expensive diplomas), relatively easily moving to another city or another country.
Rastignac didn’t actually exist and is instead a rhetorical device to make a point about social stratification. So I don’t see how a novel about Rastignac can tell us whether a real individual from 1835 who was in similar circumstances to Eugène de Rastignac, would actually have a decent chance to either become a judge or to marry into money. If people in 1835 did not, then your argument falls apart, since even if social mobility is easier than back then, it can still be quite bad.
My understanding is that marriage between different classes was strongly discouraged and that getting an advanced education was also very hard. Remember that Rastignac is an impoverished noble, who presumably can draw on his status and/or family connections in a way that most people couldn’t.
So even if Rastignac did have a decent chance at social mobility, the situation for the lower and middle classes could have been fairly hopeless.
One such claim is that some groups lack role models, which leads members of those groups to conclude that success is impossible, which leads to a lack of ambition.
The need for diplomas has gone up. Furthermore, the opportunities for paid apprenticeship may have substantially decreased.
I think that decent arguments have been made that it is has become harder to gradually climb the ladder (Precariat) compared to the post-war period.
I still think that the point made in “Père Gloriot” is rather the opposite of the one Picketty or SA, don’t know which one, is trying to make.
Balzac’s point (greatly exaggerated) is that there was no honorable career or honest means of achieving fortune in Réstauration France. Even if one was ambitious, determined, and intelligent, all avenues short of crime were closed. Even for someone like Rastignac. There was no even remotely honest and non-humiliating outlet for ambition.
For Balzac and his contemporaries (see Julien Sorel), the implicit contrast was with the Napoleonic period, which offered many more possibilities for achieving grandeur: a military career, administrative positions, diplomatic positions, the beginnings of modern engineering, etc..
The concern isn’t about stupid, naive, or unambitious people; it’s that the talents of some brilliant and ambitious people weren’t being put to good use. Rastignac was willing to try almost anything, but had no honorable way to succeed. His problem is not oppression or the lack of proper role models, it’s the pettiness of society forcing him to use petty means for advancement.
Balzac himself had a reasonably hard time striking it rich, trying pretty much everything, and he “ennobled” himself without asking for anyone’s permission.
In this way, modern leftists are like Rastignac squared. There is no path to advancement that doesn’t involve some sort of compromise and they just won’t compromise their ideals. The only acceptable way is being a misunderstood artist and saving the world through activism. Anything else is beneath them, as murder was for Rastignac. The world should just take a hint already and reward their purity.
This state of affairs is almost completely the opposite of what Balzac was criticizing. A modern-day Rastignac could, with considerable effort no doubt, become the head of a big corporation, a high-ranking banker or a hedge-fund manager, a famous musician or actor, an accomplished politician, a well-known doctor or lawyer, a general, an elite soldier, a sports champion, a marketing guru, the founder of a religious cult, etc., and acquire influence and fortune. And pretty much none of these paths involves, afaik, murder, petty theft, or sleeping with someone disagreeable (which Rastignac was willing to do).
All these possibilities did not exist in Balzac’s society (well, to some extent they did, here Balzac is exaggerating for dramatic effect), but they do now. Rastignac’s main characteristic is not his whining, but his ambition, and he would be doing quite well in our age.
So Balzac, Vautrin, and Rastignac are quite far from the modern leftist point of view. Using them in support of the familiar complaints is misleading.
David Ricardo is a few decades earlier than Rastignac and in England, not France. He came from a well off family, but his (Sephardic Jewish) parents disowned him for marrying a Quaker, so he had contacts but not wealth.
He made a fortune in financial dealings, retired in his early forties. So it was possible in the early 19th century to do what the Rastignac story claims was impossible.
Looking at Gates’ biography, he definitely had some advantages. I would say the chief ones were that he went to a private high-school where he had access to a computer early on, and that at Harvard, he was able to build a network that allowed his talent and ambition to thrive. (Or at least, to meet Paul Allen).
Those advantages come more easily to the child of a successful Seattle attorney, but are available to our theoretical Rastignac. (Note that Gate’s father, William H. Gates II, seems to be in substantial part self-made himself – named after his immigrant father, Gates II attended public university on the GI bill, law school, and became a successful lawyer and philanthropist.)
Judging by a quick look through the Wiki articles on him and his father, the father went to college on the G.I. Bill, started a law firm, and did well as an attorney. I don’t see any evidence that the father was in the top 1% of the income distribution, although he was probably reasonably well off, and similarly for the grandfather.
With a prominent lawyer as a father, a mother who served on the board of directors for First Interstate BancSystem & the United Way and a maternal grandfather who was a national bank president, I have trouble believing that he was not born to the upper upper class. Perhaps not exactly top 1%, but surely quite close to it.
Both from a cultural as from a financial point of view, I expect Bill Gates to have been well-prepared for success.
Cultural very likely. Financially, he started better off than average, but the difference is trivial relative to the amount better off he ended up. So his wealth isn’t explained by the growth of inherited capital.
Note that his father was well off because he was a successful lawyer–a laborer in Piketty’s classification, not a rentier.
but the difference is trivial relative to the amount better off he ended up
In another universe where Bill Gates III was born into a family with 1/10th the wealth of this universe, he probably doesn’t found Microsoft. His family couldn’t handle him dropping out of Harvard for a few years for those silly computer things.
Using ratios here is really tricky. Below some threshold, he doesn’t found Microsoft at all. In some relatively narrow range, he founds it but with outside money to various degrees, diluting his wealth. Above some threshold, his money simply doesn’t matter any more. He parents could have been 5x as rich and it wouldn’t affect how much Bill Gates or Microsoft is worth today.
That’s a pretty bizarre definition of ‘laborer’, to be honest.
If labourer equates to someone whose income contributes to the Labour share of income as capitalist equates to someone whose income relates to the capital share of income then the definition fits though. And they’re still paid for doing their job…
No, it’s an entirely appropriate definition of laborer: a laborer is one whose income derives primarily from a salary or wage, not from returns on investments.
Don’t most US CEOs get their income via stock market appreciation? The proportion that’s related to options is usually quite high – this is supposed to be incentive to improve their company’s fundamentals, but arguably results primarily in manipulation of the stock price. I feel funny about calling this “salary or “wage”, or even income from doing what they were supposedly hired to do.
If you define “wages” as “anything for which you are taxed in the same year it’s given to you” then stock options generally count as wages. Capital gains happens later when you exercise the options and compare what you actually received for them to what you paid taxes on when you received them.
This is not quite right. What you have described is a stock grant. Options are taxed when you exercise them, not when they are granted, and they are not generally taxed like a normal income.
a laborer is one whose income derives primarily from a salary or wage, not from returns on investments
But this definition leaves out the crucial fact that for most “laborers” by this definition, at least some fraction (often a very large fraction) of their salary or wage is not payment for their labor–the time they spend working–but a return on capital for particular skills that they have, which they obtained by investment. Counting CEO’s with assembly line workers because they both “labor”, as Piketty does, doesn’t seem to capture the actual joints within society nearly as well as counting CEO’s with capital, not labor, because virtually all of their compensation is return on capital they have invested in particular skills (one of which, btw, can simply be the skill of convincing corporate boards of directors to pay them huge salaries and give them lots of stock grants and options).
I agree it’s a weird use of the word ‘laborer’. We need a term to stand on its own. The Communists used proletariat. I suspect Piketty doesn’t use it because he doesn’t want to seem like a leftist with a political ax to grind.
Nevertheless, the Communist critique has real legs here. There are broadly three groups that exist in capital-labor. The proletariat, who sell their labor to make a living. The petite bourgeois, who own some capital and mix it with labor to make a living. And the bourgeois, who live off their ownership of capital. This is, in of itself, an evolution of the Pettian critique of landed gentry, a fact Marx himself acknowledged.
Remember, Communism is widely concerned with classes and class conflict. The CEO and the ditch digger both care about, say, a law that allows your employer to have Droit De Seigneur. The small shop owner and Walton family both care about corporate tax rates. Etc. This observation is true and not as appreciated today as I think it should be. That’s not to say other divisions, like social class, income, or ethnicity are irrelevant. But it is true people have significant common interests due to their relationship to capital.
(Petty, by the by, had four classes: the worker (the proletariat), the small proprietor (the petite bourgeois), the great merchant (the capitalist bourgeois), and the landed lazy (rentiers). Petty brings up the contrasting examples of a merchant that buys shares in a trade mission and the owner of a forest who charges entry fees to gather tinder. The former provides something, capital, and causes something to happen, a trade mission. The latter simply forces people to pay him money by force of law, at best maybe managing the forest. Still, it takes little management for a forest to produce fallen branches. Much of what Marx did to this model was building on the degree to which the other two were separate and in society.)
I again find it amazing that a group of people who believe themselves to be paragons of rationality (the commenters here) uncritically accept only arch-conservative laissez faire economics as gospel when it comes to economic matters. Where is your ballyhooed skepticism when it comes to plain Jane Republican economic theory?
I’m interested in testing Piketty vs his critics – do you have some sources that do more than call them arch-conservatives or fucking parodies?
Banned for a one-day cool down period because I’m sure you have something useful to say later.
For context, Freddie deBoer is an actual real life NIMBY of the sort you very rarely see on sites like this.
He’s explicitly opposed to new construction because it will allow immigration by the wrong type of people:
One of the explicit reasons for this is that immigrants will make natives feel uncomfortable:
This context is important; according to Matthew Rognlie, Freddie is the kind of person who’s rent seeking drives r > g. That’s why it’s not so surprising that Freddie is making an ad-hominem attack supporting Piketty – wouldn’t it be convenient for him if far away super rich outgroup folks were the real problem?
In that piece, Freddie deBoer is arguing for a deliberate lowering of the value of housing. He says:
These rents will be higher, because the property investments will be worth more. Freddie deBoer wants the rents to be lower, with the unstated assumption being that he wants the property investments to be worth less.
Now, I suppose you could call actions that both increase and decrease of the value of a property “rent-seeking”, but that seems to be an overly expansive definition, far removed from a “return on investment”. (Does doing nothing with a property also qualify as rent seeking?)
Freddie deBoer is arguing for a deliberate lowering of the value of housing.
No, he’s arguing for just leaving it alone. He is not advocating taking any actions at all to lower it. He’s just arguing for not taking actions that will raise it and destroy existing wealth (parks and community spaces whose value will be greatly reduced) in the process.
In the classical parable of rent seeking, there’s a man who owns the only hotel in town. Rates are high. Others want to come in and build hotels but he prevents them from doing so.
He’s not a rent seeker, he just wants to leave things alone!
The harm he describes is casting a shadow on a park and people feeling uncomfortable with folks who are different from them.
I’ve seen several public playgrounds that would be improved by having more shade on hot days.
The rent is being sought on behalf of the current natives and the businesses which are currently enjoying cheap rents. The form of the rent is protectionism – protection from economic competition by foreigners.
Consider Trump’s steel tax. Is there any dispute that if a domestic steel producer lobbies for this tax, that it’s rent seeking? (If they benefit from it without lobbying, they are collecting a rent but not seeking it.)
Similarly, consider Trump supporters who don’t want to lose their job to economic competition by Mexicans. They also don’t want Mexicans moving into their neighborhood, speaking Spanish and selling tacos (perhaps in a storefront vacated by a failed All American Burger Joint), since that will make them uncomfortable. Is there any dispute that these folks are also rent seekers?
This is literally the same thing Freddie is pushing for, he just wants it for different groups.
In the high-rise case, wouldn’t the people who wanted to build the high-rise, who were petitioning the government NOT to give in to deBoer, also be considered rent-seeking? Keep in mind that the property in question is almost certainly fee simple, with the government retaining the ultimate legal authority to regulate usage of it.
You seem to be describing any petitioning of an authority as an “investment”, and any outcome of that petitioning as the “return”.
So like, if I ask my brother if he wants to paint a fence with me, and he says “yes”, could we also describe this as rent-seeking, with my asking as an “investment”, and the fence painting as the “return”? We’d be extracting “rents” from whoever doesn’t want the fence painted, I guess.
Guy in TN, if the people who want to build the high rise were petitioning for some kind of exclusive access (“let us build this but don’t let other people without our connections build stuff”) they would also be rent seekers.
Rents = profit in excess of whatever is needed to cause the good or service to remain in use.
The baseline for measuring a rent is what would happen in a competitive market.
So for example, if we wanted to determine whether the builders are collecting a rent by casting a shadow on the park, we would need to answer the question “how much would the current park users pay to have a shadow free park?”
(Hint: almost certainly far less than people will pay for a home to live in.)
It looks pretty symmetrical to me. The people opposed to the high rise aren’t opposed to all buildings, they are just opposed to this building. Any access they are trying to exclude from the builder, is only in relation to this given lot of land.
Likewise, the people who want to build the building, are wanting to preclude any other usage of that plot of land. They want exclude access to control that particular lot from the building-opposers.
In this case, you are arguing that the lowered property values are the “excess” that the petitioners are gaining, if they successfully convince the committee. Why then, if instead the building-supporters are able to convince the committee, would their rewards not be considered “rents”? It’s certainly an excess from what they would gain by leaving the plot of land alone.
I get it, we are supposed to imagine that the committee has no say over the construction, and the highest bidder wins. If an outcome other than that happens, then the result is “rent” on the winners part.
So, back to the fence painting scenario. There are outsiders who definitely don’t want this fence painted. But me and my brother didn’t ask their opinion, and they got no chance to bid money on the matter. Even if they did bid, my brother wouldn’t accept it. My brother was the sole decider of whether the fence become painted.
Since I couldn’t have been able to outbid the fence-painting-opposes, and I used my personal relationship with my brother to influence his decision, surely you must agree, I am a rent collector here. In a competitive market I would have been outbid. Me and my brother weren’t interested in what the market had to say, at all.
Guy in TN, what exactly would qualify as rent seeking in your view? It looks to me that you are attempting to define rent seeking so narrowly that basically nothing qualifies (in particular, so that Freddie’s rent seeking doesn’t).
I’m guessing, “Owns private property.”
The rent is being sought on behalf of the current natives and the businesses which are currently enjoying cheap rents. The form of the rent is protectionism – protection from economic competition by foreigners.
Competition in what?
If the argument is that the current residents and businesses are not extracting the full potential value of the land, and the developers could out-compete them by extracting more value from it, then the developers should be willing to pay the current residents enough to convince them to leave. They shouldn’t have to call on government favoritism to get their project approved over the objections of the current residents.
Well, the developers have bid more than the residents to purchase the property that they want to build on. The residents want to call on the power of government to keep them out, without them having to spend any money. It’s the residents who are calling on government favoritism.
It’s absurd to say that anyone who wants to do anything “should be willing to pay” anyone who doesn’t want them to be able to until all those people go away. No one would ever be able to do anything.
Competition in living in that area, and having businesses serve their needs.
If refugees and sad children separated from their parents can get enough value out of living in the US, then they should be able to pay off every single American native who objects to immigration.
That would also be perfectly acceptable and not rent seeking, right? Maybe we should do nothing ever (including allow hispanics to immigrate to the US) unless every random third party who wants to object gets their pound of flesh?
[Posting from a phone, so forgive my short response.]
Lots of concepts being conflated here. There’s pickettys “r”, “rentiers”, and “economic rent”. Economic rent isn’t a term I’m particularly interested in defining, it plays little role in my political vocabulary, and I find it often is used to conceal highly ideological assumptions rather than illuminate.
From what I can gather, all property (and not just “private property” in the strict capitalist sense) necessitates economic rent, in the sense that I see the term most often. Yet, this is rarely mentioned, and instead used to bludgeon strictly governmental ownership.
So the answer to the fence paitinting question is, of course it’s economic rent, it’s essentially identical to the highrise situation, only with the highrise the government is the highest authority over the property, rather than my brother. The question becomes then, if this is really what Picketty means when he is taking about the rentier class, and if this is included in r (I strongly suspect not). Everyone who has any sort of property is a beneficiary of “economic rent”, in the sense you are advancing it. Surely Picketty isn’t calling petitioning “investment” and the outcome of that petition a “return”
the developers have bid more than the residents to purchase the property that they want to build on
The property, as I understand it, is currently public land, so the residents already own it as members of the community. The government is supposed to be acting in their behalf.
If refugees and sad children separated from their parents can get enough value out of living in the US, then they should be able to pay off every single American native who objects to immigration.
The refugees aren’t claiming that they can make more productive use of an existing resource, which was the argument I was (hypothetically–see below) attributing to the developers. So your comment here is irrelevant.
To be clear, I don’t know whether the developers are actually arguing that the land they want to develop will produce more value under their plan than it is currently. I was only giving that as a possible example of an argument that might be made to justify letting them develop the land. The point of my response to that hypothetical argument was that (as I responded just now to Cliff), the land is currently public land (as I understand it), so if the developers really believe they can add more value to the community by privatizing and developing it, they should be willing to offer a portion of that expected value to the current members of the community in order to convince them to support the plan. A developer who argues that he’s going to create all this extra value but is unwilling to put any money behind that argument raises the suspicion that the extra value is more hot air than real. But if the developers aren’t actually making that argument, my comment is moot and can be disregarded. (Though in that case I would be interested to see what argument the developers are in fact making to justify privatizing currently public land.)
He’s explicitly opposed to new construction because it will allow immigration by the wrong type of people
No, he’s opposed to it because it will shove the people who live there now unceremoniously out of the way. You stopped quoting in the middle of a sentence; here’s the full sentence:
As you say, context is important:
This context is important; according to Matthew Rognlie, Freddie is the kind of person who’s rent seeking drives r > g.
Yes, context is important: the context that all this new construction is not taking place in a vacuum. There are already people living in these places, whose voices and interests are being ignored; not to mention the fact that, as deBoer describes in detail in the blog post you link to, existing wealth (parks and community spaces) is being destroyed. I don’t see how this can be described as rent seeking since the people living in these places now aren’t trying to extract rent from them; they’re just trying to live in them. The parks and community spaces being destroyed are free for all; nobody is charging admission.
So, in context, I don’t see deBoer as a NIMBY. The problem he is talking about is real, and ignored by people who hype “development”. It’s like a historian I read about once, who, writing during the Cold War, contrasted the territorial expansion of the USSR with that of the US by saying that at least the US had expanded into an empty land.
I didn’t realize that casting a shadow on something (a park in this case) is equivalent to destroying it. You learn something new every day!
I also didn’t realize that building new housing for immigrants to live in somehow forces others to leave.
The rent they are extracting is (market rent – current rent). They are seeking this rent by attempting to prevent others from competing with them economically.
This is literally the textbook example of rent seeking. The original paper on rent seeking started with the example of preventing the construction of new housing (actually hotels) in order to preserve an economic advantage.
Yes, the problem DeBoer is complaining about is real. Some people just have negative feelings when Mexicans move into their neighborhood, start selling tacos, speaking Spanish, and outcompeting them by providing valuable goods and services at a mutually agreeable price.
Trying to prevent the Mexicans from moving in is still rent seeking.
What paper are you referring to?
I would have said that the original paper on rent seeking was “The Welfare Cost of Tariffs, Monopoly and Theft” by Gordon Tullock. The term was coined later by Anne Kruger in “The Political Economy of the Rent Seeking Society.”
Certainly casting a shadow on something can reduce its value. If a park’s value is too subjective, consider a solar farm.
As for new housing for immigrants, it depends. If the new immigrants come in, make noise all hours of the night, and include gangs who mistreat the incumbent residents, they can indeed force the others to leave. Of course this isn’t a strictly economic consideration.
You’re misinformed and arguing from bad faith. Freddie isn’t trying to keep out “the Mexicans.” He’s providing context for a broad trend of rentiers circumventing the spirit of zoning laws to exploit vulnerable communities despite mass protest and community action.
His article provided another example: the Bedford Union Armory, a huge abandoned building the city reserved for redevelopment. Community objections (including unanimous rejection by the community board and the borough president) and proposals for low-income housing or public spaces were ignored in favor of upscale housing that would displace vulnerable residents.
The egregious height of the proposed apartments over the Botanical Garden is a symbol of bloodless financial might casting a shadow over the organic growth of the local community. It’s an inaccessible, irresistible monolith choking out residents made powerless by the forced abdication of public resources to private interests.
You say ‘Freddie isn’t trying to keep out “the Mexicans.” He’s providing context for a broad trend of rentiers circumventing the spirit of zoning laws to exploit vulnerable communities despite mass protest and community action.’ but the imagined race of the building’s occupiers was important enough for the article writer to mention, so I do think just pretending that it’s about ‘circumventing the spirit of zoning laws’ is a trifle off.
Mass protest and community action are just methods used to seek rent. They’re probably better than the classic methods of burning crosses or generic crime, but they’re still an example of creating a negative sum game in which you gain, and in this case the name of the game is rent-seeking.
Now, if this is always government land then I do think it is different. The land purchasers in that case started the game of rent-seeking by lobbying to be given the land, but generally it should be accepted as rent-seeking even if you want to claim in this particular case that it is also a good thing.
Also, in what way is it ‘choking out residents’?
Belvarine, I agree that Freddie isn’t trying to keep Mexicans out. He’s trying to keep a slightly different group of humans out, for the exact same reason that Trump wants to keep the Mexicans out. Since I view a Mexican human as having equivalent moral worth to a yuppie human, this distinction is of no consequence to me.
Yes, and the delicious tacos provided by Mexican food truck operators are a symbol of their silent invasion of the southwestern united states and displacement of real Americans. Plus dey took our jorbs!
We can describe the wrong kind of people moving into “our”  neighborhood in all sorts of hyperbolic and silly ways. That doesn’t change the fact that exploiting the political process to avoid economic competition and express disgust towards “those people” is anything other than rent seeking.
 I live in Bangalore and very much wish some Mexicans would open a restaurant here. I miss tacos.
He’s trying to keep a slightly different group of humans out, for the exact same reason that Trump wants to keep the Mexicans out.
the problem DeBoer is complaining about is real. Some people just have negative feelings when Mexicans move into their neighborhood, start selling tacos, speaking Spanish, and outcompeting them by providing valuable goods and services at a mutually agreeable price.
Just to be clear, deBoer doesn’t mention Mexicans at all. He describes the people who want to move in as “affluent white people”.
I also don’t see the parallel with Trump’s anti-immigration rhetoric. The problem deBoer is complaining about is that he can now afford to live where he lives, but if enough affluent white people move there, he won’t be able to. The only “competition” I see going on there is competition in who can spend more and thereby bid up prices.
Correct. He makes the exact same criticisms of immigration as racist anti-hispanic types, except he levels this criticism at a different group of people.
You’ve just spotted the economic competition!
Similarly, if enough Mexicans move in and take the jobs of white people, those white construction workers also might not be able to afford things they want.
Freddie also complains about feeling “uncomfortable” and about businesses catering to newcomers (directly analogous to people feeling “uncomfortable” hearing spanish everywhere, and not wanting taco shops to displace burger shops).
He makes the exact same criticisms of immigration as racist anti-hispanic types, except he levels this criticism at a different group of people.
I’m afraid I still don’t see the parallel. The standard Trump-style complaint about immigration is that the immigrants will take away jobs from current residents; but as far as I can see, the jobs in question are ones that current residents won’t do anyway. So the complaint is not really well-founded to begin with. But deBoer’s complaint, whether or not you agree with it, is certainly well-founded.
Freddie also complains about feeling “uncomfortable” and about businesses catering to newcomers (directly analogous to people feeling “uncomfortable” hearing spanish everywhere, and not wanting taco shops to displace burger shops).
In other words, just like every other human being, he wants to live in a community that he’s comfortable living in. You can’t make people like things they don’t like just by chanting “economic competition”. Is your position that, even if they don’t like it, they just have to lump it? Economic competition doesn’t automatically make something right.
Even if we accept this as being true, the land that the Freddie wants to prevent development on is also jobs that current residents are unwilling to pay to live on.
They might be willing to pay to live on it if prices were lower, just as American natives might be willing to do agricultural jobs if the wages were higher than disability fraud.
Yes. My position is that if you want to prevent peaceful people from buying and selling goods and services or living in your neighborhood because their personal behaviors/characteristics (e.g. speaking Spanish, sipping lattes, men speaking and dressing effeminately, being and/or acting black) make you uncomfortable, you should suck it up.
I know many folks here – including me – have some alt-right tendencies, but “bring back legally enforced residential segregation” is pretty far even for this board.
My position is that if you want to prevent peaceful people from buying and selling goods and services or living in your neighborhood because their personal behaviors/characteristics (e.g. speaking Spanish, sipping lattes, men speaking and dressing effeminately, being and/or acting black) make you uncomfortable, you should suck it up.
So you don’t think people should be able to form a community that explicitly regulates any behavior of community members? What about covenant communities? What about gated communities? (For that matter, what happens if the affluent white people who end up living in the new high rise hire security guards to keep the riffraff out of their building?)
Also, how much behavior that makes them uncomfortable are people required to just suck up in the places they live? Is there any limit?
I know many folks here – including me – have some alt-right tendencies, but “bring back legally enforced residential segregation” is pretty far even for this board.
So to you, segregating based on preferred behaviors is no different from segregating based on skin color or ethnicity?
Can you explain to me how they differ?
Can you explain to me how they differ?
People don’t have control over their skin color or ethnicity. People do have control over their behavior. So it doesn’t make sense (to me, at least) for a community to set standards of skin color or ethnicity; but it does make sense to set standards of behavior. Or at least, it would seem that the two are very different kinds of reasons for wanting to segregate.
So, if I am physically capable of changing a behavior that you find objectionable, like drinking lattes and working in the financial industry, it would be acceptable for you to exclude me from your neighborhood, but it would be unacceptable for you exclude me because I am white?
I don’t know. In either case, it seems to me that somebody has some conception of what he wants his neighborhood to be like, and is trying to co-opt the power of the state in order to enforce that conception. Whether the conception is legitimate or not, I don’t see how you can call it anything but rent-seeking.
So, if I am physically capable of changing a behavior that you find objectionable, like drinking lattes and working in the financial industry, it would be acceptable for you to exclude me from your neighborhood, but it would be unacceptable for you exclude me because I am white?
It would be a different kind of basis for exclusion. I was responding to stucchio seeming to conflate the two.
Whether either, or both, would be acceptable or unacceptable will depend on the person. One of the things America was supposed to be was a country where people with different notions of what was acceptable or unacceptable could form communities based on those different notions.
In either case, it seems to me that somebody has some conception of what he wants his neighborhood to be like, and is trying to co-opt the power of the state in order to enforce that conception. Whether the conception is legitimate or not, I don’t see how you can call it anything but rent-seeking.
In our current society, yes, people do try to co-opt the power of the state to enforce their conceptions. And this applies just as much to people who want to eliminate segregation as to people who want to support it. So if it’s rent-seeking for the latter to do it, it’s also rent-seeking for the former to do it. In the particular case under discussion, if it’s rent-seeking for deBoer and his neighbors to try to get the city government to forbid the new development, it’s also rent-seeking for the developers to try to get the city government to allow the new development. Both are trying to co-opt the power of the state to enforce their conception of how things should be.
The usual objection raised against libertarians who give the obvious solution to this dilemma–stop giving the state the power to enforce one particular conception on everybody–is that the objector’s personal vision of how society should be could no longer be enforced. Yes, that’s true. One of the prices of living in a free country is that people are free to form communities based on different norms than yours.
You should understand that I am mostly in favor of freedom of association. I tend to agree with your analysis, and am trying to understand if there are principled reasons for exceptions to it.
The exception for things people “don’t have control over” does not seem principled, at least partly because one has varying degrees of control over different aspects of one’s presentation. Asking an investment banker to quit his job seems extreme and not much worse than asking him to change his skin color. From the other end, and granting that there are exceptions, many bigots’ objections to non-whites are not actually related to their skin color but to what is perceived as their dysfunctional culture — or even just their different culture, perhaps stemming from a preconscious understanding of the fact that peaceful, high-trust societies tend to be the more homogenous.
…no longer participating in this discussion, and it seems inappropriate to hold a discussion of What Nasty Things Freddie deBoer Believes if he’s not around to defend himself.
Less of this please. Just because Freddie is engaging in ad hominem doesn’t justify responding with ad hominem. He already got suspended.
(That makes two actual cases of ad hominem arguments in this thread! Not just insults, but actual (implicit) ad hominem arguments!)
Stucchio banned for one month
If a wealth tax is politically impossible, how about bringing back a higher capital gains tax? That seems a lot more politically feasible (at least in the US) and should somewhat reduce the investment return rate of large fortunes, shouldn’t it?
First of all, capital gains tax already taxes people on inflation when there is no real gain at all. Second, it taxes what we want- savings and capital investment- which increases productivity and wages. What we want to tax is conspicuous consumption.
A big difference between Jane Austen’s time and the twenty-first century is that the rents the gentry received back then mainly came from landed estates. Now passive income derives mainly from ownership in corporations and various financial instruments. Corporations are a lot less durable than estates however. Consider the so-called Blade Runner curse, or the fact that the last original entrant (GE) was just removed from the Dow. The creative destruction of the market means that passive income takes a lot more active management than it used to. This can be hired out, but still must act as a limitation on the regrowth of a rentier class.
But doesn’t the cost of active management act to squeeze out the would-be rentiers in favor of the established folks?
As I understood the argument, the returns to scale in active management are a part of the theory.
Regarding landlords, it’s worth pointing out that there is a huge amount of inequality within that group*. While some have hundreds of units, a huge number are middle-class people with a basement apartment to help with the mortgage or maybe a duplex they got as a side hustle. They probably represent the majority of landlords, although not the majority of units available for rent.
*N.N. Taleb points out that wealth and income distributions are scale-invariant.
The people I know with 1-10 residential or small commercial rental properties probably don’t qualify as rentiers in Piketty’s sense – there is a lot of labor required to manage those properties successfully, and the owners I know tend to invest a lot of sweat in their investments.
I don’t know how to separate that from the rentiers in Piketty’s work, or if it’s a big enough component to be meaningful.
So too do coffee shop owners that work their own shops.
My cynical take is that these structures are advantageous because the owner is grossly underpaying the worker. Even if they are the same person, it makes sense to evaluate it at arm’s length.
Owners who are heavily involved in their own small businesses often are functionally doing multiple jobs simultaneously. The barista would be worth more than $10 an hour if the owner could be sure that they were never late, never stole, continually tried to improve the productivity of their coworkers and found work to do whenever business was slow.
That’s a good point. I always imagined it as having to divide up the “pay the barista” versus “owner” but you’ve correctly pointed out that there is an extra bit that captures the full alignment of incentives.
Historic lows, but the 10 richest Americans per Forbes have twenty-five legitimate children between them, none less than two children, and some of them may not be finished. But even if we used the average US TFR of 1.84, that should dilute accumulated wealth by 45% per generation, for a -2.4% APR. Or -3.7% at the observed TFR of 2.5. That ought to take a bite out of R > G.
In order for this not to work, you need to either combine roughly equivalent fortunes by marriage, or not divide them among children at death and inheritance. Both of these things used to be common – clipmaker already noted the effects of primogeniture, fee tail, and the general disinheritance of women, and marriage as economic alliance is well understood. But modern rich people marry, not poor people, but “mere” 1%-ers that they e.g. met and fell in love with at some elite college. And they generally do leave equal shares of their fortunes to their daughters.
And also to charity. Many of them don’t even wait until they die to give it to charity, or to political causes, or to “squander” it in business ventures that are suboptimal in purely fiscal terms but serve the founder’s goal of creating a better world.
I wonder if it is relevant that Piketty is French, where rich people aren’t allowed to give away their fortunes to charity but are required by law to leave most of it to their children (and those children can sue any charity that got a suspiciously-large donation from Dad prior to his death). But even there, France has long since abandoned male primogeniture and divides estates equally between all children.
Even if we accept r > g forever, between inheritance, charity, and taxes, this shouldn’t lead to the eternal concentration of capital over generations.
Considering that one of the common theses in both book and blog post is “societies can construct their economic and social policies in a way that negates the wealth-concentrating effect of r > g“, I’m not sure that you’re actually rebutting anything here.
“societies can construct their economic and social policies in a way that negates the wealth-concentrating effect of r > g“
Clearly they have no need to, since there is no such wealth-concentrating effect, contrary to the point of the book and post.
Societies don’t need to construct their economic and social policies to negate r > g. That happens naturally, mostly as a result of rich people being both fertile and mortal. Societies can construct policies to concentrate and reinforce the effects of r > g, if they really want, and Europe did just that for a few centuries.
But this isn’t the universal state of human affairs, and even Europe mostly stopped doing it over the period of Piketty’s study. He seems to have not noticed this.
What is the purpose of that law?? To prevent accumulation of capital in institutions?
Same as the purpose of Life+70 copyright, I think: To make life “fair”, at least to the extent that we (well, the French, Germans, etc) don’t have to hear sob stories about how little Timmy is living in poverty even though there is a pile of money the storyteller can point to and say that it “should have been” Timmy’s. Extra bonus points if there is a corporation or rich person that we can make the blackhearted villain of the story, in this case by disinheriting some or all of his children.
1) It’s a rule that can be traced back to roman law, so ‘tradition’ is a substantial part of the answer.
2) The stated reason back is that it’s based on natural law, whereby children and spouses are natural heirs and disinheriting them entirely should be difficult.
3) Disinheriting spouses and children might leave them penniless and dependent upon the state/charity. So the state has an interest in limiting the extent to which this can be done.
FWIW, I just learned Louisiana inheritance law has similar provisions, so that make a good starting point if you want to investigate further.
“Donating your billion-dollar fortune to charity might leave those two people over there dependent on charity, so we have an interest in preventing that!”, strikes me as a very literal example of penny wise, pound foolish.
To be fair, the charity in question could be something like “a new theater building for my alma mater and a new masterpiece for the local museum” or even “malaria nets for Africans” rather than “feed destitute people in my hometown.”
However, the case of rich people giving literally zero to legitimate heirs while giving away vast sums to what amount to vanity projects seems, based on projection, like it would be pretty rare, and even then the fail case is “heir ends up like most other citizens and has to fill out a resume”.
I wonder if it is more of a concern about keeping wealth inside a particular region; keeping the middle class & servants of our area employed rather than building schools in Timbuktu.
Even in the extreme case, founding a billion dollars’ worth of theaters, etc, is going to result in >>>2 new jobs for construction workers, architects, etc. Security guards for the masterpieces, at that price level. Net effect is still to unload the help-the-starving-unemployed charities.
And the disinherited scions of billion-dollar fortunes are still going to wind up with networks, educations, and default status that should ensure they never go hungry unless they really work at it. But, yes, if you really want to believe this is an unfairness society must guard against, you can ignore all that.
This seems to have a lot in common with the entails discussed elsewhere in the thread. If you own an entailed estate, you can’t do whatever you want with it; you have to pass it down to your oldest son. (To return to Jane Austen, consider Mr. Dashwood, who inherited his uncle’s estate, with the proviso after him, his son would get it – leaving Mr. Dashwood unable to provide for his three daughters.)
where rich people aren’t allowed to give away their fortunes to charity but are required by law to leave most of it to their children (and those children can sue any charity that got a suspiciously-large donation from Dad prior to his death)
Should be expanded to mention ‘immediately prior to his death’. Rich people are of course allowed to give away their fortunes to charity while they are alive and a substantial portion upon their death
At least per this source, no.
“For the purposes of calculating the disposable and reserved portions, all gifts can be added back into the estate regardless of how long before death the gifts were made, and regardless of the intention of the gifts. Having calculated the reserved portion, if the value of the estate is inadequate, then a clawback claim can be made against the gifts. The claim is made against the most recent gift first, and so on. Gifts could include gifts made into trust. In other words, gifts made years before the donor dies could be reclaimed under French law.”
The “disposable portion” is 1/(N+1) of the estate, where N is the number of children. So if you have a billion Euros and three children in France, you are allowed to give €250 million to charity, ever. If you give three hundred million to charity, thirty years before your death with €700 million in the bank, your heirs can sue the charity for €50 million.
Rich people are of course not allowed to give their fortunes away to charity while they are alive, at least in France, because That Would Be Wrong.
This source disagrees:
Tax-free gifts up to the designated tax allowance can be made once every 15 years. Also, the 15-year period needs to have expired for the gift to be excluded from the estate of the person giving the gift. In other words, if you gift someone an asset within the tax-free allowance and then die before the 15 year period has passed, it will be added to the value of your estate for French inheritance tax calculations, plus some other tax costs may be incurred.
Since the German system uses a 10 year cutoff (and only re-adds proportions of the gifts to the estate for the purpose of calculating the reserved potions) I’m going to continue believing that.
Also, by your source, one’s ‘assets’ at death are actual assets plus every cent one ever donated and gifted throughout one’s lifetime. This is clearly nonsense, expecially in that it would make inheritance tax fiendishly difficult, incentivize the state to keep track of every donation ever and make financial planning for private charities impossible.
Apart from that: Are you assuming a person with 1 billion, whose net worth then remains unchanged for 30 years? Is this supposed to be representative? What do you imagine happens if you start spending lavishly or investing badly and end up with 500 million upon your death. Do your heirs then get to point to the high water mark of 1 billion and extract 250 million from the charity?
The fifteen-year period from your source is the limit for tax purposes, not for disinheritance purposes. These are two different things. As near as I can tell, the French government will not, for itself, try to reclaim money someone gave to charity twenty years before they died, but their courts will support claims on that money by aggrieved children who don’t think they got their fair share. Your source focuses on what is taxable, and mentions only in passing the clawback implications of gifts.
Which, yes, are likely to be complex. Hence my simplistic example of a static fortune for illustrative purposes. And I suspect it is rarely worth the bother for French heirs to try and claw back their parents’ decades-old charitable contributions. But fiendishly difficult tax and inheritance laws that incentivize ridiculous levels of paperwork and bureaucracy are the stuff of legend, in fact as well as fiction, and if your mental model is that the law can’t work that way because it would require to many lawyers and clerks and accountants doing nonsense busy-work, I can only suggest that you take care never to study law.
Apologies for brevity, my lengthy response got lost.
You can believe whatever you want, but my source still says gifts before the 15 year limit are excluded. And it has the virtue of being aligned with German law, where it’s 10 years and both legal systems trace their inheritance rules back to the same Roman source.
The problem with the static example is that it omits consideration of that which is central to the discussion: The estate upon death.
Your pontifications on the legal system are uncalled for, irrelevant and insulting. The onus is on you, to show why this particular French law you imagine does not follow the German example, that it can be justified sufficiently that it wasn’t changed in 2015 when the incorporated EU law and why it doesn’t lead to the contradictions it would reasonably be expected to lead to, were it actually as you assume.
Under your assumption, cousin Timmy’s birthday present from 40 years ago would be part of the estate. This would lead to either a peculiar and notable culture of record keeping in France or all sorts of problems, such as the heir being incentivized to claim Timmy got a lot of money, Timmy not caring much, since later recipients of gifts are on the hook first, and the potential for collusion between Timmy and the heir. Also, the massive effect on charities, who would have to form and keep enormous provisions to guard against clawbacks.
Basically, you might be right about this particular French law, but then either French society is much weirder than anticipated or there exist other provisions which make the claim technically true but irrelevant in practice.
I suspect it is rarely worth the bother for French heirs to try and claw back their parents’ decades-old charitable contributions Under your assumptions about the law, this would be of essential interest to any heir who only got the reserved portion because it increases their inheritance. Even modest 200 Euros yearly to charity over 40 years increase the estate by 8000, the reserved portion by 0.75 * 8000 and with 3 children the inheritance of any heir by 2000. If the law is clear, that’s enough money to hire a lawyer. Especially if the esate upon death is rather modest.
From inheritance tax calculation, yes. Hence the explicit statement, “for French inheritance tax calculations”. But tax calculations aren’t the subject of our disagreement.
You mean, aside from the fact that France is not Germany?
And if you’re feeling personally insulted by any of this, you need to sit back and chill.
Should we really count this as a victory? A world where 1% of people can avoid drudgery seems preferable to a world where only 0.1% can do that, holding everything else equal. Isn’t the techno-utopian ideal a world where almost everyone is a “rentier”?
Sounds like we need to figure out how to get back to the gilded age, and then figure out how to turn that 1% of rentiers into 2% and keep trying to expand that number..
Not to advocate for a wealth tax which I find even more distasteful than most other taxes, but I think Piketty’s concern is overblown here. Capital can only leave a country in boats. It’s not like a wealthy person can easily pack up and move their factories and buildings to a friendlier country. They could sell them, but any buyer subject to the wealth tax is going to consider that in their offer.
There are few limits to the ways that governments can abuse their people to achieve their goals, but I’d imagine that abusing them with an inheritance tax that diminishes to zero as the number of child inheritors increases would be least likely to foment armed rebellion.
“Capital can only leave a country in boats. It’s not like a wealthy person can easily pack up and move their factories and buildings to a friendlier country.”
This is only true to a degree. Yes, the factories and buildings remain, but those require upkeep, and often times the capital which flees to a friendlier country means that the upkeep of the factory is at risk, as well as there being a good chance that the technical experts which help keep it running may have fled the angry mobs as well. Plus, you’d be surprised as to how much can be relocated. I happen to know a bit more about the Soviet film industry due to my studies, and what you see in that industry is that the Czarist era film-companies fled not only with their capital, but with a decent amount of technical equipment. Not just because of the Red-White civil war, but also because of Royalist expatriation, the film industry suffered a severe decline which it only slowly grew out of, hastened on of course by the wonderful NEP, when Soviet Russia appeared to be taking a more moderately sane course.
Are more people entering the rentier class because the drudgery has become automated, or because they’ve pushed the drudgery off on someone else? One is an absolute improvement – there is now less drudgery to go around – and the other is a zero-sum trade – there’s the same amount of work to do, but it’s become more unequally distributed.
You say “holding everything else equal,” but what happens to everyone else is exactly the fear about wealth inequality.
Depends how the “pushing off” happens. If what you are describing is A getting richer through accumulating productive capital and using some of the money to pay B to mow his lawn, drudgery that A used to do himself, then it isn’t a zero-sum trade. Both of them are better off. B is doing more drudgery, but getting additional income that he considers at least an adequate compensation.
Or in other words, I think you have an implicit zero sum assumption-that the total output is constant, and the rentier getting more means someone else getting less. But the reason the real interest rate is positive is that capital is productive–more capital means more total output.
The idea that r is always 4-5% seems patently false to me. Simple supply and demand implies that as the supply of wealth increases, the returns to wealth should fall. In fact, real interest rates have been falling pretty steadily since they peaked after the last wealth-destroying crisis (the inflation of the late 70s), from almost 10% to basically zero: https://krugman.blogs.nytimes.com/2013/08/22/54-years-of-real-interest-rates/. This suggests that the accumulation of wealth is self-limiting. That also explains why, unlike in 1900 when interest rates were higher, most rich people today are people who earn very high salaries, whether fair or foul, and not those who live off investments—it is actually very hard to live off investments today because safe investments will only match inflation, and risky investments require you to have a non-investment income source like a salary for when things go south.
There are declining marginal returns to capital, but that’s in part counteracted by capital being a complement to labor, technology, and institutions. Population growth, technological improvements, and basket-case countries getting their acts together all create new investment opportunities.
Still, I agree that a constant R seems unlikely to be a law of nature. If capital grows out of proportion to its complements, I’d expect R to decline.
Rich investors can be better investors because they can be a bit more active. A rich shareholder can get a board seat, and work to get rid of a bad CEO. Joe Sixpack cannot do this with his 401k plan.
Rich investors are accredited. They can be angel investors. They can get before a company goes public (which can be a huge deal when securities regulations are so tight that startups stay private until their major growth spurt has plateaued).
Finally, there are situations where the size of an investment can affect how well it does. Many businesses face brutal economy of scale situations. A wealthy investor can turn an under-capitalized business into a fully-capitalized business.
Why can’t the 401K invest in an actively-held mutual that elects board members?
Or free ride on the efforts of rich investors in the same stock?
My guess is that it isn’t that being a rich investor increases the interest rate you can earn but that being smart about investments increases both the interest rate you can earn and your wealth.
Interesting point about drafting the rich active investors. Come to think of it, the American Consequences folks tried to sell me an investment newsletter based on the principle a while back.
But this opens a different magnifier: get a reputation as a successful investor and people buy what you buy after you hit the reporting threshold.
Piketty oversimplifies a lot, which is saying something because macro-economists automatically over simplify things as a consequence of their work. Large scale economies are to big to look at everything, which is (one reason) why GDP was invented. Naturally flaws were known or discovered in GDP so adjustments were made and alternative measures were used, and flaws were found in them, etc, etc, etc. A brief list of measurements and some of their flaws.
1. GDP. The obvious issue is that GDP is not GDP per capita, and that a large population increase with no standard of living increase could lead to flat or growing GDP. 1 person living on $10,000 a year is treated the same as 2 people living on $10,000 a year together.
2. GDP per capita. Just adjust for the number of people, pretty easy right? Well many population booms happen when a mommy and a daddy love each other very much and have a little baby… who doesn’t add to GDP in a substantial way for at least a few years and in modern economies for about 20. You still end up treating 4 single adults each making $10,000 a year the same as a couple with 2 kids making $40,000 a year. To clarify why this is a mistake imagine two countries starting with 100 people and $100 in per capita GDP. Ten years from now every person in country A has paired off and each couple has 2 kids, and no one in country B has any kids. If GDP per capita remained the same then country A would be at $100 per person, but each adult would average $200, while country Bs adults would average $100.
3. GDP per working age adult. An attempt to fix the problem with GDP per capita, and one that works for comparisons that are very similar. It doesn’t work across long time series or across many countries because there is no natural definition of “working age”. If you like to think of working age as 16-65 consider that when you are comparing the US now to the US in 1918 you are perhaps excluding at least 18% of the working population in 1900 (and that isn’t counting differences in the over 65 working bracket that surely existed).
4. GDP (or productivity) per hour worked. An attempt to fix the above. Seems sound at first, but it only stands alone if every worker is the average worker. If it is not you get all kinds of screwy results. Piketty claims in a blog post that
According to the OECD the long term UE rate in the US is 1/3rd that of France, and well under half of that for general unemployment. Are these average workers?
If you look at hours worked per worker and the employment rate you will see that workers in the US work significantly more. If you combine the employment rate and hours worked the average working age person in the US works 1255 hours a year, and 987 in France.
Piketty looks at this data and concludes that
This conclusion only holds if hours worked and productivity per hour are independent variables (or at least independent within the range of our comparison countries). Since this is definitely not true at the extremes such a claim requires pretty solid evidence.
Let me register an objection to the way in which you, and others, use the term “macroeconomics.” “Macro” and “micro” are popular but misleading terminology, since the distinction is not between big things and small things. The world wheat market is a problem in price theory, aka microeconomics. The unemployment rate in Monaco is, or at least might be, a problem of disequilibrium theory, aka macroeconomics.
Noted, I can see how the use of ‘large scale economies’ in reference to macro would be at a minimum potentially confusing, and possibly completely wrong.
Solving the housing crisis will not reduce the total amount of payments from tenants to landlords in excess of marginal costs.
That’s is trivial to show if you consider each landlord as a rational agent with good information about the market; when considering how to develop, they will choose the development plan that results in the highest income after costs to them. If policies change, the market will not change until new housing is on it. The first landlord to (re)develop will be one that expects to see a greater income from it. The next developer will also expect to see a higher income from their actions. By induction, the total effect of all changes is to increase the money flowing to each developer who made a change. Many more people are paying less for housing, but the total amount paid is higher.
Suggestions that someone who doesn’t already have rentier-level capital could enter the market are as absurd, as are suggestions that it is even a cogent idea to create an absolute surplus of housing units such that they can become commodities where the market price approaches the actual cost.
Commenting before having read this post at all.
I bought Capital21 a few years ago to read it. I never finished it. I got too angry at what I understood to be extremely bad, motivated reasoning on the part of Picketty.
But overall, the first sentence in this blog post summed up my opinion
The impressive part of this book isn’t the commentary on inequality. The impressive part is the quality and quantity of his data. It’s kind of a bummer that this doesn’t get more shoutouts, and I’m glad Scott noticed this
The extrapolation in figure 10.11 looks pretty wild. It takes a special something to draw a graph that’s been pretty smooth/predictable historically, then insert a stark+unprecedented regime change exactly at the current moment for no apparent reason. Does he give some justification for the sharp discontinuity?
Claiming that economic growth is always 1-1.5% also seems pretty dubious. According to Maddison’s estimates, which I don’t think are under dispute, worldwide per capita growth first reached 1% around 1900, continued increasing to 2-3% by 1960, and then fell back down to 1% in the great stagnation. You could say “A century is a long time, that’s basically always, the mid-century spike was just a deviation” but elsewhere Pikkety seems willing to write off that same chunk of history as an aberration. Or maybe his argument is supposed to apply only to the US? (Or maybe he includes Europe and then can cite steady growth for 150 years instead of 100? I don’t even think that’s true though, in 1875 I think that per capita GDP growth in Europe was not yet 1%?)
I’m not sure in what sense rentiers can be said to be winning. We can just look directly and see that rents are significantly smaller than wages, the capital share of income is staying around 1/3, it’s grown but only a tiny bit. If 1/3 of GDP is rents that get allocated inequitably then maybe you can increase median income by 25% with perfect redistribution, but that just doesn’t seem that promising compared to efficiency effects, unless you are super concerned about inequality per se (rather than regarding it as an opportunity to benefit poorer people). Even that benefit would shrink as savings rates fall.
If in fact the rentiers grow their fortunes at r, then they will get wealthier and wealthier until r = g, that’s basically an accounting identity. That seems to basically be a reductio of the concern that r>g can continue indefinitely + rentiers can have their wealth grow at the rate r.
From an efficiency standpoint it seems like the main implication of r>>g is that we could spend 1% of GDP today to make our descendants several percent richer, which sounds like a good deal and suggests that we ought to invest more. It’s pretty wild to respond to r>>g by considering massively disincentivizing investment. If you want to push for equality and think that r>>g, maybe support a sovereign wealth fund? Or else we’d need to decide collectively whether the problem with inequality is that some people are rich, or that other people are poor—I can see how a wealth tax (vs a similarly large consumption or income tax) would help with one of those problems, but not the other. I think it’s just a really bad policy for a lot of reasons with very little to recommend it other than leveling down.
Would like to signal-boost this. If you see that r>>g, the correct response is ‘wow, invested capital is great for growth, we need more of it!’ If your response is instead to say ‘Argh, this is terrible, the capital invested by people I don’t like keeps growing, how can we stop that from happening?’…you may have a problem.
I think the Piketty assumption is that r is illegitimate, or at least that it can be lowered without sacrificing g. In other words, if g is going to be 1.5% no matter what the level of private investment is, then r > g just means that the capitalists are seizing a share of g that could otherwise go to labor.
“From an efficiency standpoint it seems like the main implication of r>>g is that we could spend 1% of GDP today to make our descendants several percent richer, which sounds like a good deal and suggests that we ought to invest more. It’s pretty wild to respond to r>>g by considering massively disincentivizing investment. If you want to push for equality and think that r>>g, maybe support a sovereign wealth fund? Or else we’d need to decide collectively whether the problem with inequality is that some people are rich, or that other people are poor—I can see how a wealth tax (vs a similarly large consumption or income tax) would help with one of those problems, but not the other. I think it’s just a really bad policy for a lot of reasons with very little to recommend it other than leveling down.”
Well said. Best comment yet.
I don’t know any economics and have a very basic question. How can the rate of growth of GDP per capita differ substantially from return on capital in steady state? Why wouldn’t “society as a whole” (whatever that means) just do the thing that causes 5% return on capital (like build factories that produce one-twentieth of the materials required to build them every year, or whatever), and thereby enjoy 5% growth in terms of GDP per capita?
I can see how the growth of the wages of the median worker could only grow by 1-1.5% percent while there’s 5% return on capital—maybe all the factories are getting built by ultra-rich people with enough start-up capital, and the median worker isn’t rich enough to do that. But GDP per capita measures mean income, not median income, and should still look like the 5% number and not the 1% number… Right?
“How can the rate of growth of GDP per capita differ substantially from return on capital in steady state?”
It happens when return on capital stops being “built a factory” and starts being “we all agree that your online pet food company is worth $200 billion dollars”.
But that’s not “in steady state,” is it? Piketty explicitly tries to exclude bubbles from the claim he makes.
What I described is not necessarily a bubble. All valuation is an agreement, really; what we’re moving past is the idea that value must be tied to physical tokens.
The most obvious reason (there might be others) is that some of GDP is consumed. If half of GDP gets spent on 5%-yielding factories every year, and half gets consumed, then the total GDP will go up 2.5% every year.
I see. So the idea is that the ultra-rich consume a smaller percentage of their wealth and invest a larger percentage each year than most people? That makes sense.
This is a great question.
Return on capital is caused by the fact that people are willing to pay for “services” (utility) capital provides, i.e. landlord is earning a rent because there is demand for housing in his apartment. There is of course correlation between how much income people have and how much money they are willing to spend on rent in given apartment. Which means than when national nominal income/GDP (nominal GDP and national nominal income are not the same thing but are usually highly corelated) grows, nominal return on capital also usually grows. But in no way it implies that when nominal national income grows 5 %, nominal return on capital should be 5 %. It only implies that nominal return on capital will, absent some unusual circumstances like enactment of new wealth tax, be higher in 5 % than in 0 % growth scenario.
Now, even if nominal growth is 0 %, there is no logical reason to expect that nominal return on capital would be 0 %. Even if no one´s income would increase, people would still pay rent, buy food etc. and owners of housing, supermarkets etc. would thus still earn some return on their capital.
“Society” cannot simply build more things which are in demand and thus increase its growth rate because it is facing what economists call supply costraints. Which could be anything that prevents, um, producers, from producing more stuff that people want. From shortage of natural resources through lack of incentives for inventing new products to government regulations. Growth in labor productivity means that society is slowly learning how to overcome its supply constrains.
I realize this is imperfect answer but your question is so huge that it could serve as starting point for a long book.
Does Piketty address technology and its influence on growth and wealth? That seems pretty important, and your review gives me the impression that that may be a blind spot for him.
“Piketty suggests this is because the richer you are, the more economy of scale you have in hiring really good financial planners.”
They don’t actually need to be good, though. They don’t even need to be *better*. They’re working with such a huge mass of money that you can make bigger bets that have bigger payoffs, and the aggregate effect is larger.
A small frog jumps up two feet and slides back one. A big frog jumps up five feet and slides back three. The big frog slides back further than the small frog can even jump, and in fact the big frog loses more proportionately (more than half its jump, rather than only half) but the big frog still ends up climbing twice as fast as the small one…
edit: this is pretty much a restatement of what Luke Perrin comments above.
>It also suggests that Americans judge the state of their economy by comparing it to Europe (or at least did in the 1970s), which doesn’t really match how most people I know think. In particular, in 1990 they would have had to have said “Our economy is now equal or better to the Europeans, we’re happy now”
My recollection is that in the early 1970s, Americans compared their economy to the Soviet Union; by the late 1970s there were more comparisons to America of the 1960s; and by 1990 there was a stronger pattern of comparing America to Japan.
This has been a very interesting read. It turns out that Piketty, or at least Scott’s description of him, agrees very well with my pre-existing beliefs/intuitions. So I didn’t spot any of the potential flaws that have been brought out in the comments. Not one ;-(
Now I wasn’t trying to read critically – that’s not what I do on my first pass in unfamilar territory. And reading these comments before e.g. reading the book itself prevented me from either spotting … or more worryingly, not spotting … potential issues on a second pass .. since many have now been pointed out to me.
But it’s still an interesting … and none too encouraging … experience of encountering my own preconceptions. (Priors, in Bayesian terms 😉 irrational biases, or worse, in the language of someone with extremely different preconceptions ;-( )
If it’s any consolation, I came to this article actually knowing a lot of the flaws in Piketty’s work and disagreeing with its thrust in the first place, and still, on finishing the article, ended up thinking, “I don’t know, maybe my other sources were wrong and he’s on to something.”
I don’t know what that says about me, but it does at least suggest that a contributing factor could be that Scott is excellent at presenting arguments.
Is it consensus that Harvard and Yale consistently get better returns than other endowments and than the market?
It looks like Harvard at least has had a number of recent bad years, and that some people are suggesting that its results may be based on taking on more risk.
Harvard made the news just today for its poor fund returns.
Indeed; Havard has done badly enough in the years since Piketty’s book was published that it’s now considering switching to just using index funds.
Richer people/endowments can expect slightly better returns because of proportionally lower overhead costs (even mutual index fund providers like Vanguard offer lower expense ratios for share classes with higher minimum balances). But this is a difference of perhaps 0.1 percentage points per year; overall I think the correlation between endowment size and performance in the years leading up to Piketty’s publication is mostly a fluke of how the markets happened to perform during those years, and the difference in expected returns for long-term investments should be much much smaller.
Also obviously the individuals on the Forbes rich list experienced above-average returns, since they got there by basically being lottery winners who happened to control the right company at the right time; it’s a hopelessly survivorship-biased metric. In a large population the very very top if the distribution will be dominated by people who took dubious long-shot bets and won; not sure if Piketty’s analysis addresses these people, who are usually nominally “entrepreneurs” (and whose existence isn’t new; e.g. people who by chance bought and sold at just the right times in the South Sea or Mississippi Company bubbles).
I don’t trust inflation statistics, so I don’t trust inflation adjusted GDP statistics. During the time period covered by Piketty’s GDP growth trend line, there have multiple different methodologies for measuring inflation, with adjustments to fix obvious errors in previous versions of inflation adjusters. Since we know inflation statistics have been wrong, and there is good evidence they are still wrong, I think the steady GDP growth rate is an artifact.
Saw this sentence and thought, “Funny, I thought it was more like 2%. Well, that’s easily checkable!”
I was right: US post-1948 is 2%. Data here.
And it was more like 2.3% before 2007. 0.7% since.
Well, you just plot it in a log plot, and it kinda sorta looks linear, if viewed from sufficient distance. And then you hope nobody bothers to google other countries, because they’d find that GDP growth rates vary wildly. But of course we’re talking about true scotsmen…I mean, economies here, and they always have a growth between 1 and 1.5%…
Gee, that’s mighty big of him. If I save $300,000 for my retirement and spend a disciplined 4% a year, that’s an annual income of $12,000, just under the official poverty level.
The IGM — a panel of representative economists — have completely and almost unanimously dismissed Piketty’s central theory.
Not sure why anyone is still taking this book seriously.
Apparently the claim being assessed there isn’t actually one Piketty made: https://www.vox.com/2014/10/15/6982747/piketty-igm
“In ordinary times, the rate of return on capital always averages about 4% – 5% per year, and the GDP per capita growth rate always averages about 1% to 1.5% per year. So in ordinary times, rentiers’ yearly incomes should always be pushing further and further ahead of laborers’, and inequality should always increase. This is exactly what happened between the 1700s and 1914.”
This is the same proposition being evaluated by the IGM. Me thinks Vox is doing a sleight of hand. If Piketty wants to write another book on the dangers of CEO rent seeking, then so be it. THIS book was about some historical inevitability of capital exceeding the growth rate of the economy. And that claim is widely derided by those who should know.
…that’s interesting. Would you say that Scott didn’t read the book? If not, would you like to give an alternative hypothesis for how he could have read the book and come to the wrong conclusion concerning what was in it? Does that hypothesis apply to eCONomists, too?
I remember from reading this book that Piketty placed a great deal of emphasis on just how spotty the actual data about wealth was. He talks so much about Jane Austen and Balzac novels not because they have tons of rigorous statistics, but because there just isn’t anything better. The wealthy families of the time didn’t pay taxes, and didn’t leave a lot of records. And he uses Forbes rankings for present-day wealth despite admitting that they’re massively flawed (I think they’re mostly self-reported?), but there just aren’t any really accurate sources for the wealth of ultra-wealthy, very private families.
For example, there was a Kerfuffle in 2016 about just how much money Trump has. Trump himself claimed $10 billion, a suspiciously round number. Some liberal pundits crunched some numbers and argued that it was more like $1 billion, which Trump angrily denied. But the thing is we still *don’t know*- even for a *very* public figure running for president, a guy who loves to show off his money in big ostentatious displays, we can’t really nail down his total wealth other than “somewhere between 1 and 10 billion”.
I think that sort of thing might explain Scott’s question of “where are all the rentiers”? If they’re not a famous entrepreneur/very large single stock holder ala Bill Gates, they don’t have to publicize their wealth at all. Someone who quietly inherited a large fortune, sensibly diversified into many smaller investments, can be completely anonymous. He does have to report capital gains taxes, but (even if we assume that they’re all scrupulously honest about that, and of course many are not) that only measures *income* from investments, not the actual wealth. And it’s even harder to measure other forms of wealth, like an old mansion stuffed with fine art and gold bullion say. (or more reasonably, if they just owned a bunch of land and property but it’s not directly producing rent)
One of Picketty’s arguments for the wealth tax, aside from reducing inequality, is that it would at least shed some light on this. We know how much income the top 1% or whatever have, because they have to report it for tax reasons. If there was a tax on wealth, even a very tiny one, they’d have to report how much wealth they had and we’d finally have real numbers to go on instead of these roundabout estimation methods.
Even here, imagine trying to calculate how much cash Mark Zuckerberg would get if he decided to sell all of his Facebook stock tomorrow. When he decided to sell a large fraction of them to fund his charitable trust in 2017, it had to be disclosed (for insider trading reasons) and he had to space it out over a year and a half to not tank the stock price too much.
Trump, whose wealth is mostly in owning particular buildings and intangible brands, has an even worse time estimating that wealth.
In the Netherlands, there is a list of the richest 500 Dutch people, called the Quote 500.
The wealth is guessed based on the value of the stock that they own (this has to be made public if it is more than a certain percentage of the company), information about the land ownership & estimates of the value of that land (with the real estate). If a company they (partially) own is not publicly traded, the annual report is compared to similar companies that are publicly traded, to estimate their value.
A decent number of people on the list have remarked that the numbers are way off, though.
Do you know what the percentage of the company they have to own for it to be made public is? if a family were to diversity and just own 1% of every company, would that be made public?
Also, does that include their ownership of non-Dutch assets?
The stock owner has to notify the Netherlands Authority for the Financial Markets when passing these percentages (in either direction): 3, 5, 10, 15, 20, 25, 30, 40, 50, 60, 75 and 95%.
The records of this are public.
They could go to 2.99%, in theory, without having to make that public.
Only if the non-Dutch assets are a little bit Dutch, because they are officially traded on a Dutch market. For example, Shell has a primary listing on the London Stock Exchange, but also has secondary listings on Euronext Amsterdam and the New York Stock Exchange. So that means that the Dutch rules apply and perhaps/probably also the American rules.
This made me think about getting down to the brass
taxtacks of tax enforcement. I know we have folks here with accounting expertise. What do y’all think, is it easier to hide income or wealth from the authorities?
At least using IRS rules, income is easier to value because it is usually based on cash flow. Even accrual accounting is usually based on previous cash flow — so depreciation is a percentage of what you paid for some asset years ago. As long as IRS agents have access to all the records, it is a lot easier to calculate income from a business or a building or a collectible than it is to value any of them.
As far as hiding income and wealth, that depends. IF you can hide an income producing asset somewhere, such as a business ownership overseas or a investment documents or jewelry, then it is just as easy to hide the income from them. But obviously if you need that income to live off of, then the cash will flow through your bank account and the auditor will find it. Of course if they find the income, they’ve found the asset too. So I think it would be equally easy to hide income and wealth.
Matthew Yglesias sums up Piketty’s conspiracy theory about Secret Old Money:
“Piketty’s interesting point on entrepreneurial wealth turns out to be that the famous Forbes 400 list of the richest people in America (and similar lists in other media outlets) is probably mistaken.
“Not just mistaken, in fact, but systematically biased to overrepresent entrepreneurs and underrepresent heirs and heiresses.
“Tracking it all down would be possible, though perhaps difficult, in the course of a contentious lawsuit in which someone has the power to issue subpoenas. But a merely curious journalist has no real way of finding out how the holder of a diverse portfolio of inherited financial assets is doing.
“In other words, we are almost certainly overcounting entrepreneurs among today’s super-rich and undercounting the descendents and past entrepreneurs. And a generation or two from now we are very likely to underestimate the wealth of the descendants of today’s entrepreneurial billionaires.”
Divorce lawyers, however, might disagree about the impossibility of figuring out how much Old Money the Old Rich have.
My guess is that being a European, Piketty is convinced that the Rothschilds have vast fortunes, but he knows enough that mentioning the R-word would make him sound like an anti-Semitic conspiracy theorists, so he’s left flailing about how the American Forbes 400 has to be wrong. But he doesn’t seem to know much about America.
In America there’s a different R-word that might be worth looking into: Rockefeller. John Davidson Rockefeller was at one point the richest man in the world, with an inflation adjusted net worth roughly equivalent to that of the current top 5 billionaires combined. Yet as far as i can tell the modern Rockefellers are still pretty rich, but not OG Rock level rich. If Picketty’s thesis is correct, the should the be the latter and not the former.
Now it should be noted, John did have five children, and John II had six children, John III four children, and John IV another four children. The fortune has had the opportunity to be split several times. Still we can do some back of the envelope calculations to build some baseline expectations. If we assume each John. D Rockefeller split his fortune evenly between the kids on death, and that the fortune has grown only just enough to keep up with inflation, we should expect that John IV has about $3 billion stashed away for John V and his three siblings to inherit. That would be enough to get him into the Forbes 400 and he is… not on it.
Keep in mind here that John Davidson “Jay” Rockefeller IV is not some obscure heir of a bygone era who has been able to keep himself and his fortune out of the public eye. The man was US Senator for West Virginia for 30 years (1985-2015), not exactly keeping a low profile. So either Piketty is right and the Fortune 400 are not a good measure of who the richest Americans are, even when said Americans spend decades in public office, or he is really, really wrong and Rockefeller fortune hasn’t even managed to keep up with inflation.
Oh hey, i found a NY Post article from last year discussing the subject. Choice quote:
So, not only has the Rockefeller fortune not managed to keep up with inflation, it hasn’t come within an order of magnitude of keeping up with inflation. On the other hand, i guess having many children really does break up the goods. Nonetheless, i would have expected given Piketty’s thesis that OG Rock’s grandson David would have been able to come up with a larger fortune given his proximity to the source and choice of profession.
It’s not like $3.3 billion isn’t a fantastically large sum of money, only a couple hundred Americans can come up with more, it’s just this is the kind of money i would expect the President of JP Morgan Chase to have even when he’s not named Rockefeller. For comparison, the current CEO and Chairman of Chase Bank is Jamie Dimon, a son of Greek immigrants, and he’s worth $1.3 billion. Somehow, i’m not really feeling that rentier class heritage making that much of a difference here.
That is not even close to true. The way people get claims like that is by measuring Rockefeller’s fortune as a percent of national income or some similar measure. That isn’t the same thing as inflation adjusted.
Googling around, and ignoring all the people who do the calculation as a fraction of national wealth or income, I find a figure of $1.5 billion in 1918. That’s equivalent to about $27 billion today, so only about a fifth of what Bezos now has.
Thanks, that’s a helpful clarification. That said, if Rockefeller was worth an inflation-adjusted $27 billion at death and if his heirs are worth $11 billion today, what does that mean for Piketty? That they lost ground during the 20th century, when Piketty believes g > r?
Well, that’ll teach me to uncritically accept astounding claims about people’s back in the day wealth. Still we’re at the Rockefeller fortune failing to even keep up with inflation. Despite Piketty’s claims, i am not particularly convinced that 20th century tax laws are to blame for this, seeing as the very high taxes of the mid-20th century applied to incomes rather than capital, and were riddled with loopholes. The most likely culprit is that the Rockefellers simply gave it away through their various philanthropic endeavours.
From wikipedia: “John D. Rockefeller gave away US$540 million over his lifetime (in dollar terms of that time), and became the greatest lay benefactor of medicine in history. His son, Junior, also gave away over $537 million over his lifetime, bringing the total philanthropy of just two generations of the family to over $1 billion from 1860 to 1960. Added to this, the New York Times declared in a report in November 2006 that David Rockefeller’s total charitable benefactions amount to about $900 million over his lifetime.”
That is all nominal dollars, so OG Rock and his son both gave away a very substantial portion of the fortune. David Rockefeller too has given away substantial portions of his fortune, the Rockefellers are to this day involved in philanthropic endeavours and charitable endeavours. This suggests to me that as long as society gives inculcates values in its upper class that makes them want to be great philanthropist, and also status and recognition to those who follow through on it, that we will not see the great estates of the rentier class growing endlessly as Piketty fears. Jeff Bezos may not be as philanthropically inclined as Gates or Rockefeller, but i’m willing to bet his children are very likely going to be more interested in heading charitable foundations than in sitting on the pile and watching it grow.
If there really are Secret Old Rich people doing such a good job of hiding it, it seems like a government would not actually succeed in taxing their wealth.
But are there Secret Old Money rentiers who own sports teams or yachts or have their own personal golf course?
Ever since reading Piketty’s book, I’ve looked for examples of these, but have not found many. For instance, the biggest yachts known to be owned by Americans are owned by people like David Geffen, Paul Allen, Larry Ellison, etc. — self-made men. Now there are other yachts whose ownership is kept secret, so that’s not proof, but it suggests a trend.
Maybe that’s just proof of how secretive Secret Old Money is, or maybe it suggests Piketty isn’t all that right. Or maybe Piketty is more right about Europe than about America.
Or maybe Piketty is wrong to criticize the Forbes 400, but if a Forbes 40,000 existed, it would indeed be dominated by Du Ponts, Astors, and Vanderbilts.
But it would seem incumbent upon Piketty to come up with a little merely anecdotal evidence in support of his conspiracy theory. So far, all I’ve seen is hand-waving.
Perhaps only New Money want super-yachts (which seem to primarily be status symbols).
But what does Piketty’s Secret Old Money do with its Secret Old Money if it doesn’t do yachts, sports teams, golf courses?
Charity? Self-made man David Geffen is currently paying billions to put his name on edifices. Are Piketty’s Secret Old Money folks doing the same?
And charities are very diligent about figuring out who has what. For example, a few years ago it was discovered that a self-made man in the wholesale grocery business was worth between $2 billion and $10 billion, even though he’d never before been on the Forbes 400 list. His vast wealth was only discovered when he started to give money away.
Similarly, divorce lawyers are pretty good at discovering how much scions are worth.
In general, I think Piketty’s theory about vast hidden wealth, whether right or wrong, is pretty fascinating, but few seem terribly interested in looking for ways to test it, even though most of the tests — yachts, divorce lawsuits, etc. — sound luridly interesting.
The stereotype of New Money is that they are about conspicuous consumption, while the Old Money invests much more and lives a bit more modest and a lot more private, but still quite pleasant lives.
So where the New Money buys a record-sized super-yacht, the Old Money might buy a nice sailing boat or a smaller yacht. Where the New Money tells everyone about the art they buy, the old money buys it anonymously and hangs it in their home.
OK, but here you’re talking about what Old Money doesn’t spend money on. They don’t buy the big yachts that everybody watches, they don’t buy the sort of artwork that leads to people asking “Hey why isn’t the Mona Lisa in the Louvre any more?”
What do they spend their hypothesized vast sums of money on, why can’t we see that, and why do we even care?
Piketty’s complaint is that they pass a lot of it on to the next generation and thus reduce social mobility.
The more they invest and the less they spend on frivolous crap or non-frivolous charity, the more this proves Piketty’s point.
Of course, this lack of visibility lends itself to conspiracy theories, but we do live in a world with Mossack Fonseca as well as more ethical/legal ways to keep information about one’s wealth from the public.
That’s got to go into the running for the most Steve Sailer question ever raised.
Well, I am interested in who owns sports teams , who owns the biggest super yarchts and who owns backyard golf courses.
Sure, but that is orthogonal to Piketty’s claim (then again, I’ve also been guilty of debating a different issue here).
With respect to sports teams, the Agnelli family of Torino founded Fiat S.p.A, and still owns 29% of Fiat Crysler through their holding company Exor. They also own two thirds of Juventus Football Club. However they’re not exactly keeping a low profile about it, given that Andrea Agnelli is the team’s chairman and Massimiliano Agnelli its manager.
They are the only example i know that really resembles the thing Picketty fears. John Philip Jacob Elkann is the current head of the family, and serves as Fiat Chrysler’s Chairman and CEO. His father married a daughter of the former patriarch Gianni Agnelli, and Gianni later chose John as his heir. This is all literally off Wikipedia though, so secret is not quite the word i would use to describe it.
There’s an elephant in the room with this theory: inheritance tax. When a very wealthy person dies in the US, they can pass on about $11,000,000 to each child untaxed. After that, the IRS takes their share. And at least among the wealthy, the IRS is famous for squeezing as much out of them as they can on inheritance taxes. Even with significant financial planning, such as trusts, the US has mechanisms to make sure they’re not cheated.
The US government probably does have an idea of inherited fortunes in the US. It at least has a snapshot when a person dies, absent tax fraud. And to be frank, the IRS is pretty good at tracking that down. But the US government does not publicize individual tax records for reasons of privacy. And by the time we’re talking about such a small portion of the population, even general data is likely to cause the ability to track specific people down.
Europe is largely a different case. European countries still have legal nobility and that nobility still sometimes has privileges. Europe also (edit: mostly) has no inheritance tax. The landed nobility of Europe is mostly still around, passing on their castles and so on. There are large numbers of heirs with hidden money in Europe, money their government has no information on. Likewise, the European capitalist and entrepreneurial class is much smaller and less important. But that is specific to Europe and does not apply in the US.
US society, with its partible inheritance, strictly egalitarian legal system, and inheritance taxes is pretty close to ideal to prevent the formation of great houses. Few last more than a century, which is the blink of an eye relatively. European society is still well set up to encourage their survival.
European countries do. In The Netherlands, there is a EUR 1 million exemption for family businesses that are inherited. This seems more beneficial to farms and smaller companies, than for nobility.
The King and his successor are fully exempt and they are nobility, but other members of the Royal Family do pay inheritance tax and so does other nobility.
Corrected to ‘mostly’. Some countries do. Many do not. All of them but the UK and France have significantly smaller ones.
When Piketty writes about something that I know a modest amount about, such as Forbes 400 lists, Carlos Slim, and the impact of immigration on inequality in America, Piketty’s judgment doesn’t strike me as confidence-inducing.
Of course, I don’t know enough whether it would be fair to generalize that impression to other fields he writes about.
I just impulsively did a little basic math, and a 1.25% annual growth rate (“between 1% and 1.5%) corresponds to a roughly 56-year doubling time. If true, we should expect standards of living to get about twice as ‘good’ in real terms in, on average, every 56 years or so.
So we’d be comparing 2018 to… 1962, 1962 to 1904, 1904 to 1848, and 1848 to 1792. Pushing it back much before that would take us back to before anything recognizable as an Industrial Revolution.
Thinking about the way people in what is now the developed world lived in each of those time periods, saying “the place is, on the whole and on average, twice as well-off now as it was then…” Hm. Seems broadly consistent with reality. It passes the laugh test.
Furthermore, it indicates roughly four doubling times between now and the Industrial Revolution, indicating a roughly sixteen-fold increase in standards of living since the Industrial Revolution. This is broadly compatible with the per capita purchasing power gap between the typical developed nations (something like ~50 k$/year or so) and the typical utterly undeveloped nation that isn’t specifically, unusually, ruinously an anarchic hellhole even by undeveloped nation standards (something like 3-6 k$/year or so)
That is all. A bit naive, but I just thought it would make a nice sanity check on that big result reported at top.
What jumps out at me from the graph of r vs. g is the behavior of g over time. Piketty says it averages 1 to 1.5 percent, but averages can be misleading. What his graph actually shows is that g was growing over all of human history up until 2012; but then, suddenly, he predicts that it’s going to fall off sharply. I see no basis whatever for that prediction in any of his work.
The slow growth of g is easily understandable as an exponential with a very small time constant (this is even more obvious if you plot his graph with actual time as the x axis instead of his time buckets). And an exponential with a very small time constant is what we would expect on general principles. What we would not expect on general principles is a sudden fall-off; that would need a special explanation, and Piketty provides none. So I’m highly skeptical of this graph.
You mean the third graph, the one that actually covers all of time back to antiquity?
Well, Piketty’s point seems to be that since the Industrial Revolution, g has been consistent when averaged over long timescales. And g is the time constant of an exponential function. The thing is, the time constant of an exponential doesn’t have to be a ‘constant’ if there are underlying changes in the physical system the equation is modeling.
The thesis is that g was near-zero for most of human history because reasons, but then the rise of industrial technology in the 1700s caused a ‘phase change’ to a system where the economy could provide a per capita income increase of roughly 1.25% per year, providing enough new productivity for everyone’s standard of living to roughly double every 50-60 years. Roughly, on average, neglecting local effects.
In the future, g might become very very high. Say, because of the Singularity happening, leading to a rapid exponential expansion of productive machinery guided by AI, with the caveat that while g might be huge, the machines are doing whatever the hell the AI wants, not what we want.
Or g might become very low. Say, because of ecological damage creating a situation where much of our wealth has to be poured into damage control, and where it becomes harder and harder to find viable ways to keep producing new wealth without fatally compromising the economic sectors that keep the levees intact in the face of a rising sea.
The one thing that is almost certainly NOT true is that g is itself governed by some smooth mathematical function that is stable over very long, millenia-long time scales. Because then you’d need the function to be capable of predicting (for instance) the exact timing of the Industrial Revolution just from observing the conditions of Iron Age Europe two thousand years earlier.
You mean the third graph, the one that actually covers all of time back to antiquity?
The third one in Scott’s post, yes; marked Figure 10.11.
Piketty’s point seems to be that since the Industrial Revolution, g has been consistent when averaged over long timescales.
But “since the Industrial Revolution” is not a long timescale. Piketty seems to be averaging data over decades or centuries to begin with. That leaves only a few data points from the beginning of the Industrial Revolution to now.
The thesis is that g was near-zero for most of human history because reasons, but then the rise of industrial technology in the 1700s caused a ‘phase change’ to a system where the economy could provide a per capita income increase of roughly 1.25% per year
But again, that’s not what I see in the graph. I see g rising throughout human history, just more slowly the further you go in the past. Yes, there aren’t many data points in that graph; but if we’re going to look at the graph at all, I don’t see how to describe it as g not rising at all until the Industrial Revolution.
In the future, g might become very very high…
Or g might become very low.
Yes, both are within the range of thinkable possibilities. But Piketty’s graph doesn’t show that; it shows g decreasing sharply in the future. I don’t see any basis for even considering that to be more likely than g continuing to increase, let alone considering it to be so likely that it should be put into the graph as though it were established.
Yes. Predicting g to fall to 0 by 2100 is a joke.
People have already touched on various reasons why, but here’s one I think was only addressed obliquely. There is a good chance that someone saying “here’s some thing that super rich people do, and now I have made it available to you, the common person!” is running a scam. It could be an investment scam, or it could be a tax scam, or it could be a weird hybrid (eg, some scams “sell” shares in companies with the claim that owners of the shares can claim those companies’ losses on their tax return, or something like that). These scams are often targeted at people who have a fair bit of money (hundreds of thousands, often, or low millions for people who have a bunch of money but not necessarily financial acumen – highly paid athletes, for example) and for whom thinking of themselves as getting involved in the one weird trick those who make rather more money than them use is a sort of aspirational thing.
Wouldn’t the global economy be a lot better off if 2%, 5%, 10% of the people became rentiers? Was 1914 to the 1980s really better for poor people than 1850 to 1914? Doesn’t increasing the rentiers increase the tax base for the govt, the number of business starts and charitable donations? I think Picketty got it exactly backwards. I mean doesn’t 10 times as many billionaires mean more lawncare jobs? I’m sitting in Picketty’s France and I’d certainly be better off employed at minimum wage than if taxes went back up.
Making a million dollars is nearly impossible. Turning a million into ten million dollars is expected. I have a friend who was single, didn’t own a car, and earned good wages. One day his brother-in-law asked for tens of thousands of dollars to buy a boat and start a boat tour company. This is… a very risky investment. I advised my friend that the most likely outcome was to lose ALL of the money. But it didn’t. Harvard and Warren Buffet can get awesome returns because they can bet more on long shots that everyone else. They can buy Ford during the Great Recession or venture capital Netflix. For a person with $30,000 saved up these are stupid investments. They could have easily gone bankrupt. But for a millionaire they can “take a flyer” on hundreds of contrarian investments a year. Most of them fail, but you only need to be right once. Thus if experts are wrong 98% of the time, Harvard is still going to own the next big thing TWICE every year.
Second, wealth taxes in the EU can’t legally adjust for age. So you end up confiscating Grandma’s house by forcing her to sell to pay her property taxes. In Picketty’s France the changed the wealth tax to exclude yachts because there were only about 200 eligible yachts in France, it was killing the French yacht building industry, and rich people were just buying cheap boats or moving their residence to Portugal.
As an unemployed person, I need billionaires to commission yachts. A wealth tax sounds like the govt will take the yacht money… and do what exactly? Fund police pensions? Unless there is a great idea attached to a wealth tax like GNI, it just poors more money into sovereign wealth funds, pension obligations and military spending.
Yes. Vastly so. First, proportionally-speaking, there were less poor people in the 20th Century, and there was a far better welfare state for those that did exist, at least in most of the Western World.
And what we mean by “poor” has changed. Apart from extreme cases like the long-term unsheltered homeless, the kind of absolute poverty that was the norm for most of human history, and that was still alive and well around 1900, is pretty much gone. In the early 20th century, even in rich countries, people who were solidly middle class by the standards of the day lived in what would now be considered appalling poverty. This Megan McArdle article has some pretty striking illustrations of how poor people were in the late 19th and early 20th centuries.
You say that making a million dollars is nearly impossible. But for the “professional” couples I know, making a million dollars is less than the standard advice for how much money to save for retirement. Of course, these are couples making more than $200k/year jointly, but in the Boston metro area, that is quite common.
Apologies if someone got to this first….
But for one person to invest in a hundred companies costs about $700.
For 1,000,000 people to invest in a hundred companies you need an accountant, a compliance officer, regulatory reporting, a board of directors and to prepare regular SEC reports. Oh, and a good manager who a million people trust with all of their money.
The mutual fund also has a variety of conflicts of interest. The manager wants a lavish office, high pay and an excellent staff. The regulators and potential investors prefer you disclose all of your best ideas beforehand but if you do, your competitors will use them.
A single rich investor doesn’t have to disclose anything to anyone, they have no meaningful expenses (accountants are a sunk cost to them) and has no conflicts of interest.
And finally a single rich investor can run up a couple of years of losses as tax credits against future earnings, where two straight years of losses means all of your million investors sell and your fund goes bankrupt.
No knowledgeable person thinks the market can’t be beaten. When you read investment advice that says “you can’t beat the market” they are referring to you personally. “You” can’t beat the market. Other people can. The person writing the advice means that you, the reader, can’t beat the market. And they are probably right. If you were someone who could beat the market, you wouldn’t be reading introductory advice for a general audience; you would be reading FDA trial proposals and comparing them to animal models and drawing conclusions as to the likelihood of the FDA trial succeeding based on your extensive knowledge of organic chemistry and of the past results of other compounds in this class.
No, they mean you, as in you the general “they” can’t beat the market.
Nope. This is not enough. It sounds like enough but its not. The market isn’t a test where you just have to figure out the right answer to get an A, you have to figure out the right answer before anyone else does, and only that guy gets an A+, a few others get As and on down the line. Not only that you have to beat a weighted average of people based on how often they have beaten the market before you started. If 50% of the market is making 8% a year, and 50% is making 10% then in 20 years the top half of the market will hold 60% of the assets, in 40 years they will hold more than 2/3rds of the assets (yes lots of assumptions here).
Mutual fund managers are hired to be exactly the sort of people who spend all day long researching and comparing to figure out which companies are under and over valued. Their entire job is beating the market. And in fact, about 50% of them do outperform the market. It’s just that which 50% outperform the market in any given year has zero correlation with which 50% outperform in the next year.
Warren Buffet exists, so it is even possible to consistently outperform. But you don’t just have to be better than average. You have to be better than a large portion of the market combined. The market price is reactive to every single trade and piece of information available to anyone participating, and you have to be able to beat that total force. It’s not by any means impossible, but its hard enough that the vast majority of trained professionals can’t manage to beat it with anything better than even odds.
We do sort of need all the people who keep trying to beat the market, though. Index funds wouldn’t be able to do so well if they didn’t have actively managed funds around to frantically update all the prices.
Unless I’m missing something major, there are a couple huge holes in Piketty’s R > G thesis. R is the total return on capital, and he’s comparing it to per capita economic growth, not overall economic growth: if capital grows by 5%, per capita GDP grows by 1.5%, and population grows by 3.5%, then capital isn’t growing relative to the economy. It does imply capital will grow relative to the economy if the population continues to level off, but that’s a significantly weaker claim than his headline.
He also seems to be ignoring a portion of R going to consumption, taxes, and philanthropy rather than reinvestment. Let’s say I’m a rentier getting a 5% real return on my capital in an environment with 2% inflation, so my nominal return is 7%. I live in California, so I’m taxed somewhere between 25% and 40% of my nominal return (total of state and federal taxes) depending on the actual amount of income and the mix of capital gains, dividends, and interest. Call it 25% to keep the math easy, so my nominal return after taxes is 5.25%. I have to reinvest 2% just to keep up with inflation, so my real return after taxes is 3.25%. And I’m an idle-rich rentier in this scenario, so this is my only income and I need to spend a portion of this to fund my lifestyle. And I might want to give some money away to noble causes as well. If my total consumption + philanthropy is a little more than half of my real return after taxes, then my capital isn’t growing particularly faster than Piketty’s G.
The problem: What reward could we offer the person who already has everything, that would be enough to entice them to have more kids than they really want?
The solution: Punishment for not having enough kids!
I think if a super rich person wanted to effectively have multiple wives they could easily circumvent any laws intended to prevent this, and, at least in the US, there is nothing stopping them from divvying their fortune up among any number of illegitimate heirs.
We could have enforced polygamy, by making sure every mistress got a cut equal to a wife.
The easiest way might be to have kids with each ‘wife’, then those kids are automatically heirs.
It seems like it would be far easier simply to have rich people marry poor people. Then you don’t have the societal instability of rich people with multiple partners and poor people with none.
“Have” is doing a lot of work in your first sentence. Perhaps a wealth tax at marriage would be the easiest way to implement that, bu that seems to set perverse incentives.
A super-rich person could sleep with, and possibly have children with, multiple long-term partners. The non-spouses and their children would have less legal rights and he would have an easier time leaving them nothing.
Legalizing polygamy would change the incentive structures of the mistresses to encourage them to have children and secure as much of the collective family’s fortune as possible. It would also give them a stronger position. Absent an enforced winner-take-all system (like primogeniture) that will likely lead to dividing the fortune.
Then again, I see this as a ‘fly them to Canada’ solution. If wealth inequality were really the primary issue, there are all sort of easy solutions. You could simply fly all the billionaires to Canada and immediately knock a few points of the Gini. Since such things are almost never the proposed solution, that tells me most people complaining about wealth inequality actually care about another issue.
The non-spouses and their children would have less legal rights and he would have an easier time leaving them nothing.
For the inheritance, yes, they have less rights. But child-support laws work the other way.
Any illegitimate children of Bill Gates are at a disadvantage in trying to get his estate if Bill says otherwise in his will, but while children the state will enforce a lot of demands for money.
Some states do have caps on child support. There are also ways to avoid child support with rather expensive lawyers. For example, Bill could deny paternity and hire a very fancy lawyer to get him off the hook. It might not work, but it raises the cost so high that the mother is (probably) incentivized to settle. If they’re already legally married, on the other hand, no adjudication is possible.
Another critique of Piketty from Justin Wolfers, which at least according to /r/badeconomics is on solid ground: http://users.nber.org/%7Ejwolfers/papers/Comments/Piketty.pdf
This comment is based on reading the book two or so years ago.
Wolfer’s slides basically gets to the point I wanted to make. Piketty’s model is basically a slightly modified version of Solow’s model. See page 22 of the slides though the rests are good as well. Rather than rehash any of that content I rather focus on the style of the book.
No economist is going to say that Solow’s model is the be all end all of economic growth models. It describes a single mechanism for growth. Likewise, Piketty’s is one possible mechanism of many possible that could impact the evolution of the distribution of income. Such a simple model is not going to capture everything. However, his style promotes the idea he has found universal laws of capitalism and results in comments like Scott’s:
Reading Piketty feels closer to reading real science – the type where there are universal laws that make clear predictions – than most economics or social science I’ve read.
Or headlines at the time of its release that describe Piketty’s work as having proven that there is a fatal flaw of capitalism. Or the comparison to Marx that he makes himself. He sets himself up to be a more general version of Marx’s ideas (but later denies influence in interviews) given a world with economic growth, but Piketty also takes on the role of Keynes: proper intervention will prevent the inevitable collapse (so he’s not a communist). In my opinion this is pretty grandiose based on such a simple model. At the beginning of the book Piketty’s chides economists for being too focus on math. He should be chided for confusing non economists on the use of models in economics. See Tirole’s Economics for the Common Good chapter 4 for good discussion of how idea in general.
As mention elsewhere in the thread, Piketty states his mechanism is not currently applicable to the U.S. which appears to be driven by polarized labor income (so much for it being universally the main issue), but if my memory serves me correctly he indicates it will be a future problem. So Piketty would agree with the results of the IGM poll for the U.S. (http://www.igmchicago.org/surveys/piketty-on-inequality), but I would doubt if many of the economists in that poll would think Piketty’s mechanism will be the main future driver of inequality. In the comment section of that poll many economists mention there are many factors at play. I only saw Piketty’s coauthor Saez in that poll say that in the future r>g will be important.
As other have touched on, the central conclusion that r>g is highly in dispute, and is more likely than not a statistical artifact. On top of the criticisms that other have levied, I’ll add another: The 5% number rarely includes “failed capital”. In some other comments Scott has asked, “why can’t middle class investors pool their money and take on the risky investments?” Aside from regulation, which others have pointed to its about the ability to sustain temporary losses. This is why pension funds often do take those risks because the “investors” have no discretion as to when they can take out money.
Just from a “fun” perspective we can look at things from a Shark Tank hypothetical. Lets say, “Middle Class Investor Guy” is there next to Cuban, Mr. Wonderful, et al. MCIG invests $1 Million in a new app for virtual reality, while Cuban invests $1Million in an app for grocery stores. Both fail miserably. Cuban is out $1 million and each of the 1000 investors MCIG invests for is out $1000. Doesn’t sound bad until inevitably several of MCIG’s clients needs their money out to repair the damage from a car crash. Now MCIG has to pass on a $10 million opportunity to buy into some other startup, whereas Cuban just dives in, that startup ends up being a unicorn and MCIG is stuck with pedestrian returns because his firm has a liquidity preference.
This analysis leaves one unstated assumption unanswered: is having a growing rentier class such a horrible thing? And might it even be too small?
First of all, lets note that true runaway processes are rare in nature; the wall will turn the ship. If we had lots of renteniers looking for ways to make their passive income, returns on capital would go down. If Bob owns the entire planet, but Alice is the only one capable of preparing food, she will find herself in a very comfortable bargaining position. Of course the catering business in the real world is very competitive, but we can take that to mean we just do not have enough renteniers yet.
As you mention, taxing capital is hard. Because the marginal cost of protecting it, given the non-competitive goods that stable institutions tend to be, are close to zero. But this raises the question; renteniers are supposedly a terrible thing, yet nobody minds having them in their country? Which is it?
Remember that a guy who sells billions worth of goods, and never spends a cent, assuming a monetary policy that keeps the amount of money in circulation constant, is functionally indistinguishable from a philanthropist. It is when people spend their money that they enter into competition with others for real and scare resources; but their spending tends to be taxed like anyone elses.
Personally, id wish my country had more renteniers. All the people I know who qualify for the term live in Silicon valley. Which is a big part of what makes that place so special. Accumulated capital is a prerequisite for all kinds of more sophisticated economic activity. I think this is a big part of what made the gilded age such an exciting time full of discoveries and Zeppelins and stuff. Europe does not have anything resembling an Elon Musk. I happen to think his ideas are silly more often than not; yet I can only wish had a small army guys like him living in my city. But id settle for a few Bezos or Brins too. Having people around who can say ‘fuck it, lets gamble these few tens of millions’ is an invaluable asset. My country, famed for its low gini coefficient, practically has none.
As for why the return on labor vs capital has gone down in recent years; Pikkety may well be right that the destruction of capital in the early 20th century had a lot to do with it. But I also think that countries like china entering the world market had a big influence on the return of labor vs capital.
But regardless of the reasons why; I am still curious if someone can explain why it is so obviously a bad thing, other than envy.
Is there any reason someone would steal a loaf a bread, other than envy of those with ample food?
Joking aside, the problem with unrestrained rent is that it tends to lead to extreme wealth inequality, which does not distribute resources in a way that satisfies utilitarian ends. Not just at the basic food-and-shelter level. But also, in the sense of how lopsided power disparities subvert democratic social equality, assuming democracy is something you support.
For example, in your scenario of “Bob owns the entire planet, but Alice is the only one capable of preparing food”, it’s nice that Bob conveniently forgets how to cook meals, because otherwise the scenario you provided is horrifying: Bob owns the entire planet, meaning that Alice’s very existence now depends on his goodwill. If she needs Bob to survive, but he doesn’t need her at all, then she must become totally subservient to him. Perhaps if she became his court jester, he would give her enough crumbs to stay alive?
“I own essentially everything, except for the one thing that you lowly peasants control which I absolutely need!” Is not a scenario that historically comes up very often. However, “I own everything, therefore you peasants are my slaves” is a scenario that does. It’s not like the king couldn’t go in the fields and grow turnips if he wanted to…
An analogy. If feudalism is creating inequality problems, you’ve got two ways to approach it:
1. You can say the problem is that there are royalty, and therefore the royalty should be abolished.
2. You can say the problem is that there are too many people who aren’t royalty, so we need to find a way to up those royalty numbers, until almost everyone is king of some sort.
And its not like #2 is wrong, its just bizarrely unrealistic. What is the plan to get from A->B exactly? We know the playbook for getting rid of royalty, just like we know how to tackle wealth inequality (taxation and transfers). I’ll grant, UBI or other transfer payments could be forms of “rent” that push wealth inequality down, but they would be doing so by shifting from a system of a small number of extremely wealthy renters, to a system of a high number of low-level renters. It’s kind of like making everyone royalty, but also definitely like redistributing power from the top (via the taxation necessary to pull it off).
That disabled people, children, and the elderly depend on non-labor income to survive, should guide us not to criticize the existence of rent per se, but to criticize its increasing concentration.
Bread is a competitive good; digits on a bank account are not. Of course the rick tend to spend more than the poor, so indeed they do exert some pressure on the allocation of scarse goods. But in practice rich people do not go around buying up all grain and burning it, so a more relevant question is, for a laborer viewing a rentier: how much does this guy holding up scare labor and materials to build carbon fiber yachts negatively impact me; and is this outweighted by the positives that result from the existence of concentrations of capital in society? Yes, if nobody was bothering with carbon fiber yachts there would be more people to harvest the grain he eats; but how big is this effect really? On the other hand; the 20th century provided plenty of examples of what happens if you go the other way, and try to eliminate private concentrations of capital. I hate to sound like a trickle-down economist, but it didnt work out well for the laborers.
My hypothetical of Alice and Bob is obviously an extreme; taken literally, if they are sufficiently stubborn, they both die. Neither really has a better bargaining position than the other; but in reality laborers far outnumber rentiers, giving the latter the more enviable position.
But the point is to illustrate that the rate of return on capital and labor are subject to the same laws of supply and demand as anything.
And the last decades have been great for labor; on a global scale that is. They havn’t been spectacular for labor in western countries; but this is kind of to be expected with a billion eager-to-work Chinese without a penny entering the global market.
Note that I am not saying that more concentration of capital is always better from the perspective of the laborer; but the converse certainly is not true either; which is a consideration I dont really see addressed by Piketty or Scott; the marxist line that concentrations of capital are an intrinsic evil seems pretty much taken for granted.
“Note that I am not saying that more concentration of capital is always better from the perspective of the laborer; but the converse certainly is not true either; which is a consideration I dont really see addressed by Piketty or Scott; the marxist line that concentrations of capital are an intrinsic evil seems pretty much taken for granted.”
Exactly. If the capital is being used to create new products and services and technologies which consumers value, or if it is going into production facilities which leverage labor to increase productivity, then capital (and skilled labor) is a complement or multiplier of labor. It is not a zero sum, distributional pie.
My operational hypothesis is that the doubling of lifespan across ten times as many people with a ten to thirty X increase in median living standards (catch up vs leading economies) is in great part due to the positive sum, mutually beneficial returns to this invested capital. IOW, billionaires and wealth inequality are necessary (but not sufficient) to explain the Modern Breakthrough.
I think the underlying emotion is less envy than a kind of moral outrage; it’s less “gimme more” than “this is not the way the world should be”. I’m pretty sure this reaction (to inequality, NOT poverty) is genuine, and that other people have it much stronger than I do. To the extent that means their terminal values are different than mine, this puts me in (hopeless?) conflict with them, but I’m somewhat encouraged to find they also seem to model the world differently than I do.
Their intuitions must once have been adaptive, so possibly there’s some wisdom there I’m missing.
That said: I sort of suspect a lot of leftist concerns about inequality are really about status- judging from the people I know in meatspace, what irks them about large inequalities of wealth is largely that they are taken to imply large inequalities of status. I don’t think that’s the source of all the “this-is-not-the-way-the-world-should-be” feeling, but I do think it’s at the root of a lot of it.
Epiphany passage of sorts for me : “Around the 1970s, the US and Britain realized that Continental Europe and Japan were doing much better than they were, what with their near-constant economic boom, freaked out, and decided their economies were somehow rotten; this led to Thatcher and Reagan getting elected on a platform of cleaning up the economy. Around the same time, Europe recovered fully from its devastation and went back to normal economic growth; Japan, which had been a bit more devastated, took another few years but then had its own bust and went back to normal (or subnormal) growth. The US and Britain, seeing that they were now “caught up” to their Continental and Japanese competitors, declared “mission accomplished” and gave Thatcher and Reagan the credit.”…. This explains a bit why Thatcherite/Reaganite governments didnt arise as much in Europe and East Asia in the 80’s, something that has piqued my interest for a bit now…
I’d recommend a grain of salt.
Phillip Magness’s paper linked above shows clearly that Piketty is in the habit of twisting plain facts to support his politics, attributing anything positive to his favorites (FDR, Clinton, Obama) while denying credit to less favored politicians (Hoover, Bush, Bush)
I’m not sure about that first criticism in the Matthey Rognlie critique – if we accept that the return on capital is roughly flat except for housing between 1948 and 2010, does that refute the claims made in the book? The book already marks out the post-war period as a period of lower than usual return on capital. Housing during that period was also more widely distributed than most capital is, but I know that home ownership rates have turned around and started dropping in the last decade or so as well. That means higher concentration of capital once again, and could be consistent with a return to the historic rate of capital in the coming decade.
Where is that figure coming from? My impression is that long term real interest rates have historically averaged more like one to two percent a year–about the same as Piketty’s figure for long term economic growth. And since increasing population increases labor but not capital, the growth rate of per capita capital should be the real interest rate minus the population growth rate minus the share of the interest being consumed by the owner of the capital.
4-5% is in line with numbers I’ve seen for a safe withdrawal rate for a conservatively-allocated investment portfolio, with enough reinvestment to keep up with inflation. The numbers are usually based on investment returns in US markets since the 1920s. I think the difference from the 1-2% real interest rate numbers you’ve seen are that the latter looks at risk-free interest rates, and the former looks at a mix of safe and risky investments (usually treasury bonds and stock index funds, respectively) using diversification and a long investment horizon to mitigate the risk of the higher-yield investments.
Going back farther than that, Gregory Clark’s “A Farewell to Alms” has a table showing land rents and returns on farmland in England since 1150, expressed as interest rates (figure 9.1, on page 169 of my copy). The graph starts out in the 9-12% range between 1150 and 1250, declining sharply to around 5% in the late 1300s, and declining gradually for the rest of the graph to around 2.5% in the second half of the 20th century. I expect land rents would represent at least a modest premium over real interest rates, since collecting rents from tenant farmers is more work and less certain than collecting coupon payments on a treasury bond.
Another problem that strikes me with Piketty’s story as Scott summarizes it is a story in which rich people are rich because of inherited money gradually accumulated over multiple generations. The richest Americans at the moment (Time Magazine’s list) are:
Only the last three come anywhere close to fitting Pikettys model, and in all three of those cases the money was the result of entrepreneurial activity by the father of the present holders. Not a single Picketty style fortune among the lot.
Not only that, the last 3 on the list above also substantially expanded the inherited fortunes of their parents. They are not idle rich living off rentier income streams as Piketty predicts – they’re businessmen in their own rights who grew the size of their inherited companies.
Piketty hates the Forbes 400 list because it’s dominated by entrepreneurs. He sees it as propaganda that wealth is more created than inherited.
He thinks there is tons of Secret Old Money out there that we aren’t allowed to know about. He doesn’t mention the R-word, but it sounds like he could be talking about the Rothschilds. They’re usually #1 among Piketty’s fellow conspiracy theorists of Secret Old Money.
I don’t dismiss Piketty’s conspiracy theory. I’ve been looking into the ownership of spectacular assets — such as sports franchises, yachts, and personal golf courses. I don’t see much evidence for Piketty’s view that the Forbes 400 list is badly biased for the USA, but yacht ownership, in particular, is often kept secret so it’s hard to tell.
I’ve looked into most of the personal golf courses in Southern California and they are usually associated with famous rich guys rather than with Old Money — Walter Annenberg (although he was 2nd generation entrepreneur), Bob Hope (now Ron Burkle), Jerry Perrenchio, Will Smith, Larry Ellison, etc. There’s a personal golf course out near Zuma Beach that I don’t know who owns so that could be some old time Du Pont money or whatever like Piketty would assume, but the odds are it belongs to some hard charging arriviste.
If the secret ultra-rich are concealing their fortunes by buying yachts, I don’t think we need to worry about accumulation of wealth. A boat is famously a hole in the water into which you throw money, and the bigger the boat, the bigger the hole.
England had incredible inequality around 1700. And you can see evidence for that just driving around and noticing the incredible country homes from the era.
For example, John Churchill (Winston’s distant ancestor) was royally authorized to skim 2.5% into his own pocket of every shilling Parliament sent to pay his army fighting France. When he was made Duke of Marlborough, he and his wife built themselves a 300,000 square foot Blenheim Palace.
But by the late 19th Century, the Marlboroughs couldn’t afford to fix the roof, and the whole thing was in danger of falling down until the Duke married Consuelo Vanderbilt of the NYC Vanderbilts and her dad wrote the Duke a 2.5 million check.
That kind of thing was real common among English aristocrats of the era, as in the fictional Downton Abbey.
So, the old money rich tended to get poorer from 1700 to 1900 because they spent money on such a baronial scale.
To accuse Picketty of being concerned about conspiracy theories and Secret Old Money and then bringing up the Rothschilds strikes me as unfairly associating him with the anti-Rothschild anti-semitism that you see in white supremacist movements. Why not presume that he’s concerned about the influence of Rockefeller old money? Most white supremacists aren’t critics of capitalism in the way that Picketty is, so it seems just as likely that he’s worried more about old European aristocratic wealth than he is worried about Jewish wealth. When you use the term “fellow conspiracy theorists” what’s called to mind is more Alex Jones and less Noam Chomsky and his belief in a conspiracy of landed American/European wealth.
I’m being charitable to Piketty by assuming that he is more referring to Europe, which I don’t know as much about, than America. Perhaps the Forbes lists of billionaires are laughably bad in Europe. I have a lot more opportunity to grasp what’s going on in America, and Forbes seems to know more about the extremely rich in America than Piketty does.
And many Rothschilds are Old Money European aristocrats: e.g.,
Piketty refuses to give much in the way of evidence for his Secret Old Money theory. I’m being charitable by assuming that as a European Piketty is referring to the Rothschilds above all else, which at least makes a certain amount of sense and comes with an extensive conspiracy theory.
Anyway, Piketty’s Secret Old Money conspiracy theory is both essential to his more general theory and is luridly interesting, but nobody else seems to bring it up when discussing Piketty.
Also, quite a few of the super-rich have committed donating the vast bulk of their wealth to charity.
Gates, for examples, said he would keep only $5 million to pass down (I think).
“The US and Britain had the Baby Boom”
Just as an aside, the Baby Boom was much less of a thing in Britain than in America. There was a big spike in births in 1946, but then it fell off again until some point in the 1950s.
Britain was broke for quite awhile after WWII, so the Baby Boom was much more limited than in the US.
Britain ended rationing in 1954.
Ian Fleming’s “Casino Royale” is largely food porn in which James Bond goes to a country without rationing and orders whatever he likes on the menu.
I feel like this is an extremely obvious point, but it hasn’t been made that I can see… Bill Gates did not have excellent investment returns because he was good at picking investments. He had excellent investment returns because he owned a large fraction of Microsoft, and he made Microsoft into a very valuable company. In general, you become super-rich not by drawing a big salary, but by owning a large fraction of something that then becomes super-valuable, so any recently super-rich person will have very good investment performance. The same is true of non-founder CEOs and corporate officers, who get paid largely in stock; the ones who become really rich are the ones whose companies stock rises, and therefore they will have good measured investment performance. So you end up with a correlation between wealth and trailing investment performance that has nothing to do with investment ability.
I haven’t read Piketty so I don’t know if he accounts for this effect.
This is a special case of the general point that anyone with a very non-diverse portfolio can get excess returns ex post.
Say the “market return” is 5% (averaged over 100 companies). But if each company were owned by one person, then some companies might return 20%, and some might go bankrupt. Then if you later pick out a group of “rich people” and ask what average return they got on their investments, you would find that it is very high! This is basically what you do when you pick Gates, Bezos, Zuckerberg, etc. And probably plenty of lesser wealthy people as well.
If you’re interested in the history of inequality, you should take a look at The Great Leveler, by Walter Scheidel: https://www.amazon.com/Great-Leveler-Inequality-Twenty-First-Princeton/dp/0691165025.
He also combs through a fair amount of data and comes up with the somewhat depressing, but fascinating thesis that inequality basically slowly grows all the time and is periodically reset by one of the four sorts of events: 1) Large scale wars, 2) Large scale epidemics, 3) Revolutions, 4) State collapse.
Does he offer a theoretical mechanism by which this ever increasing inequality is effected, or is it simply an empirical observation? And what time periods and countries does he cover?
Inequality in Brazil has been reduced lately, I think mainly through political reforms:
Let me restate the thesis in a way which hopefully makes it obvious why inequality is a good, rather than bad, thing:
The wealth of individuals basically slowly grows all the time and is periodically reset by one of these four sorts of events: 1) Large scale wars, 2) Large scale epidemics, 3) Revolutions, 4) State collapse.
The same things which produce additional wealth happen to also by their nature produce additional inequality. Also, typically things which reduce one, reduce the other. In other words, rising levels of inequality correlate with economic growth and no one has discovered a mechanism by which you can destroy one without destroying the other. It’s been tried, but with disastrous results.
Instead, as wealth is allowed to increase, it increases unevenly where it increases the most. You can socially make everyone poor together, reducing inequality, but it requires individual effort and incentives which result in inequality in order to make everyone wealthier.
To quote Heinlein:
One way that the rich and powerful beat the market is simply trading on superior information.
Corporate insiders exploit their informational advantage to beat the market. If you’re a high-ranking corporate officer, you’re getting paid in company stock. You’re restricted in your ability to use your knowledge of the company’s internals to make decisions on when to buy and sell it company stock. But it’s clear that corporate officers do use this knowledge – their trades in their own company’s stock must be reported to the SEC, after which they are made public, and so they can be analyzed. The academic consensus is that there is significant alpha (alpha being active return on the trade) in their trading activity. Also, the reports on insider activity are watched by investment professionals and are an input used by quantitative hedge funds. Importantly, the quant hedge funds make money off of this data even though they get it with a lag, and even though they can’t separate out the alpha trades (CEO sells stock because he knows the company is in trouble) from the noise trades (CEO sells stock because he wants to buy a yacht).
Politicians beat the market – they know what the government is going to do, often before it does it, and until 2012 they could even trade on it legally. Now it’s illegal (the STOCK act, which later got watered down), but like the corporate insider trading above, it surely still occurs. People in government also may know about news stories before they break, as in the recent Wilbur Ross scandal.
I strongly suspect that there’s much more insider trading that than what we know about above. For example, we don’t have any data of corporate officers’ trading in their customers’ and suppliers’ stock. The opportunities for insider trading there are simply enormous.
For these “strategies”, it’s obvious why ten thousand retirees can’t pool their money to take advantage of them. They’re only available to people in key positions, and it would be illegal to run a fund based on them.
In the past, it was widely assumed that various business capitals such as Wall Street and Silicon Valley would diversify across the country. For example, financier Michael Milken operated out of Beverly Hills.
But its hard to get Wall Street inside info in Beverly Hills without leaving an electronic paper trail.
Milken went to prison in 1990.
Thank you, it’s really helpful to read a summary by someone I expect to pull out the parts that would be most meaningful to me.
You mention both, you’re not sure why richer investors are mentioned more than buy-to-let landlords, and why there’s not more about the increased rate of return for larger investments — isn’t the increased rate of return why he looks at richer people more?
But I feel like your question of “what sort of investment” deserved a lot more attention. It feels like *really* big investments win by changing the rules. E.g. Bill Gates (as much as I love his turn towards philanthropy) got rich by starting microsoft, and then by aggressively leveraging the monopolies it achieved to form more monopolies. You can’t do that unless you’re big enough to take over several big markets (and it’s actively bad for the economy, if you factor in the potential gains lost if those products then didn’t innovate for years because they didn’t need to). But I don’t know if that’s representative of rich investments, I feel like it is, but I’d like to see someone look into it.
My other thought was, wow, that Balzac rant about inequality was so soon after the french revolution — apparently even the massive upheaval of the terror didn’t effectively redistribute wealth away from rich people (whoever you consider rich, whether you consider that desirable or not)?
About the returns rich people get that poor people can’t. I don’t have any idea about the nitty gritty details of investment funds, but I know that some businesses may not give any return for *decades*, even if the return is high.
One example of this is the forest industry (my work is related to the industry). Forests give a 15% return on investment, which is much better than a lot of agriculture, which may give something close to 0 without subsidies.
Planting a forest is expensive; good quality improved seedling can cost >1 euro per tree. Say you have around 100 ha worth of land. 2500 seedlings per ha, that’s 250,000 euros just for the seedlings, and then you have the labour cost. Then, for the first few years, you have a lot of upfront expenses, because young trees are more sensitive than older trees. Then, you have to do the beating up, by replanting empty pockets in 3-4 years. This has a higher labour costs per tree, because you need to identify the pockets, instead of going in a grid like manner. In 15-20 years, you do the thinning, and frequently this is done at-cost, with no return, or very small earnings. Tipically, for a forest, you need to wait at least 40 years to get the timber. 60-70 may be better, because the rate of biomass creation is better at 60 than at 40. You also have expenses while the forest is growing: you may need to spray it; you may need to clean up the sub-forest and clean the fire prevention ways (pieces of land around 40 m wide with nothing on them that prevent the spread of forests).
This means that you invest land and money, and for 40-70 years you do nothing but pour money into it. You may be able to sell the forest to somebody, but a 30 year old forest will only be sold at a significant discount. A farm, though, may not give you good returns, but, with subsidies, you can get money every year. This is why only marginal land is used for forests, although the return is higher than for agrarian land.
This means that something you invested in will be harvested by your kids or grandkids. This kind of investment is thus only possible for very rich people, big funds, or people who think in dynastic terms and are able to pass it to their offspring tax free.
It is my understanding that Ivy league universities do invest in forests, because of the long-term thinking they can afford to do.
I do not think that is correct. If I have an investment that can be confidently expected to be worth $100 in sixty years, I can sell it in thirty years to someone else who will hold it for another thirty–and the price will be whatever $100 discounted back thirty years comes to. Similarly for shorter periods of time.
Of course it will–a discount representing the delay. As it should. That doesn’t mean that it isn’t a sensible investment for someone who wants his money in less than sixty years.
Well, the thing is, you can sell the forest in 30 years. But you will sell it with the land. In 60 years, you will have the money from the timber+the land. The thing is, the land with the forest planted on is not worth that much, so when you sell that forest you won’t be getting the value of the land at year 0+ inflation for that value+ the discounted value of the forest, it will be something less than that, because land that has a forest planted on it has no separate value from the forest.
In agriculture, you can keep the principal (the land) while getting the interest (whatever you produce from the land-cost of producing it). In forestry, you cannot, until the 60 years have passed. This is important for farmers, who like to keep land in the family. Land has emotional attachments a lot of other investments don’t have.
EDIT: I guess this means that the forest vs agriculture use of the land is not applicable to explain why rich people get more return out of their investment. The reasons small landowners plant crops instead of forests are very complex, and mostly not based on a logical calculation of return, otherwise they wouldn’t be farmers.
Posted without having read all the comments.
It seems odd to me that you can get excellent financial advice for rich people by spending a lot of money, but it doesn’t help with getting excellent CEOs. Perhaps it’s harder to be an excellent CEO.
Any thoughts about *why* GDP growth stabilizes at close to 1.5%/year? It seems to me that would require forces pushing against each other so that if it goes higher, it gets pushed down and if it goes lower it gets pushed up, but what would those forces be?
There’s some skepticism upthread that it does stabilize. If you look at table 10.11 in Scott’s post, it looks a lot like growth is an accelerating trend, which Piketty predicts will start going down at 2012, the point at which he no longer has data.
I know more about Jane Austen than economics, and some of these claims seem mistaken.
I definitely want some evidence to back up the claim that most rentiers only consume a trivial amount of their income. Jane Austen’s characters generally had to struggle not to exceed their income; their wealth stayed constant.
This varies depending on culture, but certainly in England, the usual practice was to avoid this problem by leaving the bulk of the fortune to the eldest son, and only token amounts to daughters or younger sons. (e.g. Colonel Fitzwilliam, younger son of an earl in P&P, who hoped to find a wife with a dowry to make up for his small inheritance.)
Rentier =/= wealthy.
Jane Austen has plenty of characters who are impoverished gentry, like Miss Bates, or Edward Ferrars (when disinherited). They didn’t become laborers because 1) it wasn’t done for a “gentleman” to be “in trade” and 2) as shown in the Balzac excerpt, there weren’t many good jobs available, even for a seemingly privileged person (male, from a good family, with good education). But both these factors have changed, which answers this question:
Nowadays, someone who inherits enough money to have passive income for a middle-class lifestyle is probably not going to decide to just get by on that.
I’m seeing a lot of comments along the lines of “larger percentages of rentiers should be a good thing,” and wondering why this is a good thing:
But using Scott’s definition of rentier below:
We’re leaving out a huge chunk of modern-day rentiers because we’re forgetting that people change roles over time. The largest class of rentiers today–defined as “people who live off the interest on savings instead of working”–are the retired elderly, not the rich. That interest on savings may come from a public employee pension account, private retirement savings, or Social Security (in the latter case, “interest” may be more in the sense of a Ponzi scheme than actual interest). But a retired person–a type of person who generally did not exist from 1850-1900, at least not in the sense of living independently off their own savings rather than being taken care of by their children–is not a laborer.
It’s highly relevant that this plays into the primary critique of Piketty–that the primary driver of r > g is housing wealth. Because the #1 asset for most older middle class folks is their house.
The laborers will face increased competition for a job now that there are fewer factories.
On the other hand, that particular rentier is broke, but the one whose factory wasn’t destroyed is now in a stronger position.
It seems to me that the relative power of capitalists and laborers depends on the ratio of available capital and available labor. For example, the Black Death killed a lot of people, while not affecting the amount of agricultural land. After the plague, farm laborers could demand higher wages. A bomb strike that destroys capital but not people would have the opposite effect – laborers will be worse off.
“It proposes a very long time for Europe to get over World War II, which doesn’t really match graphs that show the GDP rebounding basically immediately even in the hardest-hit countries (maybe it would be more revealing if I had a log graph like the US one above, so I could do more than try to eyeball the trend). ”
Just out of curiosity, I checked some numbers.
Taking the tables from https://www.rug.nl/ggdc/historicaldevelopment/maddison/releases/maddison-project-database-2018 , Germany seems to have had average per-capita GDP growth at about 1.45% over the time span 1800-2015. In almost the same time (starting 1829), Cuba was at 1.04, the UK at 1.133%, the US at 1.537%.
But as someone pointed out, that might be the average including 0.5% from 1800 to 1840, but Pikity mistakenly uses 1.0% to 1.5% as a range when the West has clearly performed higher for the past 50 to 60 years.
I don’t understand that remark. As I understood it, 1.0% to 1.5% is claimed to be a kind of natural growth rate. If you have underperformed for a while, the standard first-generation growth model, the Solow model, implies that there will be convergence growth, so the rate will be higher for a while and then converge to the rate of technological progress.
A few broad thoughts on Pikety.
A lot of Capital is ‘ecological fallacy, the book’.
As you point out, Pikety doesn’t seem to care about any non-governmental institutions at all. They don’t fit in his theory. This is severely problematic, as the emergence of massive non-governmental institutions (corporations, etc.) is one of the single greatest changes in the economy over the period he cares about.
Pikety’s general argument about rentiers isn’t all wrong. What is very, very wrong is the absence of consideration of why rentiers have wealth. As long as the super-wealthy get there via adding unique value and producing economic gains there are generally benefits. Put differently, Pikety believes that growth just “happens”. It doesn’t. The magic 1-1.5% didn’t happen for most of human history and there’s no reason to believe we can’t wreck it. Many governments have done this quite successfully. It’s not easy to get to that growth number.
Related: what rentiers have to do to keep their growth rates high is also very, very important. In the old days (Pickety loves his Jane Austen analogies) rentiers owned land and basically nothing else. Land is not a very productive investment, in modern terms. Basically the goal of rentiers was to get land and live off the rent of tenants (hence rentier). A lot of the old-fashioned gentry were practically absentee slum-lords. Today, this strategy doesn’t really work. To maintain high growth you need to invest. Whether or not it’s you doing it is irrelevant. To keep growing your capital you have to put the money into productive economic enterprises. This is far more beneficial than endless land speculation. Modern analogy for the rentiers would be regulatory capture – old-fashioned gentry used extensive manipulation of the political system to keep land values up and rental income high. It was their entire income. It’s actually quite similar to NIMBYism, if individual NIMBYs owned entire neighborhoods and rented out property, and if the owners colluded to keep rents high. Needless to say, this isn’t the situation we have at all.
Pikety’s best point isn’t economic at all. It’s the concern that large concentrations of wealth inevitably bleed over into large concentrations of political power, which are then used to reinforce concentrations of wealth. This might well be true. It’s a tough one to deal with. I’d like to see this tested. It has some empirical implications, but those don’t have much to do with ratios of wealth between arbitrary chunks of the overall distribution of wealth.
1. Isn’t this basically how capitalism is supposed to work? If accumulating capital were not greater than the return to labor, it’s hard to see why people would be interested in doing it in the first place.
2. The expansion of the retier class is actually the dream of many futurists and even of Scott, when he recently discussed the Basic Income Guarantee. The idea that returns on capital will eventually eliminate the need for labor altogether is still largely theoretical, though it has been around for a long time.
3. Wars and depressions destroy capital. So of course we would expect them to adversely impact people who accumulate capital. If you build a bunch of bombs that blow up buildings, which is part of a larger conflict where your buildings get blown up, your capital literally goes up in smoke. Of course the people who own those buildings are going to lose capital! That doesn’t mean the loss of capital is some great thing.
4. So if ‘rentiers’ have turned into institutions, isn’t that a good thing? Instead of one person/family living off their wealth, you have the perpetuation of institutions of higher learning. How is this worse for the world than a landed aristocracy? Instead of a discussion of how to reduce income inequality, wouldn’t a more interesting discussion be “How did we successfully transition from the 1% rentier class to an institutionally-based system?” and “How do we do this kind of thing in a more directed, intentional manner?”
5. The most recent McKinsey podcast was about corporate governance and long-term growth incentives, which I highly recommend. The most salient point I had never considered: >70% of all investment is by mutual funds, retirement pools, university endowments, and other long-term investors. Therefore, when boards and CEOs discuss their fiduciary responsibility to stock holders, they are the most heavily influenced by investors who are interested in long-term growth as opposed to quarterly earnings. This is exactly the opposite of the common myth of a stock market incentive structure that encourages short-term pillaging.
> The most recent McKinsey podcast was about corporate governance and long-term growth incentives, which I highly recommend. The most salient point I had never considered: >70% of all investment is by mutual funds, retirement pools, university endowments, and other long-term investors. Therefore, when boards and CEOs discuss their fiduciary responsibility to stock holders, they are the most heavily influenced by investors who are interested in long-term growth as opposed to quarterly earnings. This is exactly the opposite of the common myth of a stock market incentive structure that encourages short-term pillaging.
Hmm… I don’t think that people being interested in long-term growth actually means that the incentives don’t support short-term pillaging. Very few people put their investments in the market in hopes to get rich and get out; they want to get rich and then move things around to earn long-term gains. Mutual funds aren’t simply buy-and-hold programs. Someone managing mutual funds on behalf of retirees still wants to put up good numbers to remain competitive…. if they can do it by short-term pillaging, they will.
Perhaps the problem is that we’re not good at accurately assessing the long-term advantage of companies. If WidgetCo announced a new worker retention program aimed to promote long-term innovation 20 years down the line and people believed that the benefits would ultimately outweigh the costs (including opportunity cost), then the value of the stock will go up. It’s just that it is hard to assess the value of that retention program (and perhaps we have a conservative bias), so short-term income booms makes the companie’s stock comparatively more valuable.
If you consider that the Industrial Revolution started in 1800, growth PER CAPITA, which is what Pickety means, started at 0.5% before consistently rising to 1.0% to 2.0% with long stretches reaching 2.3% after 1950.
I just checked the OECD stats. The US average per capita growth from 1970 to 2017 (47 years) was 2.5%. I’m not sure why Pikety wrote 1.5% as an upper bound.
What would a modern rentier look like? A lot of the discussion seems to be around billionaires – but those would be a tiny fraction of the previous rentier class (and most of today’s billionaires aren’t living just off inherited fortune). In Jane Austen – world, there are certainly a lot of basically idle rentiers who aren’t living extravagant lifestyles (or at least can’t without risking financial ruin). Their hereditary rent income basically supports an upper middle class lifestyle at best.
Which you could basically do today with a (relatively) modest wealth of say $10 million – extract ~$100k a year, what remains after inflation is enough growth to have a decent inheritance to pass on to one or two kids.
I don’t get the sense that today’s single digit or low double digit millionaire is likely to be idly living off their accumulated wealth, and they almost certainly aren’t raising their kids with the expectation of doing so. Instead, somebody with that sort of wealth probably goes to an elite college, rubs shoulders with a similar demographic, and ends up in a full time job making some multiple of $100k at a minimum. So part of what drives their growing disparity from the lower classes is that they combine both significant investment / wealth income with high-end laborer wages.
It also seems like even the investor class has to be much more involved with their wealth management than the previous class. You can’t just be an idle landlord of a perpetual estate. You could call Warren Buffet the most successful pure capitalist / rentier around, yet clearly his investments are a full time job.
Could also just be much more opportunity for status-appropriate work. Having a law or financial job is perfectly compatible with being high(ish) class, and probably looked on better than idleness. Whereas in Austen’s time, it would be something of a scandal for any sort of gentry to engage in a profession, now we’ve blurred the line between “wealthy person who lives off capital gains” and “high-end professional”.
1 CEOs get paid more than ever per year. However they last for ever-shorter periods. Bad ones get fired, not less pay. Further, much of their comp is in stock, which punishes poor performance .
2 Today’s super rich typically made their pile by starting/working at a hyper growth company, not by some random investment.
3 “shirtsleeves to shirtsleeves in three generations” still holds.
4 Capital’s share is likely to grow, because automation is flushing labor out of many activities. Warehouses are starting to go dark: factories and others will follow. What should labor’s share of the output of an unstaffed factory be?
I remember seeing a link recently showing that ALL IN, CEO’s in America make less than pro athletes. One group runs giant corporations with tens or hundreds of thousands of employees making daily decisions that risk billions. The other play sports.
Yet Piketty is convinced CEO’s are the problem?
It’s not hard to convince me that CEOs are overpaid (relative to the value they bring). But it takes a lot more work to show that overpaid CEOs are a problem, without a prior that rich people existing is a problem.
Yeah, i suspect they are overpaid as well. If I was still on the board of a corporation, I would try to bring it up. I don’t think it is a major issue, nor do I think athlete salaries are a major issue. The CEO thingie is just a rallying point for those promoting class warfare. Piketty is a propagandist posing as an economist.
I’m struck by how much the graph marked as figure 10.11 looks like the ones Scott criticised, in my view rightly, in https://slatestarcodex.com/2014/09/03/the-guardian-vs-induction/
When I see a sharp kink between “data relating to the past, that we know about” and “data relating to the future, that we’re guessing”, I view that as cause for suspicion.
In part 3, you pointed out that There are economies of scale to large fortunes where you either hire better investment planners or invest in obscure investments. Having Bill Gates and Marty Zuck manage billions and billions of dollars is probably more efficient for the non-rentiers than having thousands of millionaires do passive investing or try to pick out a crappy hedge fund.
…particularly since Gates and Zuck seem to have strong humanitarian uses for their fortunes! This is actually predicted by the leftist axiom that there are significant diminishing returns to wealth. If you have $50bn, what is the incentive to get $100bn? It almost certainly HAS to be ideological, and empirically these mega billionaires have a fair humanitarian bent.
The real nightmare scenario is having wealth concentrated in the hands of people who haven’t hit the diminishing returns to wealth yet. The people who buy $5m houses and yachts who are still looking at bigger houses and yachts. In this toy problem, the drive to acquire more wealth is “pathological”, and only helps the needy insofar as the invisible hand works as intended.
I just don’t see what the problem is if the top 0.0001% control “everything”. It’s not like the top 1% or the top 10% or the top 50% of people are particularly intelligent or virtuous. Go ahead and have a global vote on what human rights. Let the top 10% of SAT scorers pick out what companies to invest in. Prepare for disaster.
There’s a lot not to like about Zuck and Bezos etc, but all things considered, I’m pretty glad they’re winning.
Just to note, I don’t think large endowments/the very rich really do anything special. This analysis suggests that they actually underperform a levered 60/40 portfolio (which is fairly standard, and something you could easily set up yourself). link text
I am surprised no one has mentioned the recent Cato whitepaper (and WSJ article) on inequality.
Once taxes and transfers are taken into account, inequality in America is lowest in the developed word. And the poverty rate is not 23% but one-tenth that.
Something to consider when deciding to support more taxes.
Sure, that’s _why_ the poverty figures that are widely publicized exclude non-cash transfers (which includes housing assistance) and taxes. The idea is to push people into supporting increasing amounts of welfare and taxes, which won’t do a thing to those figures, thus keeping them available for pushing yet more redistribution.
Or increase them even, as welfare spending allows people to make less money before transfers.
An oddity of Piketty’s analysis is the proposal of a steady 4% return to capital, despite a 1.5% increase in GDP per capita, and presumably less than 2.5% population growth rate (over the long run). If one merely reinvested the returns off a moderate fortune, eventually the returns would exceed the GDP.
My guess is that the problem is like what Jane Austen’s characters faced: Wealth alone doesn’t bring status, but rather spending. So very few rentiers reinvest the bulk of their income, but rather they tend to spend a lot of it, and their fortunes do not grow from generation to generation.
Good news! I hear that living off capital returns will sap meaning and community from people’s lives. So all those rentiers will be living unhappy lives without any purpose, and you’ll still have the last laugh!
(Turnabout is fair play.)
The Blazac story seems to be poorly integrated into the narrative, in both trivial and substantial ways. Using current US values, let’s say that a really successful lawyer can make $500k/year. A fortune that would yield that in income would be around $10M, assuming 5% interest.
What makes Rastignac’s situation interesting is that Victorine is penniless, and so Rsstignac has some hope of marrying her. But if Victorine’s brother dies, she’s suddenly heir to a fortune of $10M. In a more normal situation, where Victorine can be reliably predicted to inherit $10M, she won’t be living in a shabby boarding house, wouldn’t meet Rstignac, and would be pursued by young men with similar prospects.
More to the point is that Victorine’s father accumulated a fortune of $10M. The Wikipedia summary doesn’t say how, but presumably he ran a very successful business. Really, the plot is simply saying that the accumulated wealth of the lifetime of a successful businessman yields a better income than any but the very best-paid lawyers. But that’s always been true — the skill to