The example that is used in this blog post is completely and absolutely wrong. He portrays wealth accumulation as a zero-sum game with people coin-flipping against each other. In reality, someone does not have to lose for wealth to be created.
Unless the people with money are the ones that made it themselves, they will keep buying bad watches like everyone else.
The what they invest it in, is the whole point. If you spend your life and wealth playing 20% of your bankroll with zero expected value - you should completely expect not to be wealthy, and if you do become wealthy it will be completely by chance, against the odds.
Not outcompete, but intergenerational wealth does play a huge part in class mobility [1].
> The what they invest it in, is the whole point. If you spend your life and wealth playing 20% of your bankroll with zero expected value - you should completely expect not to be wealthy, and if you do become wealthy it will be completely by chance, against the odds.
The amount of money you have is a very important factor in your options. The more money you have, the more options you have to invest with more expected value. For example, what options does a family that manages to save $500 a year to invest that money in something that brings them a lot of expected value?
1: https://www.pewtrusts.org/~/media/legacy/uploadedfiles/wwwpe... Page 6, figure 3
Richer people don't have access to higher EV else their kids wouldn't have very similar relative mobility, they should be richer than their parents. And it seems that the risk of becoming downwardly mobile (absolute and relative) increases along with income. Which makes sense as some sort of mean reversion. Along with the bottom quintile having higher positive mobility than richer quintiles, EV increasing with income doesn't make sense to me.
The family with $500 should keep it as liquid as possible unless they have enough credit to cover drawdowns in income. Other than that - they get the same EV as everyone else. $500/yr at 7% over 40 years will get you $100k. How many people with $500 actually invest it? Historical lookback on 40 years of the S&P 500 gets you real return of 8.77%.
It's because they took on more risk. The bigger the risk, the bigger the payout. The safer the investment, the lower the payout.
> do not share fairly the value created between workers and owners.
They do if one considers risk.
One is that you're only considering direct monetary risk. For example, imagine a person that starts a business with X dollars, which will usually be a percentage of their wealth. This person hires an employee at a salary that's barely above their living expenses, but with the idea to ascend as the company grows. If the company goes bust, who loses more? The owner still has money, the person living paycheck to paycheck might not have enough funds to live until they find a new job and they have probably lost money because they didn't go for a higher paying job (with less upside but more safety).
Two, the risk/benefit ratio is not fairly distributed either. If I have a hundred dollars in the bank I cannot really access any investment opportunity, like creating a business, that could multiply that money with the same risk.
Three, thinking only in relative terms is a mistake, even if risk/benefit ratios were evenly distributed, because not all people have the same relative expenses. For example, assume both person A and B get into a stock that after a year gives them a 50% profit. Person A invests their emergency fund, which is $1000 bucks. Person B is far more wealthy and invests $100k, and they still have a lot of money leftover. Here, A is actually taking on more risk because losing that thousand dollars means they might not have enough money to fix their car or pay for health treatment. Person B, if they lose that money, it will hurt but it won't really change their living situation. And when the profits come, A has $500 more, which is not that much and probably goes into the emergency fund again; but B has earned $50k and probably has enough to go on a super nice vacation and still have a lot leftover. In other words, even if the risk/benefit ratio is the same, the actual consequences are not equal. Having more money makes the same ratios far more beneficial in practice.
> If I have a hundred dollars in the bank I cannot really access any investment opportunity
robinhood.com says hello!
> not all people have the same relative expenses
Right. But that's their problem, not the company's problem. If I sell Bob and Ted each a coffee for $10, and Bob is right and Ted is poor, they still each get charged $10. I don't do a background check and pour over their financial statements in order to determine how much to charge them.
"You can just get another job" not that easy for quite a lot of people. Some people lose their job and that leads to losing their homes. If I had to choose, I'd prefer to lose millions of dollars than to lose my house in a vulnerable situation.
> robinhood.com says hello!
Yeah, and the casino exists too, and I bet the casino is safer. What I said is that with less money you don't have the same investment opportunities with the same risk/benefit ratios. Yeah, you can invest in stock and not do any of the crazy options stuff, but that's not really going to give you a lot of profit.
> Right. But that's their problem, not the company's problem.
Never said it's the problem of the company, just that the same amount of dollars has different value to different people. That's one of the mechanisms that makes it easier for people with more money to get even more money for no reason other than having more money: the more you have, the less it matters to lose a certain fixed amount. A $20k investment does not actually have the same risk for someone that has $30k in their account than for someone that has $10M.
If private equity buys a pharma company and cuts research, jacks up prices to extract money from insurance, that might be "clever" but it is not really benefitting anyone, quite the opposite.
Obviously a lot of capital is used to create more value, but it does so by using labour, so it is the creativity of the people working for that capital that is adding the value mostly, while the capital sits back and enjoys it's growth. This is the concept behind public traded companies.
So people should risk their capital for nothing? I'm all for better pay and working conditions but the value from some ventures does not always come from the creativity of the workers. Sometimes it does, sometimes it doesn't so much.
I think it is more a case of the more access to capital they have. People who have demonstrated that they can create a lot of value usually get access to lots of capital, even if that capital is not theirs. It's pretty standard to not fund business ventures by one's self. An indication of a good business plan is buy-in from others.
True, there may be technological innovations in factories, farms, and labs that grow the size of the pie as a whole. But probably those with most market power will have most of the access to those innovations.
And even if the value of technology would be fairly distributed, it does feel to me that the underlying game of coin flips rigs the whole system in favor of the eventual oligarch.