How the Rich Got Rich
inc.com
inc.com
I think the structure of the capital markets, VC's and funds and the like, are still holding back efficiency by limiting the market of sellers. Things like Kickstarter that "democratize" the capital markets may also play a huge role in making them more efficient.
Because labour, by and large, isn't particularly mobile, whereas capital is highly mobile, despite governments' best efforts. It's simply cheaper to enforce labour taxation than capital gains taxation.
A second reason is stability: in a recession, employment drops by a few percent, whereas consumption (sales taxes) typically drops much more sharply, and capital gains even more so.
1) Buying capital is much, much riskier than earning wages. If we suppose people who are good at being capitalists are also approximately as good at earning money, the economic equilibrium will tend toward capital being then much more profitable. Us being "awash" in capital is a red herring; in your garden variety market equilibrium model it's the incentives that matter. The returns are exponential, which just makes things more unequal when your actors are risk-averse.
2) The current tax treatment of capital gains rewards what I call "super-capitalists", people who get one tax-sheltered blob of capital and grow it and grow it. It's a compromise between the need to tax income and the need to not tax capital, but the downside is you get all these Mitt Romneys that only pay 15% taxes.
#2 is why there's bipartisan support among economists for progressive consumption taxes, not income taxes, but you don't hear much about it since it's currently in the "pipe dream" category of economic policy.
Surely, that will really really encourage tax jurisdiction shopping
I still prefer focusing taxation on companies - if you want to base yourself in cayman islands that great. You just can never ever do business in any of these western countries...
There will need to be tax treatments for potential loopholes, like shifting consumption under a business you own or own in part, or time-shifting withdrawals, but overall economists think this would be far more elegant and simple than income taxation.
Not really. I hate this argument.
A person with $20 million who puts $500,000 into a new business is not taking that much risk. He's putting 2.5% of his net worth into it; if it tanks, he'll have other opportunities to do it again.
A person who puts 2000 of his ~3000 effective working hours per year into a job is taking on a lot more risk. He's putting about 67% of his working time in, and if that job tanks (company goes out of business, he gets fired) he can be seriously screwed.
Both deserve to be rewarded, for sure, but this mentality in which monetary investors deserve prima facie higher status than time investors is utterly fucking sickening. It reminds me that some people haven't got that we stopped having royalty more than 2 centuries ago.
If their employment ends, they no longer have the income they used to, but they have 40 more hours a week to use. Most will try to find another employer that will give them money for their time, some will start their own business, and others will retire and use the extra time for leisure.
Investing your time in earning wages is one of the least risky investments you can make; on the other hand, returns on investment tend to be inversely correlated with risk.
Anyway, I was just trying to answer the original poster's question. I'm sorry that you are "sickened". To be honest, what often sickens me is people who think their sense of moral superiority entitles them to ignore the way the world is.
Put $500000 in to a new business: This may make lots of money, or you may lose it all. That part stays the same whether or not you are rich or have to beg, borrow and steal the money.
Put 2000 hours in to a job: You are almost certain to be able to collect the money from the hours you put in to the job, no matter if the company goes bankrupt or not. Your expect value may come out lower than starting a new business, but your worst case scenario is much better. Even in the case of the employer leaving town and a locked door when you go to collect your paycheck, most governments have some kind of program to pay employees when there employer does not and to chase down and punish the employer for not paying.
It's impossible for me to fully evaluate the two risks, but I agree with conventional wisdom that having a job is the less risky path for an average individual to take. For the investor, perhaps things are different.
I don't think it has anything to do with higher status, though.
Maybe combine it with a wealth tax, particularly on non-productive assets. Raising the cost of certain kinds of goods should actually make them MORE coveted by the rich (Veblen goods) -- a tax on owning or acquiring conspicuous luxury items could then benefit everyone.
Consumption is central because it is information. It is how capitalism works: the choices made by consumers tell capital what to invest in. Unfortunately, inequality causes that relationship to break down and the economy starts making things that maximize utility of those with money instead of general utility. Combine that with the effectiveness of rent-seeking, and you get the current mess where finance trumps everything because it provides the most value to capital, rather than because it contributes the most value.
Tax regimes that most benefit economic growth shore up market failures: externalities, public goods, investment in education, infrastructure and the like. That's not controversial except in the libertarian fringes. However, I believe they also serve equality, so that we can get a little closer to maximizing utility instead of profit (which is, by definition, a sign of a poorly functioning market.)
I don't know if there's an economic argument for consumption by the poor being more economically efficient than investment by the rich, or for consumption > investment in general.
The point is to tax in a way that's most useful. There's no point in progressively and compound-ly taxing people for having large investments. There is a point to progressively taxing people who consume many times more than average.
Most people employed produce things which are valuable. Most things produced are valuable.
Sure, but my point was that, at its basic, value can be thought of as the following function:
Val(demand, supply) = const * demand / supply.
Another point is that by "labor" we usually mean either physical labor or time spent, not mental effort exerted. If we add the mental effort exerted (multiplied by intelligence of the knowledge worker) to the definition of value, we will see a closer relationship between labor and value.
Something you spend a lot of time working on may have a lot of value to you (as in: it aided development of your skills, for example), but it doesn't mean that it will have a lot of value to everyone else. We ought not to mistake what we value with what an average individual from a large group of people values.
This has an important consequence. If you're smart, you ought to position yourself where you can have a lot of leverage. That would be somewhere away from being a labor provider and closer to being one who makes decisions on the basis of demand and supply. Also, you can have a lot of leverage if you're willing to incur risk. Labor providers usually don't incur a lot of risk (in worst case, they get nothing). In entrepreneurship, on the other hand, risk can mean losing a lot of money. By moving towards making demand/supply decisions and by willing to incur risk, you can generate not only more value for yourself, but more overall value, since in voluntary transactions both sides benefit.
Uh, what? Why do people that have never read Marx think they can get away with this kind of thing? You only have to read the same wiki page you have linked to to see that what you claim Marx never thought about is in fact very much so part of the theory. According to Marx commodities under capitalism have different kinds of "values"; one of them is their "use-value", which measures whether the item is in fact useful for a given purpose for anyone. In a market economy a commodity only realizes its value (usually seen in the monetary expression of its exchange-value, or price) when it is actually sold: ie, value is realized at the point of sale, not production. Thus no matter how much labor you put into something, if nobody actually wants it for anything it has no value at all. This kind of misunderstanding or misrepresentation of the LTV is so popular it has its own nickname: the mud pie fallacy, see for example http://kapitalism101.wordpress.com/2010/05/13/law-of-value-3...
This whole thing is explained, plain as day, in all of Marx's works on this topic, including the most famous one, Capital. Why people that have never bothered to even read one paragraph of it like to pretend it says things it does not say? Beats me.
But here is where the article is most clearly wrong:
> But most important to the MudPie theory, demand doesn’t create the social value of a commodity. It only helps determine if labor has been apportioned to the right tasks. Labor is creating the value
First, the article is contradicting itself. It reduces everything to "labor is creating the value" -- if that were the case, why mention "governing" force (B) above at all? Also note, which value are we now talking about? Individual or social? (I assume the latter). Second, it conveniently presents the MudPie argument as "belief that demand is creating value". No, that is not what the MudPie argument says at all. It is the recognition of demand (which is an intellectual process) that is creating value, and that value can be (although not always is) wholly separate from the labor cost (or the "individual value").
Consider the following example. I buy a used or antique piece of furniture from someone who used to own it and who now believes the piece is quite useless since it is old. In addition, the owner does not mind selling me the piece at a low price since he had got out from the 20 years of using it all the "value" he believed he could get out of it. On inspecting the piece, I determine that the piece was made by a known designer. I resell the piece for ten times the amount I paid for it, and for three times its retail purchase price when it was new. Where is the labor here (ignoring transportation cost)? The answer is that the "labor" here is in me recognizing the potential value of the piece either from the appearance or through matching the label through a catalog (about 5 minutes of work). Now exactly the same process will occur when a reseller of a commodity finds a more profitable way to sell it. The reseller is creating value.
TL;DR There is also intellectual labor involved after the item is made but before it is sold, ignored by Marx entirely and purposefully.
Seriously? Again? My goodness. Listen, we have already established you are the kind of person that goes around pretending to discredit an entire branch of economics without having the slightest clue about what that branch even claims to say. Fine. But repeating the same nonsense after being told that it is nonsense is just too much. The entire freaking idea revolves around how individual labor which under capitalism is done by private initiative is converted to social labor, which is through market mechanics accepted as socially necessary. Of course that whether or not that labor was in fact desired, has some value for society, is a factor, and that is a fundamental aspect of the LTV. The Wikipedia article explains this, the article I linked to explains it, I explained earlier that value under the LTV is realized at the point of sale, ie, when someone actually goes through and establishes the usefulness of the labor invested by exchanging something (usually money) for it.
The rest of your post conflates price with value, which are different things according to Marxian thought, so again it is pretty useless as far as "debunking Marx" goes. Again, this is even explained in the Wikipedia article you linked to but that obviously haven't read.
Now, do you want to believe the LTV and everything Marx wrote is wrong without having any actual idea of what that is? That's cool. Just don't try to have a conversation with someone that has bothered to read it and think you can get away with it.
The 16% capital gain figure isn't saying that rich people consistently earn that much from capital gains every year, but rather the 400 highest earners had capital gains windfalls this year. Next year different people will have windfalls and different people will be on the list.
If you sell (all or some of) a company you started, that income is technically counted as capital gains as far as the IRS is concerned.
The reason societies have typically been pro-Property comes from religious superstition; consider that the concept of private land ownership emerged out of a perversion of ancestor veneration; "<dead chieftain> will rape your shit for breakfast in the afterlife if you don't honor his descendant's claim to this land". Eventually, these ancestors became legends or gods and those who claimed ancestry became the priests, and the rest (literally) is history. [Note: I'm not saying that all religion was born this way, but only that the desire to corrupt or abuse the religious impulse is as old as dirt.]
If you take a person's percentile-ranking on Property vs. Energy and compare the two, it determines what that person's politics will be-- not in a left/right sense, but in terms of how they view certain social justice questions. People who are Property-heavy (i.e. have a lot of connections and capital but low talent) tend to resist change and want to keep doors closed. People who have more Energy than Property want to shatter barriers and dynamite the doors keeping them out.
The reason it doesn't map easily to left/right politics is that both corporations and government can be corrupted to protect the entrenched (i.e. undeserving, Property-heavy people) so there are a lot of pro-Property types who are superficially liberal. Most HN-types and entrepreneurs, even the libertarians, tend to be pro-Energy. A source of our continuing frustration is that the world is still run (look at who actually makes major funding decisions, a few top incubators aside) by extremely connected people who have lots of Proprety and little Energy/talent.
There's another way to view this, which is more fundamental and equally correct. Property equals Past. Energy equals Future. Sadly, people tend to have more faith in an established (but rapidly becoming irrelevant) past than in an uncertain future.
First, property as a result of superstition? Really? This is the first I've ever heard of this. In fact, most primitive societies have no concept of property -- this is why they are primitive. "Culture Cult" does a great job expanding on this argument.
Second, a dichotomy between energy and property? Really? So you can't be somebody who has a lot of energy and wants to smash doors down and also somebody who likes to own stuff? Sounds like a conclusion you'd draw from various discussions on MPAA and BitTorrent, but not one that would work for much besides that.
Let's say it's fifty thousand years ago and I live in the forest with my clan. I take a flint and make a wood carving. At this point I own nothing -- so if it's nice, the alpha male or one of his females takes it from me. So I stop making carvings.
Somewhere down the line, at least in Western Civilization, I make the same carving and get to keep it. This is the beginning of civilization, the basis for all progress: both the naming of property as the product of somebody's energy and the common belief that they get to keep it. Property is stored energy (in your terms). Once it's stored we can trade it or pass it around without having to expend energy again. So progress begins to accumulate. Energy can either create property or not.
Of course I can't keep everything I make; the clan needs extra arrowheads or whatever in order to fight off another clan. So I share -- or I'm taxed. However you put it, I give up some of my property, some of my "stored energy" in order to benefit the greater good.
There is a tension here, and it's a good tension. Where you come down on most political issues boils down to whether you're a "sharer" or a "creator/trader" You can be both, of course, but your answer to this tension defines your sensibilities. Not some kind of energy/property thing.
I love ad-hoc analysis. Your comment strikes me as an informed comment of somebody who has kind of floated along in the various property discussions we tech heads have without taking much time at all to dive deeper (apologies if that sounds condescending.) Might want to up your game a bit. Using your terms, energy without persistent property is a fool's game. Yes, you can trade MP3 tunes all day on the net and it doesn't hurt the economy much. You can participate in the FOSS movement, providing somebody else a bigger piece of property down the road for less effort -- a great cause indeed. But the reason you can act in such an idealized manner is that you're resting on other more fundamental principles of property. They don't come and take your house or computer any more, and the things you create you get to either choose to share or not. Because we rest so solidly on the foundations of property, we begin to forget they are there.
Seriously, this property rights equals don't-change-things and religious superstition is way whacked.
There needs to be a way of storing Energy, as you said, but it needs to be limited and kept reasonable. Infinite transferability of property rights is a demonstrated disaster.
For example, private land ownership (at scale, in non-agrarian settings) is pretty much illegitimate. I'm not saying that it's illegitimate for a person to own a small house in the woods on an acre of land. That's fine. I'm talking about what happens at scale. Private land ownership was necessary at one time because it gave people an incentive to use the land properly, but the senseless wealth transfer we see in, e.g., Manhattan is just perverse. People like me (hard-working, ambitious, energetic, talented) are the fucking reason people want to live (or work, or employ people) here... we fucking make cities... and yet, instead of thanks for making this place great, we get the obligation to pay immense sums of money in rent.
I would actually support a government solution to the urban land problem. Since the total price is going to be high anyway (because of the high demand for housing) I'd rather see it go into taxes that make the place better-- better schools, more and nicer parks-- than into the already bloated coffers of multimillionaire real estate owners.
The religion aspect: private land ownership pretty much emerged out of ancestor veneration. Land "ownership" started at the ability to defend land, which was usually the job of the chieftain or king or alpha male. However, being people, they died. If their descendants weren't strong or persuasive or wily enough to defend the land claim through ordinary means, they started using supernatural claims, based on the idea that the ancestor still existed and could enforce those claims supernaturally. (Over generations, these ancestors became gods.) This was almost certainly not the only religious impulse, and it's far from true that all religion was borne of this desire, but it's a strong and consistent strain of the impulse to corrupt religion toward political aims.
Possessions are things you own (in the sense of being the exclusive user) because you made them and you're the one who uses them. You make a flint and then a wood carving, these are your possessions.
Property, however, is what we get when you start having exclusive usage rights to things you don't actually use. So a feudal landlord has the property rights to a manor. However, he only actually uses the bit of land occupied by his own castle. So what's the problem? He still "owns" the rest of the land, particularly the productive farmland, and he "rents" it to the peasants who actually work it.
He is engaging in the fundamental economic crime: rentiering, demanding that other people pay him forever to use something without their ever acquiring actual ownership over it. This can only be done because he has a property right over something he never productively uses (in fact, cannot physically make full use of: no one person can farm an entire manor or village worth of land). The creation/acquisition of property titles that can be rentiered upon is the usual historical mode of what Marx termed "primitive accumulation" or "the original accumulation", the first initial step that creates a capitalist class capable of living without working.
Note that we can use this definition to arrive at formulations of other great economic "crimes". Usury, we can now say, is the rentiering of money: the debtor never actually acquires ownership over the investment he borrowed, he just rents it for a while in the hope of generating enough return to make a profit for himself even after paying the "money-rent" of interest.
This, it is worth noting, is why modern capitalism really took off when we started forming joint-stock corporations. (Start-up guys, start reading here!) Equity investment routes around rentiering by actually trading the start-up capital for a share of ownership in the business. Ownership of one thing is exchanged for ownership of the other thing. This is why it's harder for venture capitalists to earn money than for, say, Goldman Sachs to earn money: venture capitalists are trading, Goldman can rentier (in fact, investment bankers in general are rent-seekers on their exclusive professional access to the broader capital markets) and commit usury.
Benjamin Franklin, for example, wrote this:
"All the property that is necessary to a man for the conservation of the individual and the propagation of the species is his natural right, which none can justly deprive him of; but all property superfluous to such purposes is the property of the public, who by their laws have created it, and who may therefore by other laws dispose of it whenever the welfare of the public shall demand such a disposition."
(Elsewhere he clarifies that what he means by "necessary to a man" is essentially personal possessions, work tools, and shelter.)
Thomas Jefferson made a similar distinction in some of his letters. There's some speculation that Jefferson+Franklin's view that property isn't a natural right, but a social convention, is why the Declaration of Independence discusses "life, liberty, and the pursuit of happiness", rather than the formulation, "life, liberty, and property" that was otherwise more common at the time.
This is why open source works.
The tension, I believe, is scarcity versus sufficiency. In a scarcity society you have to horde everything. Life is a zero sum game, and you benefit most when you are better off than people around you. If you ask an MBA how they would feel if a friend bought the same car they had just bought they will tell you it cheapens their car a bit. In a sufficiency society, we stop trying to beat the people around us and start collaborating with them, forming communities of discovery and creation. If you ask working class people how they'd feel if a friend bought the same car as them, they say it makes them feel better: now they both have great cars. People are happier, more satisfied and more contented when they feel like there is enough to go around. They are also more productive, creative and innovative. There isn't the wasted effort of geniuses stuck trying to figure out where their next meal comes from.
The rich in a scarcity society are better off (though still less happy): both because they are richer and because they are richer than people around them. Humans use comparative status, not absolute status as their measuring rod, and it's a rush to know you are more powerful than the people around you. However, in a world of nothing but scarcity life is incredibly miserable, lonely and riddled with anxiety.
Could you elaborate on that a bit? I'm having a bit of a problem with it, I think mostly because
"...I make the same carving and get to keep it. This is the beginning of civilization..."
doesn't seem to match what I know of the history of civilization.
Cicero argues that being pro-property (and anti-theft) is simply necessary for people to live together in cities. People can't live together in cities if the means they use to make a living can be taken by their neighbors and they have no recourse. That's a pretty good point, and it means that non-urban societies might have other arrangements but cities require property rights. So no, I don't think it's religious superstition.
Secondly I think that there are several essential commodities. These are land (where to have your office, or for production of food, etc), capital, tools, and labor. The first three we can group together as "means of production."
The fundamental question that has been so much in dispute since the days of Karl Marx is how we want to address means of production. Capitalism has the means of production owned by the wealthy, who then hire labor. Laborers, deprived of their means of production, are dependent on jobs which, if they are lucky, the capitalists will give them, The concentration of the means of production in the hands of the wealthy capitalists disempowers workers.
Communism attempts to solve this problem by taking the means of production from the capitalists and placing them in the hands of the state which, in theory, represents the workers. In practice, however, this creates a more powerful state, and the workers are even more disempowered. In essence you can't solve the problem of big businesses having too much control over the economy by centralizing that control further in the state.
Distributism (think of this in terms of distributed computing) seems instead to distribute access to the means of production to the individual laborers. Worker owned and operated cooperatives, such as Mondragon, are economically distributist systems. Bossless corporations (WL Gore, Valve, GitHub) are distributist workplaces. Open Source is a distributist way of going about developing software. In this model the worker has a chance to own all the means of production needed to start a business sufficient to feed his or her family. If the worker chooses to work for someone else, that a viable choice, but it is more a choice than it is in liberal capitalism.
I mention this because despite the best efforts of lawmakers to regulate businesses into centralized control, I think our nation is moving more towards this latter solution. It may not be exactly what Belloc or Chesterton had in mind but it will be what serves us today.
So from a distributist perspective, social justice is an emergent property of the system in which we live (and to live is to work). We shouldn't need anti-discrimination law, for example, and to the extent we do, it's either to get a fresh start (as regards the problems that existed before the civil rights movement), or as a bandaid to keep a system from looking more broken than it is (regarding gender discrimination).
In the latter case, structural changes to our economy (a shift towards more bossless workplaces, flexible commitments, and ownership by the employees over the workplace) would go a long ways towards rendering these laws unnecessary. Aren't such structural fixes better especially if they add to our freedom rather than detract from it (as regulations do)?
It does, however, seem to actually work, which is far more than we can say for state-socialism.
But I don't think it is the only model and I think that as we get more distributive systems working side-by-side we will see interesting network effects come into play.
For example, Chestertonian distributism places a large emphasis on guilds. But there isn't a reason why for-profit corporations owned in significant part by their employees can't function like guilds. Again, a business like WL Gore strikes me as very distributist in how it works on the ground. For example WL Gore is largely owned these days by the employees and the employees have tremendous freedom to work where they feel they add value. The organization provides mentoring for employees etc.
The end-result of Chestertonian distributism is an economy of tradesmen and small farmers. In other words, it is an economy of the self-employed. The US still has 20% of the work force that is self-employed and only 1/4 of those are doctors, lawyers, and others offering professional services. Anything which enables others to become self-employed moves us in that direction.
Any distributist approach cultivates the possibility and mentality of self-employment. Whatever form that takes is OK with me, even if that is the paradox of self-employment as a member of a larger firm.
The fundamental dichotomy is: Property is by nature excludable, Energy by nature must be applied to something (usually either Property or the Commons) to do any work.
Markets run on excludability. If you can't fence something off and appropriate it as your own, you can't trade it, because someone else can just take it from you.
Here's a theorem: the more excludable something is, the more accurately markets value it. This is why Commons Goods and Public Goods are dramatically undervalued in a market system: they're non-excludable. Anyone can breathe the air or attend public schools, but someone has to keep the air clean and provide public schools.
Beyond this, I recommend reading Henry George's Progress and Poverty, as well as Das Kapital by Karl Marx.
But what it comes to is that in the great struggle between Capital and Labor, or Property and Energy, capital is by nature very excludable, while Labor (lacking organization into a guild or union) is not very excludable (workers cannot stop the capitalist from working for himself, even if only temporarily). Capital will thus be valued more on free markets than Labor, in general.
This actually maps exactly onto left-right politics, outside the United States. In most of the world, the Right represents Property/Capital and the Left represents Labor/Energy, and socioeconomic politics consists of trying to form a workable arrangement between the two.
Excellent point. What I wonder is how excludable Capital truly is, though. Is it inherently excludable? Gold is, and electronic money effective is, but land isn't, and social connections definitely aren't.
This actually maps exactly onto left-right politics, outside the United States. In most of the world, the Right represents Property/Capital and the Left represents Labor/Energy, and socioeconomic politics consists of trying to form a workable arrangement between the two.
Great observation. In the U.S., we effectively have two political parties that represent Property. One is just more of a dick about it, and more willing to use cultural wedge issues to move useful idiots against their own interests, but they're both pretty rotten. I think, for what it's worth, that their uselessness is by design; an ineffectual government enables these parties' rich owners to get away with murder.
It takes energy and talent to maintain connections. Money also helps [1]. With the exception of perhaps some outliers having a connection does little other than give you an audience and the ear of the person who might be able to do something for you. And in order to maintain that connection you have to be in their face and provide some benefit to them that is tangible. In general. [2].
Let's take an example. You did a favor for Paul Graham in college but haven't spoken to him since then. You will probably get his ear, he will listen to you, but how much more is that connection going to do for you without some other compelling value to Paul to help you (vs. what he has to give up to help you if he needs to get a favor off of someone else). "Paul sign my petition" (ok). "Paul get my son into YC" (hmm.)
Connections can also be made with energy. I've done multiple free consulting freebies for various people on the net. Ranging from nobodies to very well respected VC's. The VC's are now connections and in fact have taken the lead (w/o being asked I might mention) in referring paid work to me. I put energy into making that connection [3] and I also have to expend energy to keep in front of these people. If I don't, in 5 years the help I gave them will mean little.
Conclusion: Don't generalize with "connections" the way people do with "got lucky". Luck and connections are important and yes they are essential. But they also take energy to maintain as well. (Once again I'm not talking about connections that you might have because your father is super important or you're a Kennedy but achievable connections that are attainable to anyone with energy and talent.)
[1] (note all the charity events that allow you to mingle with connected people (say the Obama fundraiser recently in NY with Sarah Jessica Parker which was 40k to attend).
[2] (Remembering in college where my father had a connection to someone who had something to do with an Ivy League college. I met with that person who very clearly gave me the idea that my father wasn't important enough to him to do anything to get me into the particular school.)
[3] I contacted the VC's with offers of gratis help which they accepted, thanked me for, and at least one wrote an unsolicited testimonial.
Just as there's money (in the sense of the $1.25 I might spend on a cup of coffee) and then there's generational wealth, the same thing exists for (c|C)onnections.
Having Real Connections doesn't mean that the VC will fund you. That much is true. It does mean that if you get rejected, you get a sit-down explanation of why, and what to do in the future to get funding, and probably an EIR position. If there's another VC who might be interested, you'll get an introduction. That's what having Real Connections buys you. No, you don't get funded if it doesn't make business sense for the firm to fund you, but you get all the assistance (including an EIR gig in which you can learn what is required to be a "real founder") you need toward getting there... and an unending supply of chances.
Without Connections: "We're not interested. Sorry. Our policy is not to discuss our reasons."
With Connections: "We like your proposal, but <A>, <B>, and <C> are our issues with it. We also think you need a couple more years of operational experience. Speaking of which, one of our portfolio companies is looking for a <executive-level role> and would like to have it filled by Friday. Can you interview on Thursday?"
Most people, of course, don't have kind of safety net.
The people in power in society, by and large, don't consider the rest of us to be their social equals. Nobility in the pejorative sense is very much alive in the U.S. If you think otherwise about that set of people, you don't really know them. I do, and they're not nice people and they're not interested in helping out outsiders. They want those doors to stay closed.
I don't disagree with that at all and I've experienced that behavior.
For me personally I'm happy with what I've achieved and how I am mainly responsible for it and that it wasn't handed to me. I did have advantages of course (I didn't grow up in the projects for example and had parents who were middle class) and I don't think I would be happy if I didn't have to work hard for what I have achieved. (No desire to marry rich or anything like that.)
Not saying you are "whining" by saying this but I don't feel there is anything productive about whining about the advantage that others have. It's a given like memory and hard disk space. Just do the best you can to your benefit given the game and any unfairness. After you achieve your goals you can work toward changing society if you want.
Surely the most noble of goals is to change society for the better.
Regarding 'whining' I think it's important to have awareness of the different advantages and disadvantages people can have because government policy is directly influenced by awareness of these type of disadvantages.
* Disability
* Poverty
* Parents
* Surroundings
* Connections
The world is really complex but possibly we are going to be in a situation in the next few decades where society can look at really complicated problems and figure out really complicated solutions.
The US is a post-apocalpytic nation. Literally. The indigenous people and cultures were so badly wiped out by a variety of factors (some with European fault, some without) as to leave a sense of an untamed wilderness (actually, there were probably advanced agrarian societies over every inch of the US at one time) and an abundance of land. I think much of the appeal of zombie/apocalyptic fiction in the US comes from a longing for a future (like our semi-imaginary past) of open land.
When land was (or seemed) effectively free, the "obviously virtuous", positive-sum thing to do was to find unused land and bring it into productivity-- rather than to squabble for allocation of an existing resource as people did in the cities. Hence the association of the rural frontier with positive-sum virtue and urbanity (and Europe, at that time) with zero-sum congestion. So more specifically, it was a rural style of land ownership (in "new" land) that was associated with virtue.
Of course, the frontier closed, and over time we became urban (suburbia is extremely-low-density and often dismal urbanity) like everyone else.
Land doesn't matter as much as it did, except in major cities. A landed gentry has been replaced by an educated (sometimes in name only) and connected one, and urban land is only worth so much on account of the people it is (implicitly through locality) connected to. That's why Manhattan and Silicon Valley real estate are so ungodly expensive: because ambitious, smart people move there, so they're good places to set up a business and tap local talent. We are the reason for the value that justifies the price, and for thanks, we get royally fucked-over by the landlords for it.
I have no issue with small-time landowners and the notion of owning one's own home, and any land reform policy that I'd support would have to have an exemption (around $500,000 seems reasonable) under which it doesn't apply. However, I definitely don't think the association of land ownership with virtuous stewardship applies to large-scale urban housing ownership. It's classic medieval rent-seeking, nothing more.
However I do know that when this question is posed (in various forms), the answers seem to all be rooted in a combination of ideology and differing priorities, some of the arguments are circular, some are based on a set of assumptions, and in various combinations. For a sampling of things i've seen[1]:
* The capital disbursement problem is hard, and that it naturally evolves into this pattern, similar to hubs in a scale-free network. It may look inefficient, but really is the result of maximizing efficiency
* A truly free market would not have this problem, but government regulations create it by favoring some over others.
* Government isn't strict enough, allowing some bad players to accumulate enough money and power to get away with anything and becoming these power nodes.
* Modern economic theory is just not capable of describing reality, because much like early undergrad physics, the theory is simple and nice, but when getting to real issues, actual issues (akin to friction, thermodynamics etc) cause inefficiencies that are hard to fully account for.
* Individual greed and shortsightedness cause people with lots of capital to act in a manner counter to efficient capital investment.
* People with all the capital are morally superior and deserve their position, (various morals at play - from religious to it is earned via hard work)
* It doesn't actually matter, because the high end pulls the bottom up with it, e.g. those pools of capital create jobs directly and indirectly (the latter being such things as creating early demand for products allowing for production to be figured out, eventually lowering price, allowing more production research to lower price more).
I certainly hope people jump in here and expand on all of these, because almost certainly someone here knows more than me about all of them. I think it would be useful for all involved to state their base assumptions, because for some reason, discussions of this topic don't ever seem to examine those, and it would be neat to get to that level once in a while.
[1] Please note, I am not taking a side on any of these, just presenting various arguments as I understand them.
(of course, sometimes annual income is ALSO the result of deferred compensation. Say a doctor spends 8 years making $30k/yr when she could have been making $120k, and then starting in year 9 makes $300k/yr for 8 years, then has children and leaves the workforce for 20 years (fairly common for female doctors in pediatrics, which is why there is an undersupply...). That doctor is paying way more total tax than someone with a more stable income.)
That tends to happen when the central bank dumps false signals (ie, low interest rates) on the market.
However, if they all have lots of profits and all invest looking to make additional profits... you get the problem that more and more money goes chasing the same amount of productive assets/investments. The supply of capital has increased versus demand, which will naturally lower the price of capital (ie: return-on-investment).
The best thing the rich could do for their own rates of return would be to consume or donate large fractions of their wealth, returning wealth into the economy as something other than capital. This would reduce the oversupply of capital and thus increase its price back up to where capital investment becomes worthwhile again.
How does one return capital as something other than capital? And how would that decrease the aggregate supply of capital?
But that's exactly what we do see. Interest rates are absurdly low. Interest rates are the price of capital.
The fact that you can select a sample of outliers who won big on risky investments doesn't change the overall statistical situation. Most capital is still getting low returns.
You: "Interest rates are absurdly low."
Interest rates are low because of government policy.
I think that's inaccurate. The price of the capital is its cost of opportunity. Interest rates are the price of debt.
That's the key part. Looking at only winners doesn't tell you the whole story. It's like looking at lottery winners and saying: "Why are returns from gambling with the lotto so high?"
Yes, that was called the Global Financial Crisis. Then the capital-owners (dare I call them the capitalist class?) bought control over major governments and propped themselves up using public bail-out money, shifting their red ink into the public ledger.
And now we have a "public debt crisis". Who knows where that came from?
Steven Keen has shown that there is no public debt crisis. The real issue is a drop in private debt (the international credit crisis) which means a drop in consumption, which leads to recession, which leads to less lending, which leads to a drop in private debt......
I disagree that the problem is a drop in private credit. The problem is the decoupling of productivity from broadly construed returns (on assets and on labor). The problem is that productivity has become unable to outgrow debt service.
We need private debt reduced as close to zero as possible, and we need to rebalance our economies to once again power themselves off productivity improvements (driving returns on investments, labor wages, and hence both consumption and investment) rather than debt growth (which is like cocaine: a temporary high followed by a major fall).
Basically he picks up on Minsky's idea of credit cycles and uses this to explain both the current economic problems and the Great Depression. He also points out that private debt is much greater than public debt.
I don't know if he sees the reduction in credit as a bad thing or just an inevitable thing.
As he points out, the way banks work is that they lend money, create deposits in the process, and look for reserves later.
As for private debt being reduced to zero, wouldn't that require a drop in housing prices by something like 90% so one could just buy a house without a bank loan?
Which would, in my mind, be a Good Thing. At the very worst, we should be decreasing housing prices down to 2x or 2x annual income, which would put mortgages back in the 5-year or 10-year range rather than 30-year.
A normal family taking out a mortgage to buy a house should be able to look forward to paying off their mortgage.
If he chooses coding his project versus producing bullshit for you, the same kid has to go work at a grocery store or something and do some coding in his spare time. If he were serious about raising money, on the other hand, he basically couldn't work on his project at all while he does. Which is the same as raising money with no idea.
It's awash with money, but not to the people who have any immediate use for it to generate return. You will invest in a kid's powerpoint, his "team", his business "plan", no code, no project, but you wouldn't invest in a project, no powerpoint.
So "our society is awash with capital" to whoever learns to say the right things to get it - which is pretty much the opposite skill of doing something that actually requires any.
Hence the importance of "super-angels", who go against this grain, who will invest in and mentor the kid while letting him actually code instead of making him refine bullshit instead!
Every day we hear of teams who have raised $50-$200k, where neither of the cofounders is capable of producing anything but bullshit. They literally can't make anything. When was the last time you heard of a kid who made a project and scaled it by continuing to work on it instead of learning to spew bullshit?
Honestly, there is almost no money for anyone who is working on something, unless they quadruple their investment of time and personal risk to bring the project failure rate up to 95% as they jeapordize working on it it in order to 'raise money' instead. Our society - and, specifically - you, reward people who say what you want to hear to get money, and finding out what you want to hear takes a lot of time and has nothing to do with working on anything else.
For the greater public, the question of "how the rich people went from 0 to $1B" might more interesting than "how the rich people maintain their $1B+". Definitely I find the latter more interesting than the former (probably because I don't have $1B+)
That means these are not people who are necessarily rich and are raking in the money. These are most likely people who have a company, have stock options, and are cashing out. Most of them never come back to the list. The point here is that grabbing on to a company could be like catching a rocket -- your ticket to the stars. Whereas working an hourly wage is likely never going to do much more than make you upper-middle-class.
I realize you could interpret these numbers differently, but that's what it looked like to me. You can't have big capital gains income without some kind of underlying company that's doing tremendously well.
Combined with the fact that only 27% appear more than once in the IRS's list, and the fact that people tend to stay billionaires for a long time, this suggests that once people get to this level of wealth they turn down the aggressiveness of their investing and become risk averse.
For if every billionaire earned a healthy return on their capital, the top 400 earners would stay roughly the same from year to year, and correspond closely to America's top wealthiest.
Furthermore, America would be generating a lot more wealth than it currently does.
Please, when you read an article discussing AGI, keep in mind that it is a semi-random number. Unfortunately since it's the number available, it's what gets used.
This also serves to demonstrate the artificiality and awkwardness of taxing capital gains v.s. simply taxing wealth directly.
The title to the article is "How the Rich got Rich". But "the list" doesn't deal with "the rich". It deals with "400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes".
It is entirely possible for someone to own an asset (which they could, for example, borrow against) that was passed down to them (or that they themselves bought in 1992) that makes them "rich" by generally accepted "de facto" standards of our society.
The Forbes list tries to come across as a list of the richest americans but it is obvious that there are quite a few people with considerable wealth who for one reason or another don't make that list until they have some kind of liquidity event. (Added: As you mentioned).
"Whereas working an hourly wage is likely never going to do much more than make you upper-middle-class."
While that would seem to be true I don't think it is to the degree you are implying in your statement. (By "hourly wage" I'm assuming you don't mean "hourly wage" you are including "salary" workers as well.) Someone in a nice corporate job making a stable salary that invests in the right assets at the right time can become wealthy. (An example might be a physician making $250,000 per year or an attorney, both in a stable situation (no fear of loss of job) that decides to invest in real estate or be a partner with someone else who manages a project. Or decides to be an angel investor (as if, ok..). The key here is that they make a stable income from a job and that they dedicate a portion of their income to investments. (I've personally seen this happen several times with attorneys and real estate they become the partner with the real estate person providing the legal work needed for projects as well as physicians who do a similar thing).
Here's the key though: stable job. My wife has a very stable job with a predictable income that will rise every year (healthcare). So she can afford to take a portion of her income that exceeds what she needs and invest it in something that could make her rich. Will she make "the list". No she won't. But she could become "rich" by the standards that most people care about.
"If your only goal is to become rich, you'll never achieve it."
"It's easy to make a lot of money, if that's all you want to do
is make a lot of money."Also, Rockefeller's quote applies in the sense that, once you make a lot of money, your definition of what "a lot of money" is changes.
A lot of money can be $1 million in a lot of countries, $10 million in most countries, $100 million in all countries, $1 billion in silicon valley.
Your first million is the hardest they sometimes say but if you have that, you SHOULD not ever have to work ever again if you are smart. That smart part messes most of those cases up.
If you have $10 million you are done unless you are a complete idiot. Again, this idiot part messes most of those cases up.
So currently most blahblah about getting rich is focused on $100 million or above. I read with much amusement how people in Monaco who have 'only $10 million' feel poor and unhappy. What a sad moron you are. Even in Monaco you can easily live a super nice life, the rest of your life, with $10 million, but apparently people IN Monaco are so insane they consider this poor.
Anyway; I believe Citizen Kane was right if he means 'a lot of money' in the sense of being rich/never having to work again in your life. If he means $100 million or over, he is wrong IMHO. Nor did I ever met anyone who had as only goal to make money while I know a lot of rich people (who are rich in the sense they never have to work); even 2 with the magical 'over $100 million and they didn't even ever think about money much, they did what they did best and it shot to the top. That's the best way IMHO, but then again, I don't live in SV.
So, again (and this is the reason why most people are not automatic millionaires after a certain age) IF getting a lot of money is ALL you want to do, you will sacrifice things; you will move to a cheap place, you will eat and live cheap. So yes, it's easy, but maybe not what you wanted to hear.
I don't want to wait that long so I have the next easiest thing; software services. Works great, no competition. It's much harder than the above, but it's also much quicker.
The Tax Foundations take (http://taxfoundation.org/article/fortunate-400) is a little different. Interesting that in the 18 years that the report covers none of the taxpayers were on the top 400 list for all years. & only 4 (1%) were on the list for 17 years. 73% were on the list for just 1 year.... Their take was that most folks were on the list due to one time event...sale of assets, etc
Also wages were flat for all 17 years (as a % of total income). Partnership & S Corp income was up ~400%, which could be because of the growth in publicly traded partnerships.
There is a similar report by Harrison Group which surveyed 3,000 pentamillionaires ($5 million net worth) and found that almost all pentamillionaires made their fortunes in a big lump sum after a period of years.
Any pointers folks?
The Millionaire Next Door claims that 80% of millionaires in the USA are the first generation in their family to be rich.[2]
I also did my own research looking at (non-Forbes) biographies of the top 10 richest people in the world according to Forbes in 2009. 3 out of 10 came from millionaire or richer families (Eike Batista, Bernard Arnault, Stefan Persson).
If you trust Forbes, you can simply go through their website[3], it classifies each billionaire's wealth as self-made, inherited, or inherited + grown.
[1]: http://www.economist.com/node/17929057
[2]: http://www.investopedia.com/financial-edge/0810/7-Millionair...
[3]: http://www.forbes.com/lists/2010/10/billionaires-2010_Carlos...
For the rest, it depends on where you want to draw the line for "modest backgrounds". For example, which side does Bill Gates fall on? He's certainly more self-made than Christy Walton, in that he inherited only millions, not billions. But having a multi-million trust fund from your bank-founding grandfather, and a mother who's on several boards of directors, is still considerably above the median in terms of winning the birth lottery (http://philip.greenspun.com/bg/).