Page 30 - DIY Magazine June 2018

THE RICH LIST IS EVIDENCE THAT CAPITALISM ISN’T BROKEN
Interesting proof that French economist Thomas Piketty got it wrong comes from The Sunday Times’s annual rich list where some 94% of the 1,000 people made the cut not by getting rich the old fashioned way — by marrying or inheriting — but instead by making it.
The findings match those from other sources such as Bloomberg and Forbes, with far fewer of those listed being from the lucky sperm club and many more there because of their own hard work.
This refutes Piketty’s beliefs who in ‘Capital in the Twenty-first Century’, a seminal look at global inequality, used his argument as a basis for his major policy demand: that the rich should be taxed more.
Piketty insists that r > g, that the return to capital exceeds economic growth; thus, the rich will just
carry on getting richer, leaving an economy in which plutocrats are surrounded by us homeless and starving waifs. He goes on to say that the rich who inherit have access to much greater returns than the rest of us, making it a self-supporting spiral of economic misery; a fine hypothesis disproven by those pesky facts – so why does Piketty’s theory fail?
A key start point for Piketty was that capital as a multiple of GDP is increasing; however it could be that baby boomers are, at present, at the point of peak savings. Lots of capital has been saved and it’s about to get spent too, and pensions savings are a major portion of household wealth.
For the sake of argument, we could even go on and agree that r > g.
Piketty complains that the r of inherited money is greater than growth, meaning we’ll end up with more rentiers (OED –‘a person living on income from property or investments’) ; he agrees that there’s also self-made money and that any society that has any growth is going to allow that to happen too. There are libraries full of examinations of how incentives –the ability to get rich — drive technological progress and productivity, the very things which make us richer over time.
LOTS OF CAPITAL HAS BEEN SAVED AND IT’S ABOUT TO GET SPENT TOO
If we say that we want entrepreneurial growth in wealth but not that of the rentiers, an alternative theory suggests itself.
If ‘re’ is the growth in wealth of entrepreneurs, ‘rr’ is that for the rentiers; Piketty didn’t break the two out, insisting that we’ll have that plutocratic rentier society.
But the rich lists evidence that re is substantially
greater than rr –‘re > rr’, which is why who the rich are has changed in recent decades; thankfully the polar opposite to Piketty’s theory.
There is also no evidence that rr is higher than g; given the manner in which inheritances are split among families, it may be rather lower.
The conclusion is that it is only ‘good’ wealth, being made anew in each generation, which reduces Piketty’s work to ‘interesting theory unsupported in the real world’ status as this newly proven decline in the importance of inherited wealth rather suggests the opposite.
Article originally published by CapX.
DIY Investor Magazine | Jun 2018 30