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How the Rich Got Rich

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Re: How the Rich Got Rich

#61

Post by michaelochurch »

eli_gottlieb wrote: post #47
michaelochurch wrote: post #25

Earlier quoted context omitted.

I've come to the conclusion that there are two essential commodities in any society. One is Property-- land, financial capital, social connections, reputation. The other is Energy-- talent, ambition, willingness to work hard, vision. Most social and class tensions are centered on the exchange rate between these two, which has historically favored Property except in times of crisis. The reason societies have typically…

There's a lot that's correct about what you wrote, but a lot that isn't. 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:…

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.

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.

Re: How the Rich Got Rich

#62

Post by eli_gottlieb »

michaelochurch wrote: post #46
DanielBMarkham wrote: post #38

Earlier quoted context omitted.

Your analysis prompts a bunch of knee-jerk reactions from me which I'm going to attempt to squelch. :) 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…

"Property" is quirky word, and I now wish I could think of a better word to represent what I'm talking about, because the points you've raised are valid. Property rights are a great thing in moderation. There's a social need for people to have the right to own the products of their own labor. Where property becomes a systemic disease when property relations persist for longer (and allowing larger concentrations than…

You seem to be getting at the distinction between possessions and property. Proudhon would be proud.

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.

Re: How the Rich Got Rich

#63

Post by roguecoder »

DanielBMarkham wrote: post #38
michaelochurch wrote: post #25

Earlier quoted context omitted.

I've come to the conclusion that there are two essential commodities in any society. One is Property-- land, financial capital, social connections, reputation. The other is Energy-- talent, ambition, willingness to work hard, vision. Most social and class tensions are centered on the exchange rate between these two, which has historically favored Property except in times of crisis. The reason societies have typically…

Your analysis prompts a bunch of knee-jerk reactions from me which I'm going to attempt to squelch. :) 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…

I don't think "creator" goes with "trader". Every creator I know enjoys having people enjoy their work, but would also like to eat. However, as soon as their basic needs are covered many prefer to give their work away because it isn't being created to make them rich, it is being created to be useful to people.

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.

Re: How the Rich Got Rich

#64

Post by mcguire »

DanielBMarkham wrote: post #38
michaelochurch wrote: post #25

Earlier quoted context omitted.

I've come to the conclusion that there are two essential commodities in any society. One is Property-- land, financial capital, social connections, reputation. The other is Energy-- talent, ambition, willingness to work hard, vision. Most social and class tensions are centered on the exchange rate between these two, which has historically favored Property except in times of crisis. The reason societies have typically…

Your analysis prompts a bunch of knee-jerk reactions from me which I'm going to attempt to squelch. :) 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…

"...most primitive societies have no concept of property -- this is why they are primitive."

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.

Re: How the Rich Got Rich

#65

Post by eli_gottlieb »

einhverfr wrote: post #55
eli_gottlieb wrote: post #43

Earlier quoted context omitted.

If the capital markets were efficient, shouldn't supply and demand equilibrate things to drive down the price of capital? 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…

It comes from the same people trying to distract us. 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 agree that the real problem is the recession of the nonfinancial economy based on consumption and production.

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).

Re: How the Rich Got Rich

#66

Post by michaelochurch »

larrys wrote: post #59
michaelochurch wrote: post #25

Earlier quoted context omitted.

I've come to the conclusion that there are two essential commodities in any society. One is Property-- land, financial capital, social connections, reputation. The other is Energy-- talent, ambition, willingness to work hard, vision. Most social and class tensions are centered on the exchange rate between these two, which has historically favored Property except in times of crisis. The reason societies have typically…

"extremely connected people who have lots of Proprety (sic) and little Energy/talent." 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…

Most people have a number of small-c connections of varying strength. That's not what I'm talking about. On the other end, there's Connections, which most people don't have. Small-c connections require energy to maintain. They can dry up. Big-C Connections don't, unless you fall into disgrace to a degree that very few powerful people ever will. Big-C Connections mean that people will go out of their way to help you out, in the hope that you'll one day return the favor.

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 , , and 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 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.

Re: How the Rich Got Rich

#67

Post by toddh »

michaelochurch wrote: post #25
rayiner wrote: post #11

The huge amount that comes from capital gains got me thinking... why is the return on capital, versus say the return on labor, so high? Our society is awash with capital. We apparently have more of it than we know what to do with (see, e.g., the real estate bubble, the tech bubble). If the capital markets were efficient, shouldn't supply and demand equilibrate things to drive down the price of capital? I think the st…

I've come to the conclusion that there are two essential commodities in any society. One is Property-- land, financial capital, social connections, reputation. The other is Energy-- talent, ambition, willingness to work hard, vision. Most social and class tensions are centered on the exchange rate between these two, which has historically favored Property except in times of crisis. The reason societies have typically…

Being pro property, primarily in the form of land, in the US is linked to virtue. A republic eventually is founded on the virtue of its citizens, not laws or paper. So property owners, as steak holders in society, are thought to be better behaved. Yeoman farmers are independent and self sufficient which makes them less likely to be manipulated into abusing power. Moving towards a manufacturing/finance society changed that equation dramatically and now all the incentives are towards self-interested manipulation. Virtue has become a public facade, not a private goal.

Re: How the Rich Got Rich

#68

Post by cynicalkane »

michaelochurch wrote: post #29
cynicalkane wrote: post #17

Earlier quoted context omitted.

Two things: 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…

1) Buying capital is much, much riskier than earning wages. 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…

What? It's a fact that capital is riskier than earning wages. If you can earn $X working, and have a neutral choice between the two, you will want an expected value of >>$X to be a capitalist. Economists have found this holds across income strata. Don't compare capitalist millionaires to your average laborer; that doesn't tell you anything about the risk-return of capital ceteris paribus.

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.

Re: How the Rich Got Rich

#69

Post by nonce42 »

leot wrote: post #12
DanielBMarkham wrote: post #4

Earlier quoted context omitted.

I had the same exact reaction, but looking at the article again, it clearly says A total of over 3,800 taxpayers have made the top 400 since 1992, but only 27% appear more than once, and only 2% appear 10 or more times. 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…

There are ~400 Americans with > $1 billion in wealth, and 200 with >$2 billion. $77 million in return on $1 billion is 7.7%. On $2 billion it's a mere 3.85%. 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…

The important thing to remember is that AGI (which the article discusses) and how much money you "make" are not very correlated once you make above, say, 200K a year. A key reason is unrealized capital gains - I guarantee you that if a billionaire makes $77 million, most of that isn't going to appear as AGI. In a sense, realizing capital gains means something went wrong, not to mention income which is very wrong. Other factors that keep money out of AGI include tax-exempt bonds, business expenses, and capital loss harvesting. (And these are just some of the legal ways.)

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.

Re: How the Rich Got Rich

#70

Post by laaph »

michaelochurch wrote: post #29
cynicalkane wrote: post #17

Earlier quoted context omitted.

Two things: 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…

1) Buying capital is much, much riskier than earning wages. 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…

You are having two different people evaluating different situations. Having the same person evaluate the situations would make for a different picture.

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.

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