Why Inequality Matters

One of the problems is that people get different r's. Just look at VC firms. A pension fund that invests in venture capital funds gets mediocre returns: nothing much better than they'd get from an index fund, and often less. VC partners collect 2-and-20 and get to allocate favors (because it can benefit their careers to make decisions that are suboptimal for the portfolio, and they often do). The "real r" in that engine might be higher (if VCs focused on technical excellence rather than their own careers, I think we'd see quite a respectable r) but the delivered r is mediocre. That's just one example.

To go further, and I don't know how to solve this: if you have good relationships with various counterparties (especially, banks) you can get a low-risk r > 15% in arbitrage. Contrary to stereotype, arbitrage is neither risky (it's low in risk, and most arbitrage blow-ups occur because some hotshot trader got bored and started taking unauthorized positions) nor is it socially harmful (it provides liquidity to markets, which is a good thing). It is, however, not open to most people.

There are many things that cause "wealth decay" or normalization. I'll name four. Hyperinflation and violent revolution are the most disruptive (sorry San Francisco, but disruption is a bad thing). Taxation is the smoothest but can be ineffective (loopholes). Wealth management is yet a fourth: at some point, a large fortune has management overhead and, as its owners become less interested in day-to-day running of the money, much of that excess "r" goes to the agents than to them.

As for "r >? g", I'd prefer two things. First: I'd like that everyone have access to the same r, but I don't know how to achieve that. Second, g isn't constant. World economic growth is 4.5% per year. I believe that it could be 8% or 10% with some heavy R&D investment, and with better (and, quite frankly, smarter) people running the world. The all-time record high for world GDP growth is 5.7% in the 1960s, but we have so much more technology, and the shape of economic growth is (while I don't believe in a "singularity" of the theatrical sense) faster-than-exponential.

Even now, we have a world in which programmers (not 10x or 2.0+ engineers, but just regular programmers) become 10-12% more productive each year due to tool improvements. Motivated, ambitious programmers can do 30% per year. The bad news is that it's almost impossible for a programmer to grow her income at any rate near that. In fact, as she becomes more experienced, she's also more specialized and dependent on her employers (or clients) for great projects. They'll pay her pennies on the dollar relative to what she's worth, that charge being for the "favor" of allocating the good work. The reason why 10x engineers only make 1.3-1.5x salaries (until they become consultants, at which point it's more like 2-3x) is that their employers are very good at playing the "we can give you a raise, or we can give you career-positive work" game.

The software economy is at the fore of what's happening to other industries, but people in most sectors are a good deal poorer. We're comfortable upper-working class people complaining about our slide into the upper-middle-working class, but people outside of tech don't have anything to lose.

What we actually need to focus on is g, and r_labor. We want a high r_capital and an even higher r_labor. Sadly, badly managed economic growth tends to make r_labor negative. That happened in the American 1920s with agricultural commodities (contributing to spiral rural poverty, which led to the Great Depression) and it's happening to all human labor in the 2010s.

Also, using 1910-1940 period as an example to show that Piketty is wrong doesn't make much sense given that Piketty's data show that inequality have actually lowered in that particular period.

Oh, please. The poor don't benefit from philanthropy. The poor benefit from a more balanced system. This reeks of justification.

Also, you could compare philanthropy with the "foreign aid" that western countries give to poorer ones for decades now. Did it help? In many cases, it made things worse, because the money did not help the people to help themselves, but made them addicted to the aid.

The point is also that philanthropy -- as it might silence the own conscience -- is often the overflow of the overflow. We give, because we have more than we need and than we give what we need least. But what people really need, is not somebody that throws pennies in your hat, so you can buy some old bread -- but what they really need, are equal chances -- to be able to visit the same universities, to have the same jobs and to earn the same money as other people with the same talents.

You might argue: But Bill also fought his way from "rags to riches" -- no, that is not right. Bill already was born in a well being family and visiting visited Harvard College. With such a background, it is much easier to come from rich to riches, as if you come from Uganda slums (or even Harlem).

It is true that philanthropic organizations can focus on areas neglected by government (society). This is a good thing. However, relying on the good will of others to do this voluntarily does not make for good public policy. I know you weren't advocating that a society use only charitable giving to provide for the needs of the poor. I suppose it is the case that I believe that government is more efficient than charities in terms of scale and sustainability. Hence my desire to rely more on government and taxation. I don't advocate relying solely on this mechanism and I'm not opposed to someone being very wealthy per se. A balance is needed and I don't know where the sweet spot is for the optimal solution.

The free rider problem in question was the issue of some very wealthy people deciding not to give anything to charity to help others. To avoid this particular free rider problem taxation can be used. This forces participation so to speak.