How the Rich Got Rich • Hacker News Board

Re: How the Rich Got Rich

#51

Post by roguecoder » Sat, Jul 07, 2012, 4:05 PM UTC

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…

Returns aren't that different: statistically speaking the rate of return off an average college degree is significantly better than the return on capital. However, capital scales without limit, whereas you only have one lifetime of labor to sell to the highest bidder.

Re: How the Rich Got Rich

#52

Post by ccarpenterg » Sat, Jul 07, 2012, 4:05 PM UTC

ef4 wrote: post #39

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…

"to drive down the price 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.

Interest rates are the price of capital

I think that's inaccurate. The price of the capital is its cost of opportunity. Interest rates are the price of debt.

Re: How the Rich Got Rich

#53

Post by kd5bjo » Sat, Jul 07, 2012, 4:05 PM UTC

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…

Employees never have 2000 hours worth of labor at risk; they (usually) get paid twice a month, so they only ever have about 80-100 hours worth of wages at risk at any given moment.

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.

Re: How the Rich Got Rich

#54

Post by eli_gottlieb » Sat, Jul 07, 2012, 4:07 PM UTC

einhverfr wrote: post #45

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…

Way back in the day, Cicero wrote Des Republica, which is really belongs with Aristotle's Politics on the bookshelf. 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-urba…

Structural fixes are indeed better, but Chestertonian distributism has a slight difference from what you've been talking about: it prefers to actually minimize the size of enterprises and assign ownership to families. It's very British, in that way.

It does, however, seem to actually work, which is far more than we can say for state-socialism.

Re: How the Rich Got Rich

#55

Post by einhverfr » Sat, Jul 07, 2012, 4:07 PM UTC

eli_gottlieb wrote: post #43

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…

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......

Re: How the Rich Got Rich

#56

Post by einhverfr » Sat, Jul 07, 2012, 4:09 PM UTC

eli_gottlieb wrote: post #54

einhverfr wrote: post #45

Earlier quoted context omitted.

Way back in the day, Cicero wrote Des Republica, which is really belongs with Aristotle's Politics on the bookshelf. 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-urba…

Structural fixes are indeed better, but Chestertonian distributism has a slight difference from what you've been talking about: it prefers to actually minimize the size of enterprises and assign ownership to families. It's very British, in that way. It does, however, seem to actually work, which is far more than we can say for state-socialism.

Chestertonian distributism is something I like to push too.

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.

Re: How the Rich Got Rich

#57

Post by webwright » Sat, Jul 07, 2012, 4:10 PM UTC

KevinEldon wrote: post #21

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…

All the capital gains statistic tells us is that of the top 400 tax payers in 2009 capital gains represented 45.8% of their earnings. These 400 are the winners in the capital market. They're earnings aren't likely to reflect the risk associated with all capital investments. The overall markets shows us that there are a lot of losers and capital losses are common.

Yep- one interesting tidbit in the article is that, of the 3800 folks who hit the list since '92, only 27% showed up more than once. This seems to indicate than many of them won on one big bet... Quite possible not a capital bet either.

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.

Re: How the Rich Got Rich

#58

Post by SatvikBeri » Sat, Jul 07, 2012, 4:12 PM UTC

_delirium wrote: post #26

SatvikBeri wrote: post #18

Earlier quoted context omitted.

For millionaires (defined as people with >$1MM of capital goods that can be easily reinvested), Capgemini claims that "only 16% of high net-worth individuals inherited their stash"[1]. I'm not sure what the precise definitions are since it's not defined in the article. 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 researc…

Bill Gates also came from a millionaire-or-richer family, so that'd make 4, if that's the cutoff you're using. (He inherited several million from his grandfather, in a generation-skipping trust fund, although I don't believe he yet had access to that money at the time of founding Microsoft.)

Yeah, my logic was that he didn't have/use those resources while building Microsoft. I was trying to divide billionaires into those who built up their wealth without relying much on other resources, vs. those who took existing wealth and grew it.

Re: How the Rich Got Rich

#59

Post by larrys » Sat, Jul 07, 2012, 4:12 PM UTC

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…

"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 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.

Re: How the Rich Got Rich

#60

Post by roguecoder » Sat, Jul 07, 2012, 4:16 PM UTC

rdl wrote: post #33

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…

I'd even be fine with a flat consumption tax, with a personal exemption of $50k or so. Generally the investments made by the rich have more social benefit than their consumption, so it's ok that a billionaire only spends 30% of his annual income, while a well-paid engineer might spend 80%. Maybe combine it with a wealth tax, particularly on non-productive assets. Raising the cost of certain kinds of goods should actu…

Investments made by the rich have less social benefit than consumption. Consumption is, after all, the point of it all. Taxing utility and not non-utility is a great way to have a society where assets are employed in the least useful way possible.

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.)