According to Thomas Piketty, the rich get richer across generations. That increases inequality of wealth, and wealth inequality is a major social problem. He advocates a worldwide wealth tax to reduce it.
The widespread interest in Piketty’s argument has led me to puzzle about the source of the incomes of the rentiers—the idle rich—and the economic relationship between them and the rest of the population.
As I understand it—and I admit I have read only reviews—Piketty is not much concerned about first-generation creation of wealth. He recognizes that outstanding performers, athletes, and entrepreneurs such as Oprah Winfrey, LeBron James, Bill Gates, and Steve Jobs earn their wealth by providing the rest of us valuable entertainment, tools, and products that make us better off. Rather, he focuses on the inheritors of wealth who create and produce no goods or services, but merely live off the income their inherited wealth generates for them. He seems particularly concerned that wealth can grow over time in the possession of heirs who do nothing to earn or deserve it.
Set aside the matter of wealth inequality. I want to examine how—by what actions or inactions—the rich pass increased wealth to their heirs, and what that process means for the non-rich. Is it bad for the rest of the population for the idle rich to grow increasingly wealthy?
Let’s begin with the source of the income of the idle rich in a free economy. We need this proviso, “in a free economy,” because in an unfree, crony capitalist economy, the idle rich can receive income taken from others through the political process. We’re not talking about crony capitalism, but rather only wealth derived from existing wealth.
Whence come the “rents” these rentiers collect? Of what do they consist?
Well, they consist of interest on the rentier’s bank deposits and bonds (let us think here of corporate bonds only, because government bonds must be paid off with taxes taken from the general population), dividends on the rentier’s stocks, rental payments on the rentier’s land and buildings, and capital gains on any bonds or stocks or land he sells which are now more valuable than when he bought them.
How are these companies able to pay interest, dividends, or rental payments? If they are able, they will make the payments because they have used the rentier’s wealth productively. Perhaps they have built facilities with it, leased equipment with it, done research with it, or hire employees with it. When and if all these together produce new value for the companies’ customers in excess of the amount the rentier has invested with them, their capital value increases.
But think about what that all means: Who has the rentier’s wealth in this process? In the legal sense, the rentier has it: he has legal title to it. But in the practical sense, the employees of the different businesses have the rentier’s capital wealth: They work in the buildings, operate the equipment, use the research facilities. They use the rentier’s capital to earn their own incomes, and the better the capital equipment, the higher their productivity and hence the higher their incomes.
Another group that benefits from productive use of the idle rich’s wealth is the customers of the businesses in which that wealth is tied up. They get better products at lower prices.
By contrast, consider what happens if the rentier uses his wealth by himself, for himself, so that he has his wealth in both the legal and the practical sense. Suppose he spends his income—or even cashes in some stocks, bonds, and real estate—for goods that he personally can use and enjoy. Suppose he indulges himself, buying extra houses (or mansions) in scenic places, jetting around the world, driving hot cars, taking exciting trips, dining at expensive restaurants, watching professional sports from box seats to which he has season tickets, and so on. What happens to such a rentier’s income? And will this affect his net worth? Consumption spending is not the way to increase family wealth for the next generation.
In short, to earn income from their wealth, the idle rich must let other people use it.
In a free economy, the wealthy can stay wealthy only by putting the great bulk of their wealth into the hands of businesspeople who use it to put buildings and equipment and employees to work creating goods and services for the rest of us. The great bulk of rentiers’ wealth, in a free market, is at the disposal of and in service to other people. The rentier who gets continually wealthier merely has legal title to “his” capital. Others have the use and enjoyment of it.
Is acquisitive investing damaging to society? Does it harm those with less wealth? On the contrary, it raises the living standards of others. Indeed, there is probably nothing better the rich can do for their fellows than live simply, leave their capital invested, and watch it grow.