Capital in the 21st century

Thomas Piketty’s blockbuster bestselling economics 816-page brick is about capital which he defines broadly as all sorts of wealth. Wealth is anything that earns money for its owner and it is extremely unequally distributed. The richest 1% own almost half of the total world’s wealth. Piketty’s book is often summed up in three characters:

r>g

This is the idea that the growth of wealth (r) is bigger than the total growth of the economy (g). A much simpler way of explaining this is the income of wealthy people grows faster than the income of workers because if you don’t get money from living off of the earnings of your wealth, the only other option is to work.

So a simpler equation for explaining Piketty’s main thesis would be

r>(wage growth)

There are a few times in history when Piketty’s simple equation was reversed and the incomes of people who work for a living grew faster than the income of the leisure class, but they aren’t particularly pleasant. The first well-documented event was the black plague when wages rose about 50% and rents (r) fell in Europe leading to a dramatic shift in political power away from the landed aristocracy to the laborers of Western Europe (although there is an alternative story about how the wage-rent ratio influenced political power).

In any case, Kelsey Piper gives some anecdotal evidence that reinforces Piketty’s broader statistics.

Last week, a bump in Microsoft’s stock prices pushed Bill Gates’s net worth above $100 billion… It’s a mind-boggling amount of money. What makes it more mind-boggling is that Gates says he’s working to give away nearly all of it.

Bill and Melinda Gates have given away more than $45 billion through the Bill and Melinda Gates Foundation, which primarily works to combat global poverty. Their work has saved millions of lives. At the same time, the Gateses themselves have just kept getting wealthier.

… In December, writing for Inside Philanthropy, David Callahan looked at the numbers and pointed out that across the board, the wealthiest people in the world are sitting on $4 trillion, and accumulating money much faster than they give it away.

“[Bill] Gates was worth $54 billion in 2010, the year the Giving Pledge debuted; he’s worth $97 billion today. [Warren] Buffett’s wealth has also nearly doubled, to $90 billion, despite annual transfers of Berkshire Hathaway stock to the Gates Foundation and the four foundations controlled by his three children,” Callahan wrote.

Most of the wealthiest people in the world are accumulating money much faster than they give it away because they don’t give away much money, so it is easy to accumulate more and more wealth given the low-low taxes on capital income and numerous tricks to hide it from even those low tax rates in tax havens abroad. The top tax rate on income from owning capital (rent, interest, dividends, etc.) is taxed at a top rate that is about half the top rate we tax income from working.

The data makes it look like the super-rich donate a lot of their money to philanthropy, but that is an average which is heavily skewed by super-donors like the Gateses and Warren Buffet who have given away many billions. To balance them out, there are a lot of super-rich who give away next to nothing.

And unlike the Gateses who really do try to make the world a better place for the non-rich, a lot of what the world’s wealthiest people focus their philanthropy on are their own hobbies like art, opera, museums, and their elite alma maters. A lot of the super rich give most of their money to politicians who will help make the super rich even richer. So a lot of what the rich consider “philanthropy” isn’t really very philanthropic at all.