The scenario you led with was clearly designed to be invidious ("rich guy with $100K lying around to spend on a Lamborghini or invest") but a lot of investors are ordinary people putting away money for retirement or contingencies. At least to me it is entirely "fair" that such investors have an upside for deferring consumptions for years or decades.
Also, as to the free 1% from "risk free" t-bills: you left out taxes. After tax, any high-income investor is lucky to not lose purchasing power if they only invest in t-bills or munis. And that's before assuming the risk of a rapid devaluation.
It always makes me queasy when people talk about "fair" because the term is so subjective. I'm glad you mostly focus on the policy question of how investment affects the economy and society.
Might be worth noting that when I buy a share of stock my money doesn’t go to the company, unless I’m buying from the company in an IPO or subsequent offering. Usually my money goes to someone who owns a share and wants to sell. So I’m usually not investing in the company. The existence of a trading market in company shares does assist the company in raising capital by setting a market price.
I had the same thought about IPOs, but I think from Noah's perspective it makes the narrative more confusing. I probably would have just put this point in a footnote.
After all, when you buy stock, you could conceptually trace it back to the person who bought it in the IPO. The person buying it today in the secondary market is giving the original IPO purchaser a way to lock in their gains (or losses). If you couldn't ever sell stock, then that's additional risk the IPO purchaser would have to bear.
Also, firms are constantly buying back stock (to a lesser extent selling additional new stock) and issuing dividends. Which complicates the discussion further.
Company always has the potential to issue new shares. A $100B company can do a lot more than a $100M company by issuing a secondary offering or issuing stock based compensation or using its own stock as collateral.
This is the story I've always been told. Investing is the decision to forego consumption to build capital with the expectation that it will increase productivity. I can do it by myself: I will work more, and rest less, so I can build a tool that makes my normal work easier and faster. I can work more so I can pay someone to build the tool for me. I can work more so I can buy the tool and give it to someone who does not have it, so his work becomes more productive. I can give some money to someone who knows which tools are useful, so they can buy them and give them to other people. And so on, with increasing intermediation, until we have the modern system in which causation is near-impossible to understand.
And yet…the last time you went on a vacation the airplane flew, someone built it, someone piloted it, someone fueled it, someone printed those little tags for your luggage…they got paid and you enjoyed your vacation. That mind boggling chain of intermediated investments in tools and labor somehow produced exactly what you wanted.
MMMM- well as a starting point the discussion collapses "investing" into what is more or less "retail investing in the stock market into publicly listed equities"
And that's quite distortive as it overfocuses on a specific sub-set of investment.*
Also somewhat uniquely American given financing and investment outside of US for productive investment into the private sector is much much less publicly listed company driven (versus Bank financing and similar vehicles that are transforming savings into investment differently). Bank financing and near-bank finaning is really dominant for Europe.
(the Blind Trust tweet is just... well.... dumb. I don't even have words for his 'conclusion.' Its about as logically coherent as his 2014 risk comment... [one could see Blind Trusts as an interesting exploration of Agency Problem though]).
Overall this rather reminds me of the Lefty Left tendency to collapse all business policy and thinking into "big companies" via a lens as if everything is Google or Microsoft of Exxon, ignoring small-and-medium sized operators, non-listed mid-Caps etc.
But to the question:
"Which brings us to the question of whether buying an S&P 500 index fund is actually productive.
The answer to this one, unfortunately, is “We don’t really know.” The reason is that we don’t know exactly how the economy works. "
I think if one takes the direct action of buying into a listed Index fund, is it productive, possibly not directly.
However if one looks at a more structural view and on investment into growth, the existence of a dynamic publicly traded capital markets is a quite necessary factor for having high-risk taking private capital - classic VC, midCap/Growth oriented Private Equity (versus the megacap buyout PE). Recently Matt Yglesias highlighted (https://www.slowboring.com/p/the-biden-reckoning-democrats-need) although rather buried flagged literature on the former (while showing the buyout KKR ... well not so great).
Without a full cycle to Exit (onto stock market) the risk capital availability is much more constrainted (see Continental Europe).
Most firms of course are not listed on any publicly traded exchange, but having a real component of investment market that is able to go to publicly traded markets opens up more risk investment potential. Post listing it is a lot muddier, and probably most so in America as I think one has to question the direction of US markets policy and if it's not very heavily over-incentivized short-termism (not to assert though it definately has but one has to be open to the suggestion it has, to try to examine empirically)
I love that you’re diving into this topic. From an ethical/social perspective, what has always struck me as unfair is the “feedback” nature of interest: Debt is harder and harder to dig out of, and wealth is easier and easier to compound.
Even though I do think it’s fine to earn on savings on principal in principle, there seems to be something extremely not-progressive going on, in a way that progressive income taxes address in the “wages” realm.
Said another way: not many people would object to someone saving $1000 and investing it in their hardware store down the street and earning back $100. Or even buying $1k of S&P and earning back $100. But, it’s kind of insane to let someone put in $10M and earn back $1M, effortlessly harvesting millions of dollars. Each subsequent million should be harder to earn, not easier, right?
If 1000 people each put in $1000 and invest the pool the return must be the same as if one person invests $1M. So there’s no practical way to reward the former more than the latter.
In fact usually it’s the opposite, since pooling adds transaction costs. So large single investors can get even better returns.
The idea is that 10 million dollars helps not just the individual but the rest of society by funding productive uses of capital. To restore some fairness to the system see my reply to Max F as one approach.
"Debt is harder and harder to dig out of, and wealth is easier and easier to compound."
Talk to any asset manager and they'll tell you that it's actually easier to get high returns on lower capital amounts than high ones. If you have a million to invest you can (in theory) find some undervalued company and invest in it to get great returns. If you have a trillion there are not enough assets out there for you to buy and you'll be investing on the market at large for much lower returns.
Should be? The question to ask is if a system where it got harder to invest as money grows would lead to a better complex adaptive system or a worse one? I think I know the answer to that.
I’m not sure I follow why your argument wouldn’t also apply to progressive income taxes?
There are a lot of ways to crank the economic efficiency and output higher that we choose not to do, because we need to balance social outcomes that we value. For example, minimum wages and progressive income tax.
The whole argument turns on ‘fairness’, a loaded word, to say the least, and used most often – or assumed to mean most often - a degree of equality of outcome. At its extreme, everything is fair if everyone has the same, as in a communist paradise.
But an economy is made up of people. Economists think people are rational – I’m not so sure. I have always thought that people are emotional and political and that they rationalize their arguments to justify their decision to themselves or to others. (I have never sat in on a Board meeting without wondering afterwards whether anyone made any rational decision at all.)
People are competitive – at all levels even in negotiating the price of beans at a market. So this means that fairness is not an outcome, because in trying to make it so you are militating against people’s natural tendencies, and is that fair to them? The world isn’t fair – some people will end up being rich and others will end up be3ing poor. But the key to making the world prosperous and happier is in giving its participants a stake in the deal – making them feel ownership. I don’t know anyone who feels ownership as a result of being told they have to have equality of outcomes, but I do know people who feel ownership when they are given the chance to make things better for themselves (‘better’ being a personal thing). This is true of any walk of life – and is the root of getting people in big organisations – whether government or corporations – to successfully navigate the changing context of the economy – the original meaning of Change Management in the 1990s. So is it fair to press a button to invest in the S & P ETF? Fair to whom? To the person who does it and takes a risk in doing so? To the rest of society – not only in the way Noah describes – but also in the extent to which society can benefit from the wealth created – by progressive taxation that re-distributes wealth across society? And that is another question: does our current tax system do that properly? Who benefits from the redistribution at the moment? How can we give everyone a stake in the game? Another topic for discussion, I suggest.
Great comment, Matthew. I will add that there are at least 5 distinct definitions of fair, and only one is equality of outcome regardless of contribution (Marxist fairness).
Others include 1) outcomes relative to contributions, 2) outcomes based upon faithfully following the rules, and 3) outcomes defined by one’s role, and 4) the fairness of higher order rules that one would choose behind a veil (Harsanyian).
Critics of markets often blur all these distinctions for rhetorical impact.
I've lost a lot of faith over the past few years in the stock market's connection to real business outcomes, and therefore to it's likelihood of driving efficient capital investment.
-Telsa is valued at more than the rest of the auto industry combined, despite holding only a tiny fraction of industry revenue or profits, consistently declining revenue, a brand value collapse, and being technologically lapped by several other companies.
-Meme stocks just keep going...Gamestop has held most of its insane valuation increase for several years now.
-Bitcoin has shown that an asset with almost zero prospects of generating productive revenue can be worth over a $1 trillion. If Bitcoin can be worth this much, why not any other asset that generates no real world revenues.
My prediction: the whole thing is a house of cards in a way that it wasn't for sustained periods in the past. It'll collapse and China, with its growing command of actual value creation will rule the world. But I realize this is a crank-style belief.
I'm not sure if you got far enough with the distribution question. Fine to have some difference in rewards in the economy, but when distribution gets too unequal, like now, it looks like democracy fails, classes really do have very different interests that cause conflict (sometimes violent) and economies get less efficient because most of us on the bottom give up because the game is rigged. Poor people can't afford college in the U.S. now. Poor health care for the poor hurts productivity. Another issue is that initially making money takes brains and good judgement--meaning capital creates wealth. But in the hands of the heirs, sometimes wealth is destroyed. Trump for example made a billion into 50 million with his Taj Mahal casino. It matters how good investors are at picking winners. Markets in aggregate make mistakes that cost economies a lot. Those mistakes are more likely in some institutional settings than others. I think big disparities of wealth make it likely things will fall over. Too much investment, too little consumption, the Keynesian demand deficit depression.
For whatever it is worth, I pretty much disagree (respectfully) with just about everything you wrote.
All people can have conflicts, regardless of their class.
Who gets to decide when it is too unequal? How?
People also give up when the game is rigged and the free riders coast on the efforts of others.
College is affordable for anyone going to a community college for the first two years then transferring to a state college while living at home. There are even lots of employers that subsidize the costs for part time employees (Chipotle is an example).
Heirs face the same trade offs between consumption and investment, which is part of the reason why fortunes dissipate so fast over generations in dynamic economies.
Markets are decentralized complex adaptive systems that do indeed generate knowledge and make decisions (and mistakes). The question is whether central coercive command does better. For the last 250 years (since Adam Smith disvovered the system) the outcome is glaringly obvious.
A great complementary post (which Noah may have already written) is how important redistribution is based on the disparities in results and luck inherent in life and how a Frankian progressive consumption tax may be one of the best ways to obtain it.
Along with another comment, I think the weak connection between real corporate investment and stock prices deserves further exploration. I suspect most investors who purchase stock in Microsoft intuitively believe they are “investing in Microsoft.” In fact, they are simply exchanging their ownership for that of another investor. This is especially true for the biggest tech companies that typically generate ample cash flows to fund their real investments. Another point about the “cost” of investing. For most of us, the marginal value of consumption declines as we have more stuff. How much joy do I really get from that third Porsche!? In contrast, the added wealth from ever higher equity market ownership just keeps compounding. Indeed, the psychological boost from just checking on one’s rising wealth each day probably compares favorably to the joy derives from that third Porsche. All this just contributes to the wealth distribution challenges that Pickety has described best.
When they buy Microsoft and cause the price of each share to rise this allows Microsoft to invest more in hiring and capital. So in that sense they are investing in Microsoft.
It's very possible I'm just missing something. But while I find the questions laid out in this piece interesting, I find the Bruenig tweet confusing. Why does the blindness of the trust matter for the thought experiment?
Paying someone with greater expertise to do something that is opaque to the "buyer" seems both common and obvious.
"An electrician, where a property owner pays a person to fix something the owner does not understand, without explaining exactly what the fix entails, is like a thought experiment you would construct to tease out whether property owners actually need electricity"
...That's not a profound thought experiment. It's just stupid on its face.
And all this ignore that fact that, as I understand it, the primary reason for a blind trust, rather than just, having a financial advisor who DOES tell the client what they are doing with the money, is because it is either legally required, or else would be harmful to not have one.
You can ask the question Noah does, about whether it's fair or good or useful for stock market investments to provide so much value, without bringing in blind trusts or money managers or anything like that.
I always wonder how inflation figures into the fairness equation. Currently, those with enough wealth to own their own house and passively invest in the S&P 500 (or QQQ!) are riding a large inflation wave. It feels a bit unfair to those stuck in such low paying jobs that they cannot accumulate any equity.
Seems fair to me that people who don’t try harder to get educated or to contribute to others in their work don’t get more. Indeed, they should be appreciative of those who did work hard enough to get a surplus that was then used to buy the capital and invest in the ideas to create their job in the first place.
I think you’re stating the basic logic of a market economy, which I’m not specifically disagreeing with here. I’m saying that monetary inflation falls outside that fairness argument. Inflation is regressive in its effects on the lower working class vs the wealthier classes.
I say this from a place of considerable ignorance. My understanding of econ in the classroom is pretty much limited to a college course based on Samuelson in the 1970s and a look at cigarettes as a currency in a German run POW camp during the 2nd world war.
But one of the things that always struck me as odd about capitalism is that most investors act more like bankers than owners. If I own a hot dog stand I will do a lot of things before dumping the business. But if I buy a share of one stock I can quickly sell it and buy another based on some rumor or tip. Are most investors really owners; they dont seem to act like owners.
You are confusing "minority portfolio investor in publicly traded company" for "investor"
Those are not in any way real synonyms. And publicly traded companies are not most companies.
IF one is a minority investor in a stock-exchange traded company, one's ownership is really not much more than the call on future cash flows (directly via dividends, indirectly via appreciation of the share). You have about fuck-all ability to influence the company
They are MINORITY owners without real effective governance control which is radically different than being a majority or controlling investor (2nd to allow one can have legal structures where a technically minority investor by some simplistic percentage has controlling governance rights).
So they act like minority speculators (and not like bankers, Bankers are stuck with a loan [to simplify as of course one can sell-off loan portfolios, but then there's an effective banker who will be stuck with it) and generally fixed return - the interest rate. Banks therefore are classically much much more conservative about where they put their Depositors money to work than equity investors who roll different dice.
Your Hot Dog stand operator is an Owner-Operator, the business is in his control, he is a majority / controlling investor, and yes better well do something or he's screwed and loses all.
In end there is a substantial illusion going on that "Most' investors and "capitalism"= Publicly traded stock markets. Because... public, visible. But that's hardly most finanincg / investment (allowing particularly for private capital, private debt, commercial bank lending of depositor money etc)
How do automated investments like through 401ks affect this analysis? I’m not even pushing a button there, money is just taken from my paycheck and a brokerage buys stock. A lot of people who own stock in this way have no idea what they’re holding.
I have argued with my "investor" friends that they have every right (and expectation) of realizing a reward for buying stocks since they are taking a risk. Where we butt heads is when they claim they are "working" or "researching" stocks, and therefore contributing to the economy.
They add no value. I provide a service (construction) that adds value. I earn my money.
I have no issue with persons receiving a reward for putting up capital....just do not insult those of us who actually create and benefit society.
"Fair" comment (!) I wonder whether these five distinct definitions are not covered, though, by the notion of ownership, which I was trying to use as an umbrella term.
Whether it's fair or not is subjective. But what is an objective truth is that investing over a lifetime is an important and smart thing to do. It's also true that many people will never do it on their own, because of lack of insight, discipline or means.
I'd like to see the US force people to invest a percentage of their income up to a certain annual minimum amount and hold it till retirement. low income people's investments would be subsidized by the government to meet that minimum.
The scenario you led with was clearly designed to be invidious ("rich guy with $100K lying around to spend on a Lamborghini or invest") but a lot of investors are ordinary people putting away money for retirement or contingencies. At least to me it is entirely "fair" that such investors have an upside for deferring consumptions for years or decades.
Also, as to the free 1% from "risk free" t-bills: you left out taxes. After tax, any high-income investor is lucky to not lose purchasing power if they only invest in t-bills or munis. And that's before assuming the risk of a rapid devaluation.
It always makes me queasy when people talk about "fair" because the term is so subjective. I'm glad you mostly focus on the policy question of how investment affects the economy and society.
👆🏼👆🏼👆🏼👆🏼 This is exactly what I was going to say....
Might be worth noting that when I buy a share of stock my money doesn’t go to the company, unless I’m buying from the company in an IPO or subsequent offering. Usually my money goes to someone who owns a share and wants to sell. So I’m usually not investing in the company. The existence of a trading market in company shares does assist the company in raising capital by setting a market price.
I had the same thought about IPOs, but I think from Noah's perspective it makes the narrative more confusing. I probably would have just put this point in a footnote.
After all, when you buy stock, you could conceptually trace it back to the person who bought it in the IPO. The person buying it today in the secondary market is giving the original IPO purchaser a way to lock in their gains (or losses). If you couldn't ever sell stock, then that's additional risk the IPO purchaser would have to bear.
Also, firms are constantly buying back stock (to a lesser extent selling additional new stock) and issuing dividends. Which complicates the discussion further.
Company always has the potential to issue new shares. A $100B company can do a lot more than a $100M company by issuing a secondary offering or issuing stock based compensation or using its own stock as collateral.
This is the story I've always been told. Investing is the decision to forego consumption to build capital with the expectation that it will increase productivity. I can do it by myself: I will work more, and rest less, so I can build a tool that makes my normal work easier and faster. I can work more so I can pay someone to build the tool for me. I can work more so I can buy the tool and give it to someone who does not have it, so his work becomes more productive. I can give some money to someone who knows which tools are useful, so they can buy them and give them to other people. And so on, with increasing intermediation, until we have the modern system in which causation is near-impossible to understand.
And yet…the last time you went on a vacation the airplane flew, someone built it, someone piloted it, someone fueled it, someone printed those little tags for your luggage…they got paid and you enjoyed your vacation. That mind boggling chain of intermediated investments in tools and labor somehow produced exactly what you wanted.
MMMM- well as a starting point the discussion collapses "investing" into what is more or less "retail investing in the stock market into publicly listed equities"
And that's quite distortive as it overfocuses on a specific sub-set of investment.*
Also somewhat uniquely American given financing and investment outside of US for productive investment into the private sector is much much less publicly listed company driven (versus Bank financing and similar vehicles that are transforming savings into investment differently). Bank financing and near-bank finaning is really dominant for Europe.
(the Blind Trust tweet is just... well.... dumb. I don't even have words for his 'conclusion.' Its about as logically coherent as his 2014 risk comment... [one could see Blind Trusts as an interesting exploration of Agency Problem though]).
Overall this rather reminds me of the Lefty Left tendency to collapse all business policy and thinking into "big companies" via a lens as if everything is Google or Microsoft of Exxon, ignoring small-and-medium sized operators, non-listed mid-Caps etc.
But to the question:
"Which brings us to the question of whether buying an S&P 500 index fund is actually productive.
The answer to this one, unfortunately, is “We don’t really know.” The reason is that we don’t know exactly how the economy works. "
I think if one takes the direct action of buying into a listed Index fund, is it productive, possibly not directly.
However if one looks at a more structural view and on investment into growth, the existence of a dynamic publicly traded capital markets is a quite necessary factor for having high-risk taking private capital - classic VC, midCap/Growth oriented Private Equity (versus the megacap buyout PE). Recently Matt Yglesias highlighted (https://www.slowboring.com/p/the-biden-reckoning-democrats-need) although rather buried flagged literature on the former (while showing the buyout KKR ... well not so great).
Without a full cycle to Exit (onto stock market) the risk capital availability is much more constrainted (see Continental Europe).
Most firms of course are not listed on any publicly traded exchange, but having a real component of investment market that is able to go to publicly traded markets opens up more risk investment potential. Post listing it is a lot muddier, and probably most so in America as I think one has to question the direction of US markets policy and if it's not very heavily over-incentivized short-termism (not to assert though it definately has but one has to be open to the suggestion it has, to try to examine empirically)
I love that you’re diving into this topic. From an ethical/social perspective, what has always struck me as unfair is the “feedback” nature of interest: Debt is harder and harder to dig out of, and wealth is easier and easier to compound.
Even though I do think it’s fine to earn on savings on principal in principle, there seems to be something extremely not-progressive going on, in a way that progressive income taxes address in the “wages” realm.
Said another way: not many people would object to someone saving $1000 and investing it in their hardware store down the street and earning back $100. Or even buying $1k of S&P and earning back $100. But, it’s kind of insane to let someone put in $10M and earn back $1M, effortlessly harvesting millions of dollars. Each subsequent million should be harder to earn, not easier, right?
Curious your thoughts on this?
If 1000 people each put in $1000 and invest the pool the return must be the same as if one person invests $1M. So there’s no practical way to reward the former more than the latter.
In fact usually it’s the opposite, since pooling adds transaction costs. So large single investors can get even better returns.
Is that true for income taxes? 1000 people work for $10/hr vs 1 person working for $10k/hr?
The idea is that 10 million dollars helps not just the individual but the rest of society by funding productive uses of capital. To restore some fairness to the system see my reply to Max F as one approach.
Interesting idea!
"Debt is harder and harder to dig out of, and wealth is easier and easier to compound."
Talk to any asset manager and they'll tell you that it's actually easier to get high returns on lower capital amounts than high ones. If you have a million to invest you can (in theory) find some undervalued company and invest in it to get great returns. If you have a trillion there are not enough assets out there for you to buy and you'll be investing on the market at large for much lower returns.
Should be? The question to ask is if a system where it got harder to invest as money grows would lead to a better complex adaptive system or a worse one? I think I know the answer to that.
I’m not sure I follow why your argument wouldn’t also apply to progressive income taxes?
There are a lot of ways to crank the economic efficiency and output higher that we choose not to do, because we need to balance social outcomes that we value. For example, minimum wages and progressive income tax.
The whole argument turns on ‘fairness’, a loaded word, to say the least, and used most often – or assumed to mean most often - a degree of equality of outcome. At its extreme, everything is fair if everyone has the same, as in a communist paradise.
But an economy is made up of people. Economists think people are rational – I’m not so sure. I have always thought that people are emotional and political and that they rationalize their arguments to justify their decision to themselves or to others. (I have never sat in on a Board meeting without wondering afterwards whether anyone made any rational decision at all.)
People are competitive – at all levels even in negotiating the price of beans at a market. So this means that fairness is not an outcome, because in trying to make it so you are militating against people’s natural tendencies, and is that fair to them? The world isn’t fair – some people will end up being rich and others will end up be3ing poor. But the key to making the world prosperous and happier is in giving its participants a stake in the deal – making them feel ownership. I don’t know anyone who feels ownership as a result of being told they have to have equality of outcomes, but I do know people who feel ownership when they are given the chance to make things better for themselves (‘better’ being a personal thing). This is true of any walk of life – and is the root of getting people in big organisations – whether government or corporations – to successfully navigate the changing context of the economy – the original meaning of Change Management in the 1990s. So is it fair to press a button to invest in the S & P ETF? Fair to whom? To the person who does it and takes a risk in doing so? To the rest of society – not only in the way Noah describes – but also in the extent to which society can benefit from the wealth created – by progressive taxation that re-distributes wealth across society? And that is another question: does our current tax system do that properly? Who benefits from the redistribution at the moment? How can we give everyone a stake in the game? Another topic for discussion, I suggest.
Great comment, Matthew. I will add that there are at least 5 distinct definitions of fair, and only one is equality of outcome regardless of contribution (Marxist fairness).
Others include 1) outcomes relative to contributions, 2) outcomes based upon faithfully following the rules, and 3) outcomes defined by one’s role, and 4) the fairness of higher order rules that one would choose behind a veil (Harsanyian).
Critics of markets often blur all these distinctions for rhetorical impact.
I've lost a lot of faith over the past few years in the stock market's connection to real business outcomes, and therefore to it's likelihood of driving efficient capital investment.
-Telsa is valued at more than the rest of the auto industry combined, despite holding only a tiny fraction of industry revenue or profits, consistently declining revenue, a brand value collapse, and being technologically lapped by several other companies.
-Meme stocks just keep going...Gamestop has held most of its insane valuation increase for several years now.
-Bitcoin has shown that an asset with almost zero prospects of generating productive revenue can be worth over a $1 trillion. If Bitcoin can be worth this much, why not any other asset that generates no real world revenues.
My prediction: the whole thing is a house of cards in a way that it wasn't for sustained periods in the past. It'll collapse and China, with its growing command of actual value creation will rule the world. But I realize this is a crank-style belief.
Lots of people are taking about a bubble now. Hardly a crank belief.
I'm not sure if you got far enough with the distribution question. Fine to have some difference in rewards in the economy, but when distribution gets too unequal, like now, it looks like democracy fails, classes really do have very different interests that cause conflict (sometimes violent) and economies get less efficient because most of us on the bottom give up because the game is rigged. Poor people can't afford college in the U.S. now. Poor health care for the poor hurts productivity. Another issue is that initially making money takes brains and good judgement--meaning capital creates wealth. But in the hands of the heirs, sometimes wealth is destroyed. Trump for example made a billion into 50 million with his Taj Mahal casino. It matters how good investors are at picking winners. Markets in aggregate make mistakes that cost economies a lot. Those mistakes are more likely in some institutional settings than others. I think big disparities of wealth make it likely things will fall over. Too much investment, too little consumption, the Keynesian demand deficit depression.
For whatever it is worth, I pretty much disagree (respectfully) with just about everything you wrote.
All people can have conflicts, regardless of their class.
Who gets to decide when it is too unequal? How?
People also give up when the game is rigged and the free riders coast on the efforts of others.
College is affordable for anyone going to a community college for the first two years then transferring to a state college while living at home. There are even lots of employers that subsidize the costs for part time employees (Chipotle is an example).
Heirs face the same trade offs between consumption and investment, which is part of the reason why fortunes dissipate so fast over generations in dynamic economies.
Markets are decentralized complex adaptive systems that do indeed generate knowledge and make decisions (and mistakes). The question is whether central coercive command does better. For the last 250 years (since Adam Smith disvovered the system) the outcome is glaringly obvious.
A great complementary post (which Noah may have already written) is how important redistribution is based on the disparities in results and luck inherent in life and how a Frankian progressive consumption tax may be one of the best ways to obtain it.
Along with another comment, I think the weak connection between real corporate investment and stock prices deserves further exploration. I suspect most investors who purchase stock in Microsoft intuitively believe they are “investing in Microsoft.” In fact, they are simply exchanging their ownership for that of another investor. This is especially true for the biggest tech companies that typically generate ample cash flows to fund their real investments. Another point about the “cost” of investing. For most of us, the marginal value of consumption declines as we have more stuff. How much joy do I really get from that third Porsche!? In contrast, the added wealth from ever higher equity market ownership just keeps compounding. Indeed, the psychological boost from just checking on one’s rising wealth each day probably compares favorably to the joy derives from that third Porsche. All this just contributes to the wealth distribution challenges that Pickety has described best.
When they buy Microsoft and cause the price of each share to rise this allows Microsoft to invest more in hiring and capital. So in that sense they are investing in Microsoft.
It's very possible I'm just missing something. But while I find the questions laid out in this piece interesting, I find the Bruenig tweet confusing. Why does the blindness of the trust matter for the thought experiment?
Paying someone with greater expertise to do something that is opaque to the "buyer" seems both common and obvious.
"An electrician, where a property owner pays a person to fix something the owner does not understand, without explaining exactly what the fix entails, is like a thought experiment you would construct to tease out whether property owners actually need electricity"
...That's not a profound thought experiment. It's just stupid on its face.
And all this ignore that fact that, as I understand it, the primary reason for a blind trust, rather than just, having a financial advisor who DOES tell the client what they are doing with the money, is because it is either legally required, or else would be harmful to not have one.
You can ask the question Noah does, about whether it's fair or good or useful for stock market investments to provide so much value, without bringing in blind trusts or money managers or anything like that.
I always wonder how inflation figures into the fairness equation. Currently, those with enough wealth to own their own house and passively invest in the S&P 500 (or QQQ!) are riding a large inflation wave. It feels a bit unfair to those stuck in such low paying jobs that they cannot accumulate any equity.
Seems fair to me that people who don’t try harder to get educated or to contribute to others in their work don’t get more. Indeed, they should be appreciative of those who did work hard enough to get a surplus that was then used to buy the capital and invest in the ideas to create their job in the first place.
I think you’re stating the basic logic of a market economy, which I’m not specifically disagreeing with here. I’m saying that monetary inflation falls outside that fairness argument. Inflation is regressive in its effects on the lower working class vs the wealthier classes.
I say this from a place of considerable ignorance. My understanding of econ in the classroom is pretty much limited to a college course based on Samuelson in the 1970s and a look at cigarettes as a currency in a German run POW camp during the 2nd world war.
But one of the things that always struck me as odd about capitalism is that most investors act more like bankers than owners. If I own a hot dog stand I will do a lot of things before dumping the business. But if I buy a share of one stock I can quickly sell it and buy another based on some rumor or tip. Are most investors really owners; they dont seem to act like owners.
You are confusing "minority portfolio investor in publicly traded company" for "investor"
Those are not in any way real synonyms. And publicly traded companies are not most companies.
IF one is a minority investor in a stock-exchange traded company, one's ownership is really not much more than the call on future cash flows (directly via dividends, indirectly via appreciation of the share). You have about fuck-all ability to influence the company
They are MINORITY owners without real effective governance control which is radically different than being a majority or controlling investor (2nd to allow one can have legal structures where a technically minority investor by some simplistic percentage has controlling governance rights).
So they act like minority speculators (and not like bankers, Bankers are stuck with a loan [to simplify as of course one can sell-off loan portfolios, but then there's an effective banker who will be stuck with it) and generally fixed return - the interest rate. Banks therefore are classically much much more conservative about where they put their Depositors money to work than equity investors who roll different dice.
Your Hot Dog stand operator is an Owner-Operator, the business is in his control, he is a majority / controlling investor, and yes better well do something or he's screwed and loses all.
In end there is a substantial illusion going on that "Most' investors and "capitalism"= Publicly traded stock markets. Because... public, visible. But that's hardly most finanincg / investment (allowing particularly for private capital, private debt, commercial bank lending of depositor money etc)
How do automated investments like through 401ks affect this analysis? I’m not even pushing a button there, money is just taken from my paycheck and a brokerage buys stock. A lot of people who own stock in this way have no idea what they’re holding.
I have argued with my "investor" friends that they have every right (and expectation) of realizing a reward for buying stocks since they are taking a risk. Where we butt heads is when they claim they are "working" or "researching" stocks, and therefore contributing to the economy.
They add no value. I provide a service (construction) that adds value. I earn my money.
I have no issue with persons receiving a reward for putting up capital....just do not insult those of us who actually create and benefit society.
"Fair" comment (!) I wonder whether these five distinct definitions are not covered, though, by the notion of ownership, which I was trying to use as an umbrella term.
Whether it's fair or not is subjective. But what is an objective truth is that investing over a lifetime is an important and smart thing to do. It's also true that many people will never do it on their own, because of lack of insight, discipline or means.
I'd like to see the US force people to invest a percentage of their income up to a certain annual minimum amount and hold it till retirement. low income people's investments would be subsidized by the government to meet that minimum.