On Capital and Fairness

“That’s not fair!”

That’s our instinctive reaction when we see people without skill, talent, or hard work get ahead, seemingly at the expense of everyone else. It’s why we root for the gritty underdog in sports contests. And it’s why Thomas Piketty’s recent critique of growing inequality in our economy strikes a chord.

Piketty looked the real net worth of 65-74 year olds in 1990 and 2010 (from a Fed survey) and found that it had grown by 2.8% per year over these three decades—significantly more than the mere 0.7% of the average family. He concludes that these people are benefitting from a high real return on capital, and that in a few years a few families will dominate our economy. We’ll all be wage-slaves for the Zuckerbergs.

To put it simply, this is nonsense. First off, his data suffers from survivorship bias. Older folks’ wealth didn’t grow by 3%–that age cohort got richer, but most of the elderly in the 1990 cohort had died by the time the 2010 group was measured. It’s like measuring the average height of NBA players in 1990 and 2010, finding it was 3 inches higher in 2010, and then concluding that playing NBA basketball makes you grow taller.

Second, nothing makes capital “grow” by itself. Wise investment and hard work can create wealth, just as foolish choices and lavish spending can disperse it. That’s why so few of the richest folks on the Forbes 400 list are there 20 years later. Instead, the list is dominated by entrepreneurs: people who have a great idea and make it part of our everyday lives—like Henry Ford’s automobile, or Sam Walton’s store, or Bill Gates’ operating system. But they don’t stay there forever. There’s an old proverb: “From shirtsleeves to shirtsleeves in three generations.”

Inequality can be a problem when it leads to social disruption—like the race-riots of the ‘60s. But punishing hard work and innovation won’t improve the plight of the very poor. Instead, it will probably make it worse.

Douglas R. Tengdin, CFA

Chief Investment Officer

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