Of course, it is much easier to get hold of these assets if you already have plenty of money, but the message is basically correct. Many countries have seen the rich, particularly the top 0.5%, taking a much bigger share of total national income in recent decades by boosting their passive income. In my own country, the UK, the top 1% now get over 12% of national income, whereas 40 years ago they only got 7%. Wealth has concentrated at the top to an astonishing degree: at L576 billion, the combined wealth of the richest 1,000 people in the UK could fund its beleaguered National Health Service for over 4 years. But then, in a world in which the 62 richest people have as much wealth as the poorer half of the earth\u2019s population (all 3.5 billion of them), perhaps we should not be surprised.<\/p>\n
We are encouraged to admire the rich and to see them as especially talented wealth creators, as \u201chigh net worth individuals\u201d (HNWIs), but as I argue in my book Why We Can\u2019t Afford the Rich, if we take a closer look at what passive income entails, we can see this is a gross mystification.<\/p>\n
So what is passive income, and where does it come from? It is a neutral sounding name for unearned income, gained by controlling existing assets that others do not have but need or want, and who can therefore be charged for their use. Those who receive it are \u201crentiers.\u201d The simplest case is land. As it already exists, there are no costs of production, so rent is not a payment for anything the landlord has contributed. As Adam Smith said, landlords \u201clove to reap where they have not sown.\u201d So unearned income can only be at someone else\u2019s expense. If someone receives L1,000 in unearned income, that sum of money can only have any value if there are goods and services produced by others that it can buy. There is no such thing as a free lunch. As John Stuart Mill argued:<\/p>\n
\u201cLandlords grow rich in their sleep without working, risking or economising. […] If some of us grow rich in our sleep, where do we think this wealth is coming from? It doesn\u2019t materialize out of thin air. It doesn\u2019t come without costing someone, another human being. It comes from the fruits of others\u2019 labours, which they don\u2019t receive.\u201c<\/p>\n
The get-rich-quick books do not encourage you to think about where the unearned wealth comes from: it seemingly comes out of thin air, provided one makes \u201csmart\u201d decisions.<\/p>\n
The same applies to rent for the use of buildings. Anything the tenants pay in excess of construction, maintenance, and management costs is unearned income for the owner. Likewise capital gains: if some assets that you own happen to inflate in value, as housing and shares have done for many years, and you can realize those gains, this too is a free lunch at others\u2019 ex- pense. In 2015 many Londoners\u2019 houses increased in value by more than their annual earnings. They may have congratulated themselves on their smart \u201cinvestments,\u201d but they had basically siphoned off wealth produced by others. Capital gains produce hidden transfers of wealth from the asset-poor to the asset-rich.<\/p>\n
Interest on loans is money\u2019s rent\u2014a payment for the use of an existing asset. Unless the loan funds investment that creates something new, the interest is a deadweight cost, something for nothing. Most bank-lending in Britain and many other countries is not for investment in new productive ventures but merely against existing property, so the interest does not compensate for the creation of anything new. The massive increases in private debt that the financial sector\u2014encouraged by the governments\u2014has created since the 1980s has further swollen the flow of unearned income going to rentiers and rentier organizations.<\/p>\n
Then there are transferable shares. Shareholders may like to think of themselves as investors, but the vast majority of share transactions in any given time period take place in the second market, and so the money paid for them goes to previous owners, not the company. No capital has been provided, no real investment has taken place. All that has happened is that the new owners have bought an entitlement to a stream of unearned income (dividends) and the possibility of getting gains from buying and selling the shares.<\/p>\n
Economic rent can come from other sources than land or building: any asset whose supply can be controlled by a small number of owners offers this possibility. Intellectual property has become a huge source of economic rent. So are such internet-based platforms as Google, Uber, or Facebook, which have become \u201cnatural monopolies.\u201d Asset markets in general are a major source of rent because they behave differently from markets for everyday products like bread. When the price of shares rises, it tends not to prompt an increase in the supply of shares, for this goes against the interest of share owners, indeed share buy-backs have become a common source of unearned income as a way of pushing up the price of shares. \u201cFinancialization\u201d is heavily based on rent-seeking.<\/p>\n
The term \u201cinvestor\u201d has an impressive aura: who would not want investment? Surely the investor is a kind of social benefactor, and therefore worthy of respect and gratitude? But note how the word \u201cinvestment\u201d covers two very different things that needn\u2019t go together. First, it can refer to wealth creation, where the investment funds new ways of doing things, new infrastructure, new technologies, products, and training. Second, \u201cinvestment\u201d may merely mean anything that yields a financial return to the owner, that is, a wealth extraction. Often an investment in the first sense will also give the investor a return, but it is also common for investment in the second sense to have no connection to wealth creation, and merely be parasitic. The use of the same word for these two very different things is a brilliant source of mystification.<\/p>\n
Here is the key point: mere ownership produces nothing, and so any return to an owner merely for access or use is a deadweight cost on the economy. A rentier economy is not only unjust but dysfunctional. Most people, by contrast, can only get an income by working\u2014by contributing to the production of goods and services that users want and that do not already exist, whether it is a loaf of bread, a computer app, or tomorrow\u2019s school lessons. Merely having \u201chuman capital\u201d is not enough: it has to be put to use to earn anything.<\/p>\n
Passive or unearned income comes from what John Atkinson Hobson, writing nearly a century ago, called \u201cimproperty,\u201d that is, assets that are held not for use by the owner but for extracting payments from those who lack but need or want to use them. By contrast, property refers to possessions that are used by the individual or group owning them, such as a person\u2019s home, a self-employed worker\u2019s tools, or a cooperative\u2019s equipment. A similar distinction was made by R.H. Tawney, who used the term \u201cproperty without function\u201d for improperty. Property is a good way of enabling people to live well, giving them control over what they need; improperty allows the strong to take advantage of the weak. In the UK, rampant house price inflation coupled with the promotion of buy-to-let landlords has reduced home ownership and produced \u201cgeneration rent\u201d and soaring numbers of young people having to live with their parents.<\/p>\n
It might be objected that John Stuart Mill\u2019s reference to rentiers getting rich in their sleep does not fit with the fact that many of today\u2019s wealthy belong to the \u201cworking rich,\u201d with most of their income coming as salary rather than in rent or interest or dividends. However, the working rich in the top 0.1 percent mostly either work for rentier organizations that collect and seek rent, interest, dividends, capital, and speculative gains, or control key positions where they can determine their own pay and inflate it with economic rent. This is most obvious in the financial, insurance, and property sectors where many rich people work, but companies in the non-finance sector have made an increasing share of their profits in finance by \u201cinvesting\u201d in securities as well. In the UK in 2008, 69 percent of the 0.1 percent worked in finance and property, and 34 percent were company directors. Twenty-four percent of those in the rest of the 1 percent were company directors too.<\/p>\n
During the postwar boom, workers\u2019 share of the gains from labor productivity remained roughly constant, but over the last 30 years in most OECD countries, labor has got a declining share of such gains, with an increased share going to those at the top, particularly the 1%.9 Some commentators wondered if this was an effect of new technology favoring higher-paid workers, but as Thomas Piketty noted, if this were the case one would expect wage shares across the top 10 or 20 percent to have increased too.10 Rather, it is a consequence of the weakening of organized labor by globalization and the shift of power to capital, shareholders, and other rentiers. In the US in the postwar boom, CEO pay was \u201conly\u201d 24 times that of the average worker. By 2005 it had reached nearly 300 times as much, and by 2012, 8 CEOs in the US were getting over 1,000 times the average pay.11 These increases reflect not some remarkable improvement in their performance but merely their increased power.<\/p>\n
In 1936, Keynes called for \u201cthe euthanasia of the rentier, the functionless investor,\u201d12 but rentiers have flourished since the 1970s, gaining enormous political power; neoliberal policies from the World Bank downwards promote rentier capitalism. Later this month, in Davos, we will have to endure the annual meeting of the World Economic Forum, where plutocrats meet with fawning politicians to extend their rent-seeking, while reassuring the public that they have the world\u2019s best interests at heart. It is time to challenge them and to make Keynes\u2019 expectation come true. We truly cannot afford the rich.<\/p>\n","protected":false},"excerpt":{"rendered":"
How-to-get-rich books and videos show no sign of going out of fashion. Their consistent message is that you are unlikely to get rich just by working hard. What you need is \u201cpassive income\u201d based on control of assets like shares, land, and buildings. This is where the smart money goes\u2014 and comes.<\/p>\n","protected":false},"author":18,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[108,131,132,133,134],"class_list":["post-9345","post","type-post","status-publish","format-standard","hentry","category-nezarazene","tag-economy","tag-investment","tag-keynesianism","tag-smart-money","tag-wealth"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/posts\/9345","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/users\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/comments?post=9345"}],"version-history":[{"count":1,"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/posts\/9345\/revisions"}],"predecessor-version":[{"id":10400,"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/posts\/9345\/revisions\/10400"}],"wp:attachment":[{"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/media?parent=9345"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/categories?post=9345"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.aspeninstitutece.org\/cs\/wp-json\/wp\/v2\/tags?post=9345"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}