The concerns about inequality have been out there for several decades now, and I still don’t get it. Global markets were blown wide open through technology and timing. Those first to market have reaped incredible sums. But there are historic precedents to such things. If anything I think it is very favorable that this wealth is generated 80% of the time from work and not investments.
As Raghuram Rajan points out in chapter six of The Third Pillar (Page 188)
The increase in top incomes is not because countries are dominated by the idle rich. Even for the richest 0.01 percent of Americans toward the end of the twentieth century, 80 percent of income consisted of wages and income from self-owned businesses, while only 20 percent consisted of income from financial investments. (35. Piketty and Saez, “Income Inequality”) This is in stark contrast to the pattern in the early part of the twentieth century when the richest got most of their income from property. The rich are now more likely to be the working self-made rich rather than the idle inheriting rich.
The wealth is the result of people producing stuff that other people want. This is a good thing that we want more of. Tremendous financial incentives are the fuel to get the motors running, to get people to take a risk and go all in on a business idea. These aren’t people who just tumbled into a fluke situation, their firms also run more efficiently then their competitors.
The majority of top earners receive business income, and tend to be owners of single-establishment, skill intensive, midsized firms in areas like law, consulting, dentistry, or medicine. These firms tend to be twice as profitable per worker than other similar firms, and the rise in incomes appears to be driven by greater profitability rather than an increase in scale. The study finds owners typically are at an age where they take active part in the business. The premature death of an owner cuts substantially into profitability, suggesting their skills are critical to income generation. The authors conclude the working rich remain central to rising top incomes even today. (Piketty, Capital)
The private market is supposed to be propelled by private incentives.
This is not how the public market works, which is fueled by other incentives. And fortunately many of the individuals who happen into the windfalls of private wealth are susceptible to those incentives as well, and frequently fold their wealth back into society.
Fraud, or tricking people into thinking they are doing business in one market when they are really playing in the other is the culprit to root out. These are the people, or groups of people, who profess to work for the pubic while internalizing benefits; or the private enterprises who finesse their commercial power to press particular public objectives. It’s the cloaking, aggregating, and averaging, that can cause setbacks like the great recession.
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