Piketty was wrong: The Rich Get Poorer: The Myth of Dynastic Wealth

[Axulus]

We believe Piketty’s core message is provably flawed on several levels, as a result of
fundamental and avoidable errors in his basic assumptions. 2 He begins with the sensible
presumption that the return on invested capital, r, exceeds macroeconomic growth, g, as must be
true in any healthy economy. But from this near-tautology, he moves on to presume that wealthy
families will grow ever richer over future generations, leading to a society dominated by
unearned, hereditary wealth. Alas, this logic holds true only if the wealthy never dissipate their
wealth through spending, charitable giving, taxation, and splitting bequests among multiple
heirs.

As individuals, and as families, the rich generally do not get richer; after a fortune is first
built, the rich get relentlessly and inevitably poorer.

The “evidence” Piketty uses in support of his thesis is largely anecdotal, drawn from the
novels of Austen and Balzac, and from the current fortunes of Bill Gates and Liliane Bettencourt.
If Piketty is right, where are the current hyper-wealthy descendants of past entrepreneurial
dynasties—the Astors, Vanderbilts, Carnegies, Rockefellers, Mellons, and Gettys? Almost to a
man (or woman) they are absent from the realms of the super-affluent. Our evidence—used to
refute Piketty’s argument—is empirical, drawn from the rapid rotation of the hyper-wealthy
through the ranks of the Forbes 400, and suggests that, at any given time, roughly half of the
collective worth of the hyper-wealthy is first-generation earned wealth, not inherited wealth.

The originators of great wealth are one-in-a-million geniuses; their innovation, invention,
and single-minded entrepreneurial focus create myriad jobs and productivity enhancements for
society at large. They create wealth for society, from which they draw wealth for themselves. In
contrast, the descendants of the hyper-wealthy rarely have that same one-in-a-million genius.
Bettencourt, cited by Piketty, is a clear exception. Typically, we find that descendants halve their
inherited wealth—relative to the growth of per capita GDP—every 20 years or less, without any
additional assistance from Piketty’s redistribution prescription.

Dynastic wealth accumulation is simply a myth. The reality is that each generation
spawns its own entrepreneurs who create vast pools of entirely new wealth, and enjoy their share
of it, displacing many of the preceding generations’ entrepreneurial wealth creators. Today, the
massive fortunes of the 19th century are largely depleted and almost all of the fortunes generated
just a half-century ago are also gone. Do we really want to stifle entrepreneurialism, invention,
and innovation in an effort to accelerate the already-rapid process of wealth redistribution?

Read more for a detailed analysis demonstrating the depletion of wealth from the richest 19th century families, contrary to Piketty's assertions:

http://poseidon01.ssrn.com/delivery...112102116074105092109064081065&EXT=pdf&TYPE=2

 

[Jimmy Higgins]

Amazing how a failed business man George W Bush was, and he is still rich. Granted, given 150 years, maybe that'll self correct itself. Go invisible hand!

 

[Axulus]

Amazing how a failed business man George W Bush was, and he is still rich. Granted, given 150 years, maybe that'll self correct itself. Go invisible hand!

Within about 50 years the vast majority of the wealth is depleted and spread thin, if you bothered to read the paper. By the third generation, the wealth is greatly diminished and continues to diminish further with each passing generation.

 

[dismal]

Amazing how a failed business man George W Bush was, and he is still rich. Granted, given 150 years, maybe that'll self correct itself. Go invisible hand!

Bush is not particularly rich. I seem to recall he was the least wealthy guy on either ticket both times he ran. Far less wealthy than Kerry or Gore. Or of course Hillaromney.

 

[ksen]

Started reading this but stopped here:

He begins with the sensible presumption that the return on invested capital, r, exceeds macroeconomic growth, g, as must be true in any healthy economy.

Why must r exceeding g be true in any healthy economy?

 

[Tom Sawyer]

Amazing how a failed business man George W Bush was, and he is still rich. Granted, given 150 years, maybe that'll self correct itself. Go invisible hand!

Bush is not particularly rich. I seem to recall he was the least wealthy guy on either ticket both times he ran. Far less wealthy than Kerry or Gore. Or of course Hillaromney.

Ya, the guy had a net worth of barely $20 million. It's amazing that he could afford shoes for the campaign.

It really is inspiring that a man of such modest means could still overcome his economic hardships and go on to become the worst President in US history.

 

[dismal]

Bush is not particularly rich. I seem to recall he was the least wealthy guy on either ticket both times he ran. Far less wealthy than Kerry or Gore. Or of course Hillaromney.

Ya, the guy had a net worth of barely $20 million. It's amazing that he could afford shoes for the campaign.

It really is inspiring that a man of such modest means could still overcome his economic hardships and go on to become the worst President in US history.

Right, for Hillaromney that's just a couple speeches or approving uranium mining rights to Kreplakistan.

 

[Tom Sawyer]

Ya, the guy had a net worth of barely $20 million. It's amazing that he could afford shoes for the campaign.

It really is inspiring that a man of such modest means could still overcome his economic hardships and go on to become the worst President in US history.

Right, for Hillaromney that's just a couple speeches or approving uranium mining rights to Kreplakistan.

Well, maybe if the Bush family had sold weapons to the winning side of WWII and didn't have all those assets seized as a result, they wouldn't be so far in the hole compared to others.

They made a bet and lost and took an economic hit as a consequence. That's capitalism and you shouldn't spend so much time hating it and America.

 

[Axulus]

Started reading this but stopped here:


Why must r exceeding g be true in any healthy economy?

It's a good question but not really relevant to the main point about how accumulated first generation wealth diminishes as it is transferred to subsequent generations, and the process happens fairly rapidly (the majority if it diminished by the 3rd generation). Generally, a healthy economy results in stock prices increasing and real estate values increasing.

Piketty's thesis seems to imply that total wealth transferred among each generation would _increase_ due to high returns on capital, meaning that Bill Gates' (or other wealthy individuals) children will transfer more overall wealth to the grandkids than Bill Gates transfers to his own kids. The data does not support this conclusion and in fact supports the notion that the wealth transferred from the 2nd to the 3rd generation is already largely diminished, and it is diminished further with each subsequent generation.

 

[Loren Pechtel]

It's nice to see some numbers on this depletion.

 

[ronburgundy]

The article is a complete red-herring for any real issues or claims made regarding the wealthy. The article looks only the most extreme outliers in wealth, namely individuals above .0001 percentile. Of course such extreme wealth depends upon random luck and uncontrollable circumstances, and therefore anyone at such an extreme is likely to be at a less extreme level at a later time. It is actually conservatives and free market faithers who are the one's that deny the massive role of unearned and undeserved randomness and luck in determining wealth (both positive wealth and poverty). IOW, the data in the article contradict claims of hard work and skill as the primary determinant of such wealth, and show that fleeting luck is a major factor.

Nothing in the article contridicts (and actually some it supports) all the following facts:

Few of the top 1% were raised in families with below median incomes.

The wealth a person is born into or "given" in other ways heavily and positively impacts their future wealth, both assets and yearly income.

A major reason for the point above is that wealth generates wealth. The more wealth you have the more opportunities to gain more wealth, the greater the amount gained by each opportunity, and the less the amount of effort or skill required to yield those outcomes (e.g., simply writing a check when someone else tells you to in order to acquire a high return asset.

The concentration of totla wealth at the top has been getting more and more extreme.

 

[AthenaAwakened]

We believe Piketty’s core message is provably flawed on several levels, as a result of
fundamental and avoidable errors in his basic assumptions. 2 He begins with the sensible
presumption that the return on invested capital, r, exceeds macroeconomic growth, g, as must be
true in any healthy economy. But from this near-tautology, he moves on to presume that wealthy
families will grow ever richer over future generations, leading to a society dominated by
unearned, hereditary wealth. Alas, this logic holds true only if the wealthy never dissipate their
wealth through spending, charitable giving, taxation, and splitting bequests among multiple
heirs.

As individuals, and as families, the rich generally do not get richer; after a fortune is first
built, the rich get relentlessly and inevitably poorer.

The “evidence” Piketty uses in support of his thesis is largely anecdotal, drawn from the
novels of Austen and Balzac, and from the current fortunes of Bill Gates and Liliane Bettencourt.
If Piketty is right, where are the current hyper-wealthy descendants of past entrepreneurial
dynasties—the Astors, Vanderbilts, Carnegies, Rockefellers, Mellons, and Gettys? Almost to a
man (or woman) they are absent from the realms of the super-affluent. Our evidence—used to
refute Piketty’s argument—is empirical, drawn from the rapid rotation of the hyper-wealthy
through the ranks of the Forbes 400, and suggests that, at any given time, roughly half of the
collective worth of the hyper-wealthy is first-generation earned wealth, not inherited wealth.

The originators of great wealth are one-in-a-million geniuses; their innovation, invention,
and single-minded entrepreneurial focus create myriad jobs and productivity enhancements for
society at large. They create wealth for society, from which they draw wealth for themselves. In
contrast, the descendants of the hyper-wealthy rarely have that same one-in-a-million genius.
Bettencourt, cited by Piketty, is a clear exception. Typically, we find that descendants halve their
inherited wealth—relative to the growth of per capita GDP—every 20 years or less, without any
additional assistance from Piketty’s redistribution prescription.

Dynastic wealth accumulation is simply a myth. The reality is that each generation
spawns its own entrepreneurs who create vast pools of entirely new wealth, and enjoy their share
of it, displacing many of the preceding generations’ entrepreneurial wealth creators. Today, the
massive fortunes of the 19th century are largely depleted and almost all of the fortunes generated
just a half-century ago are also gone. Do we really want to stifle entrepreneurialism, invention,
and innovation in an effort to accelerate the already-rapid process of wealth redistribution?

Read more for a detailed analysis demonstrating the depletion of wealth from the richest 19th century families, contrary to Piketty's assertions:

http://poseidon01.ssrn.com/delivery...112102116074105092109064081065&EXT=pdf&TYPE=2

You think the main point of Piketty's book was to prove that rich people get richer and the rich families of the 19th century stay rich to this day?

 

[Jimmy Higgins]

Amazing how a failed business man George W Bush was, and he is still rich. Granted, given 150 years, maybe that'll self correct itself. Go invisible hand!

Within about 50 years the vast majority of the wealth is depleted and spread thin, if you bothered to read the paper. By the third generation, the wealth is greatly diminished and continues to diminish further with each passing generation.

George W Bush is the third generation!

 

[Axulus]

Read more for a detailed analysis demonstrating the depletion of wealth from the richest 19th century families, contrary to Piketty's assertions:

http://poseidon01.ssrn.com/delivery...112102116074105092109064081065&EXT=pdf&TYPE=2

You think the main point of Piketty's book was to prove that rich people get richer and the rich families of the 19th century stay rich to this day?

Not the main point, but a significant side point.

- - - Updated - - -

Within about 50 years the vast majority of the wealth is depleted and spread thin, if you bothered to read the paper. By the third generation, the wealth is greatly diminished and continues to diminish further with each passing generation.

George W Bush is the third generation!

His daddy isn't even dead yet. Also, how much wealth did Prescott Bush accumulate and pass on to his kids?

What we need to look it is the total inheritance amounts: total combined amount passed on from first to second, from second to third, third to fourth - etc.

Also, this doesn't mean there won't be some outliers - every so often a 2nd or 3rd generation does accumulate massive wealth beyond what was passed down to them.

 

[zorq]

When people are saying that the rich get richer they are not saying that the Rockerfellers are the richest family in the US because they were the richest family in 1890. It is a statement about wealth and income inequality between the "classes."

America is not a meritocracy. Diligent and gifted people are struck low thanks to bad luck. And lazy dullards live lavish lifestyles thanks to good luck. Average upstanding working people who work just as hard as average upstanding rich people every day are not compensated similarly because of luck.

It is not fair and it grows ever more unfair every day as incomes of the rich balloon out of proportion to those of the poor.

It's not that fairness is necessary but extreme inequality damages the health of economies and fosters discontent which is a threat to the safety of average citizens. I'm sure if the shit really hit the fan the rich would all emigrate to Switzerland or Bermuda or something. (One more reason we can't really trust the super rich: they don't have as much skin in the game.)

 

[AthenaAwakened]

For another critique of Piketty, see Is the Piketty Enthusiasm Bubble Subsiding?

It's not so political, and it came out a year earlier.

 

[Togo]

The OP is an odd paper.

The most noticeable issue is the vast disconnect between the paper's conclusions, many presented in the abstract Axulus quoted, and the paper's figures and findings. The former trumpet ideas like American exceptionalism driven by extraordinary rewards to business 'geniuses', and the idea that when wealth is accumulated, it is through 'entrepreneurialism, innovation, and invention.' However, these 'conclusions ' are simply assumptions - they are not supported by anything presented in the paper itself, which focuses on the details of Pitkey's analysis of wealth. In some cases, the conclusions are even contradicted, as when the authors note the huge concentration of wealth given to corporate executives, without any connection to performance. They make no attempt to link the hyper-wealthy with any kind of performance measure, simply assuming that large pools of wealth are both beneficial to society and, in their words, 'fairly earned.'

This approach, of starting from a position of extreme hagiography of the hyper-rich, and then only using figures to try and refute details of Pitkey's analysis that might threaten these ideals, is very distracting, and it's hard to tell, as a result, what point they are trying to make. They don't have any solid conclusions supported by data, so the only message you can really take away is that they don't agree with some of Pitkey's formulae, and thus the hyper-rich are vital to the health of the global economy.

On the former, which is supported by a mix of figures and anecdotal evidence seemingly similar to that that they criticise Pitkey for using, they make the point that the ranks of the Forbes 400 change every year, and thus the hyper-rich aren't the same people. That they may form a class of extremely wealthy from which the hyperwealthy are selected, more or less at random, is a point they acknowledge, but claim it is beyond the scope of their analysis, even though it would totally destroy their constantly repeated claim that such hyper-wealth is earned on the basis of purely personal virtues.

I've not read Pitkey, and can't comment on their specific criticisms of his work. As a defence of the importance of maintaining hyper-wealthy individuals and protecting them from taxation, however, it is inconsistent drivel.

 

[SimpleDon]

Auxlus Piketty was wrong

Started reading this but stopped here:

<snip>​

Why must r exceeding g be true in any healthy economy?

It's a good question but not really relevant to the main point about how accumulated first generation wealth diminishes as it is transferred to subsequent generations, and the process happens fairly rapidly (the majority if it diminished by the 3rd generation). Generally, a healthy economy results in stock prices increasing and real estate values increasing.

Piketty's thesis seems to imply that total wealth transferred among each generation would _increase_ due to high returns on capital, meaning that Bill Gates' (or other wealthy individuals) children will transfer more overall wealth to the grandkids than Bill Gates transfers to his own kids. The data does not support this conclusion and in fact supports the notion that the wealth transferred from the 2nd to the 3rd generation is already largely diminished, and it is diminished further with each subsequent generation.

But it would be much healthier for the economy if the wealth depleted much faster than after an additional two or three generations. By your own evidence's admission,

The originators of great wealth are one-in-a-million geniuses; their innovation, invention, and single-minded entrepreneurial focus create myriad jobs and productivity enhancements for society at large. They create wealth for society, from which they draw wealth for themselves. In contrast, the descendants of the hyper-wealthy rarely have that same one-in-a-million genius.

There is no reason to even pass wealth to the second generation. If the children of the one in a million genius are also one in a million themselves let them earn their own fortunes. The economy will be better off for it. Make the children of the wealthy earn their own way in society. They start out with tremendous advantages as it is, the best schools, the best contacts, etc.

You obviously haven't read Piketty in spite of having two or three threads on him. His thesis is that the wealthy in the overall economy gain wealth whenever r > g and that the wealthy lose wealth to the great unwashed if g > r. He backs his thesis with exhaustive research over two hundred years or more. This is the strength of the book.

His thesis doesn't have anything with one family's wealth dissipating over one, two or ten generations. It is that the wealthy as a whole accumulate more wealth than everyone else in the periods in which r > g. That the wealth inequality increases in these times. That while the people who are in the 0.1% change over time the 0.1% accumulate wealth at the cost of the 99.9%.

This paper is making a microeconomic argument about a macroeconomic thesis. This puts you in the position of repeating an argument that you don't understand well about a thesis that you understand even less well.

The bs about "r > g in any healthy economy" is indicative of your (and most people's) approach to economics. You don't seem to want to understand anything about it that doesn't support your preconceived biases. You don't in any way study economics, reading different authors to understand and to judge different ideas against one and another. Rather you mine the literature for support for your worldview.

You have to be very careful about accepting any economist's arguments uncritically. The "science of economics" is just about where physics was when the argument was whether the solar system was stars and planets hung on the ceiling rotated above us as the bible said or if they actually rotated independently around the stationary earth in the center. The only difference is that the interpretation of economics determines the wealth of nations, the distribution of wealth in the nation and literally the lively hood and the well being of every person in the nation.

 

[SimpleDon]

I have serious problems with Piketty. He is still a slave to his neoclassical roots. He doesn't recognize that the problem isn't so much that the wealth of nations accumulates in the wealthy few when r > g but then is balanced when g > r and the wage earners accumulate wealth. It is that now the wealthy are able to guarantee that r will always be greater than g through their political control. For example one way they are able to keep growth down is by keeping inflation fears high and unemployment high, since we control inflation by producing unemployment. All of the income gains coming out of the Great Recession, a time of uncharacteristically low growth while recovering from a recession has gone to the high incomes because r has been so large. All of the inflation that we have had in the recent years has been profit lead inflation. Wages are mainly deflating.

The wealthy no longer have to depend on economic growth for their wealth. They end up with more wealth by keeping growth low, then even a low r guarantees that the wealthy will accumulate wealth rather than the wage earners. The wealthy benefit from taking a larger portion of a smaller pie.

And how do they keep growth low? By the inflation/unemployment mechanism above, by keeping wages low and profits high with all of the wage suppression means that I have repeatedly listed. But there is a yet another way. They avoid investing in the US in the real economy. They invest overseas. Or more likely they invest in the US in Wall Street's paper economy. Money that stays with the wealthy and doesn't fund productive investments like factories, new products and productivity gains, but which passes from one rich man's portfolio to another's, and like a Ponzi scheme is only able to have an overall net profit if new money comes in.

You probably believe that when you buy a stock that you are investing in that company. You might even believe that your money is helping that company. You are wrong on both counts. When you bought that stock the money that you paid for it went to the person or institution that owned the stock before you. If they made a profit by selling the stock that profit came from you. The company has nothing to gain or lose in the transaction. Years ago companies routinely issued stock to raise money for new investments in the company's business. Not anymore.

The outstanding stock of a corporation is a liability for the corporation, it is like a permanent loan that has some poorly defined claim on the corporation's profits, but can never be paid off with the profits paid as dividends. The liability could only be eliminated by the corporation buying its own stock. Goldman estimates that US corporations are going to buy back one trillion dollars of their own stock this year, out of a total valuation of about 18 trillion dollars. This amount dwarfs the productive business investments in the economy that the 99% depend on entirely for their lively hood.

This buy back of stock doesn't generally benefit this real economy. The money goes to the wealthy who won't spend the money on consumption but will try to re-invest it. This will make the problems with the excess financial capital that we have been building for the thirty five years even worse.

This excess financial capital, money really, that has caused an ever increasing number of our economic problems over the last thirty five years. It is the reason that we have had one asset bubble after another. The bursting of which have caused all of our recent financial instabilities and recessions.

The pressure to find high return investments that this money creates is what is behind the generally ill advised privatization of services like prisons, education, infrastructure and the really big one, health care. The conversion of the health care sector from a largely non-profit and government run industry into a for profit industry is what directly caused the run away increases in costs in this vital sector.

The concentration of money in the paper economy of Wall Street games hurts the real economy that the 99% depend on. Because of the way that the money has been made to shift to rewarding the rich and away from rewarding everyone else, the true driver of the economy, demand, has been decreased. Demand comes primarily from wages. The people with money to invest won't invest unless there is sufficient demand for the good or the services that the investment will produce. We are in a largely demand driven economy that is becoming more demand driven every year. And yet we are stupidly boosting supply, financial capital, the incomes of the wealthy.

 

[ksen]

We are in a largely demand driven economy that is becoming more demand driven every year.

And yet when you say this there will be those on the Right, and at least one I've seen on this very board, that will read that statement and look at you with a confused look on their faces and ask you to prove that we have a demand driven economy like they've never heard of such a thing and such a thing is just ridiculous on the face of it.

No matter how many failed experiments we get in places like Kansas, Wisconsin and Louisiana they will not acknowledge even a little bit that their economic policies might be wrong and should be rethought.

btw, the rest of your post was great, as always, and a pleasure to read. I didn't quote anymore of it simply because what more could I say other than, "Well said!"