Thomas Piketty, a French economics professor, has created a lot of controversy with his book, Capital in the Twenty First Century. Piketty’s central thesis is that the concentration of wealth is growing and this will continue, based on the high nominal return that the wealthy obtain on their fortunes. While certainly lengthy at 600-plus pages, I found Piketty’s book fascinating, more for its research into historical returns on capital than for its economic prescriptions.
Returns on Wealth are Higher than Economic Growth
To the extent that the return on wealth already accumulated is higher than nominal economic growth, which Piketty demonstrates has historically been the case, then the fortunes of the wealthy will mathematically grow as a percentage of total wealth. Expressed mathematically, Piketty postulates that if “r”, the average annual rate of return on capital, is higher than “g”, the growth of the economy, then wealth will become increasingly concentrated since wealth grows faster than the overall economy. Piketty’s controversial conclusion is that estate taxes are necessary to prevent wealth being increasingly concentrated among fewer and fewer wealthy families.
The Historical Record
What is particularly interesting, from a portfolio manager’s point of view, is Piketty’s considerable research into historical rates of return. Piketty used extensive French and other government tax records to establish what people earned historically on invested capital.
Revolutionary France, besides chopping off the heads of its elites, created detailed documentation of existing wealth and income in its tax records. This gave Piketty almost 300 years of evidence of how people accumulated wealth, earned income and then passed it on to their heirs. Piketty also used historical tax records from other countries to establish historical rates of return for these economies.
Piketty’s research puts the nominal (before inflation) historical rate of return on capital at 5%. This is very high by contemporary standards. For example, in late 2015, the 10-year Treasury bond yield in the U.S. was comparatively low at 2%.
Marriage as a Merger
The historical context that Piketty develops is quite interesting. He determined the return from landowners renting out their fields to tenant farmers in France at five per cent. Piketty also turns to the literature of Balzac and Jane Austen for illustration. The fixation of the 19th century English and French gentry on “marrying well” reflected the economics of their era. Many of the characters in Jane Austen’s Pride and Prejudice considered marriage to be a business transaction.
This was well founded and reflects the mechanics of compound interest. The five per cent income derived by a wealthy family from their lands and holdings meant that existing fortunes increased through compound interest giving them the capital to buy out their less fortunate neighbours and relations. Families wishing to maintain their wealth and social position used marriage as a way to enhance and concentrate their fortunes, much as companies do through mergers and acquisitions.
Piketty points out that investors in government bonds in the 18th and 19th centuries did pretty well with an average coupon of four to five per cent in a period of low inflation. The high income available from government bonds gave rise to what the French called the “Rentier Class”, people who were not employed and lived off their interest income.
Euthanasia of the Rentier Class
Piketty points out, as Financial Pipeline readers know, there is a significant downside to fixed income investments from increases in inflation. The French Rentiers benefitted from the low inflation that resulted from technological improvements and international trade, especially agricultural imports from the Americas. Inflation is very much the enemy of the fixed income investor and higher inflation during the 20th century wiped out many French fortunes. Piketty calls this the “Euthanasia of the Rentier Class” and believes this to be one of the reasons that wealth became much less concentrated in the latter part of the 20th century. He believes that the revolution, turmoil and social disruption that followed the First and Second World Wars dispersed wealth much more than historically has been the case.
This doesn’t mean that we can count on inflation to inordinately hit the wealthy. Piketty observes that the wealthy are much more able to cope with inflationary periods than normal citizens. Normal people tend to have their savings in bank accounts and cash that are very exposed to the ravages of inflation. The wealthy tend to hold real assets that tend to maintain their value.
Wealthy Portfolios Outperform
A very surprising conclusion that Piketty makes is that the wealthy tend to achieve a higher return on their investments than the rest of us. He uses the Forbes magazine annual rankings of wealthy people globally to observe the changes in their fortunes over time. His data show that the wealthiest people have a real growth rate (nominal growth rate minus inflation) of 6.8 per cent compared to a 2.1 per cent real growth rate for the average person. His “most striking” lesson from the Forbes data is that all large fortunes seem to grow quickly, whether or not the owners of these portfolios are involved in the underlying businesses or fortunes. This means inherited fortunes grow at similar growth rates to those of current entrepreneurs.
Portfolio Skill Matters to Piketty
To me, this was perhaps the most striking and controversial conclusion of the good Professor Piketty. An entire generation of finance graduates and investment bureaucrats has been schooled to believe that “excess return” is not possible in the “efficient” financial markets. It doesn’t matter that markets have never performed efficiently and that some skilled portfolio managers obviously outperform.
The shared consensus truth is that portfolios should be indexed, as outperformance is impossible. This has given rise to a whole industry of passive management that is feverishly milking their passive cash cow for all it’s worth, the current ETF mania being a fine example. Piketty’s observation that it is possible for skilled portfolio managers to outperform the markets flies in the face of this pervasive conventional wisdom that securities portfolios should be indexed. All the public sector pension funds investing passively and individuals buying passive Exchange Traded Funds are only going to speed the process of wealth concentration if Mr. Piketty is right.
To read another review of Capital in the Twenty-First Century by Thomas Piketty, click here!
Thomas Piketty, profesa wa uchumi wa Ufaransa, amekuwa akizungumzia suala hilo katika kitabu chake cha Capital in the 21st Century. Piketty anaamini kwamba utajiri unaongezeka na utaendelea kuongezeka kwa sababu ya faida kubwa ya matajiri wanaopata kutokana na utajiri wao. Ingawa kitabu hicho ni kirefu sana, kina zaidi ya kurasa 600, kitabu cha Piketty kinanivutia sana kwa sababu ya utafiti wake kuhusu faida ya kihistoria ya mtaji kuliko kwa sababu ya mapendekezo yake ya kiuchumi. """Kama faida ya utajiri tayari imekusanywa ni kubwa kuliko ukuaji wa uchumi wa jina, ambayo Piketty inaonyesha imekuwa hivyo kihistoria, basi utajiri wa matajiri utaongezeka kama asilimia ya utajiri wa jumla.""" Piketty alidai kwamba ikiwa kiwango cha wastani cha kila mwaka cha mapato ya mtaji ni juu kuliko ukuaji wa uchumi, basi utajiri utaongezeka kwa kasi zaidi kwani utajiri unakua kwa kasi kuliko uchumi kwa ujumla. Hitimisho lenye utata la Piketty ni kwamba kodi za mali ni muhimu ili kuzuia utajiri usikuzame zaidi na zaidi miongoni mwa familia chache na chache tajiri. The Historical Record Nini ni hasa ya kuvutia, kutoka kwa mtazamo wa meneja wa kwingineko, ni utafiti mkubwa wa Piketty katika viwango vya kihistoria vya kurudi. Piketty alitumia rekodi nyingi za kodi za Ufaransa na serikali nyingine ili kuanzisha kile watu walichopata kihistoria kwa mtaji uliowekezwa. Ufaransa ya Mapinduzi, mbali na kukata vichwa vya wasomi wake, iliunda nyaraka za kina za utajiri na mapato yaliyopo katika rekodi zake za kodi. Piketty aliandika kitabu chake cha kwanza cha miaka 300 ambacho kilionyesha jinsi watu walivyojikusanya utajiri, kupata mapato na kisha kuupitisha kwa warithi wao. Piketty pia alitumia rekodi za kodi za kihistoria kutoka nchi nyingine kuanzisha viwango vya kihistoria vya kurudi kwa uchumi huu. Piketty's utafiti huweka nominal (kabla ya mfumuko wa bei) kihistoria kiwango cha kurudi juu ya mtaji katika 5%. Hii ni ya juu sana kwa viwango vya kisasa. Kwa mfano, katika mwaka wa 2015, faida ya dhamana ya serikali ya miaka 10 nchini Marekani ilikuwa chini kwa kulinganisha na 2%. Ndoa kama Mshirika Muktadha wa kihistoria ambao Piketty anaendeleza ni wa kuvutia sana. Alitambua kwamba kwa kuwa wenye mashamba walikuwa wakiruhusu wakulima wa Ufaransa kukodisha mashamba yao, walilipa ushuru wa asilimia tano. Piketty pia hutumia fasihi ya Balzac na Jane Austen kwa ajili ya mfano. "Kutaka kuoa kwa njia ya ""kuoa vizuri"" kwa watu wa hali ya juu wa Uingereza na Ufaransa katika karne ya 19 kulionyesha uchumi wa enzi yao." Wahusika wengi katika kitabu cha Jane Austen kinachoitwa Pride and Prejudice waliona ndoa kuwa shughuli ya kibiashara. Hii ilikuwa na msingi mzuri na inaonyesha utaratibu wa riba ya mchanganyiko. Mapato ya asilimia tano yaliyopatikana na familia tajiri kutoka kwa mashamba yao na mashamba yalimaanisha kwamba mali zilizopo ziliongezeka kupitia riba ya mchanganyiko, na kuwapa mtaji wa kununua majirani na jamaa zao wasio na bahati. Familia zilizotaka kudumisha utajiri na cheo chao cha kijamii zilitumia ndoa kama njia ya kuongeza na kukusanya utajiri wao, kama vile makampuni yanavyofanya kupitia muungano na ununuzi. Piketty anasema kuwa wawekezaji katika dhamana za serikali katika karne ya 18 na 19 walifanya vizuri sana na kuponi ya wastani ya asilimia nne hadi tano katika kipindi cha mfumuko wa bei. Mapato ya juu yaliyopatikana kutoka kwa dhamana za serikali yalisababisha kile ambacho Wafaransa waliita "Darasa la Rentier", watu ambao hawakuwa na kazi na waliishi kutokana na mapato yao ya riba. Euthanasia ya Rentier Class Piketty anasema, kama wasomaji wa Financial Pipeline wanajua, kuna hasara kubwa kwa uwekezaji wa mapato ya kudumu kutokana na ongezeko la mfumuko wa bei. Wenyeji wa Ufaransa walifaidika kutokana na mfumuko wa bei wa chini uliotokana na maendeleo ya kiteknolojia na biashara ya kimataifa, hasa uagizaji wa kilimo kutoka Amerika. Mfumuko wa bei ni adui wa wawekezaji wa mapato ya kudumu na mfumuko wa bei wa juu zaidi wakati wa karne ya 20 uliondoa utajiri mwingi wa Ufaransa. Piketty anaita hii "Euthanasia ya Rentier Class" na anaamini hii ni moja ya sababu kwamba utajiri akawa chini sana umakini katika sehemu ya mwisho ya karne ya 20. "Ameeleza kuwa ""mapinduzi, machafuko na machafuko ya kijamii yaliyofuata Vita vya Kwanza na vya Pili vya Dunia yalitanganya utajiri zaidi kuliko ilivyo kwa kihistoria.""" Hii haimaanishi kwamba tunaweza kutegemea mfumuko wa bei kuwapiga matajiri kwa kiasi kikubwa. Piketty anasema kwamba matajiri wanaweza kukabiliana na mfumuko wa bei kuliko raia wa kawaida. Watu wa kawaida huwa na akiba zao katika akaunti za benki na fedha ambazo zinaonekana sana kwa uharibifu wa mfumuko wa bei. Watu matajiri huwa na mali halisi ambazo huwa na thamani yao. Piketty anaelezea kwa njia ya kifupi kwamba watu tajiri wana faida kubwa zaidi ya uwekezaji wao kuliko wengine. "Mwanahabari huyo wa Forbes amekuwa akichunguza orodha ya watu tajiri duniani kote na kugundua mabadiliko ya mali zao kwa muda.""" Takwimu zake zinaonyesha kuwa watu matajiri zaidi wana kiwango cha ukuaji halisi (kiwango cha ukuaji wa jina minus mfumuko wa bei) cha 6.8%, ikilinganishwa na kiwango cha ukuaji halisi cha 2.1%. "Mafundisho yake ya ""kushangaza zaidi"" kutoka kwa data ya Forbes ni kwamba mali zote kubwa zinaonekana kukua haraka, ikiwa wamiliki wa kwingineko hizi wanahusika katika biashara au bahati za msingi." Hii ina maana mali kurithi kukua kwa viwango vya ukuaji sawa na wale wa wajasiriamali wa sasa. "Piketty aliandika: ""Kwa mimi, hii ilikuwa labda hitimisho la kushangaza na la utata zaidi la Profesa Piketty." Kizazi chote cha wahitimu wa fedha na wasimamizi wa uwekezaji wamefundishwa kuamini kwamba "marudio ya ziada" haiwezekani katika masoko ya kifedha "ya ufanisi". Haijalishi kwamba masoko hayajawahi kufanya kazi kwa ufanisi na kwamba baadhi ya wasimamizi wa mkoba wenye ujuzi ni wazi outperform. Ukweli wa makubaliano ya pamoja ni kwamba portfolios inapaswa kuwa indexed, kama outperformance ni haiwezekani. Hii imesababisha sekta nzima ya usimamizi wa passive ambayo ni feverishly milking ng'ombe wao wa fedha passive kwa wote ni thamani yake, ETF mania ya sasa kuwa mfano mzuri. Piketty's uchunguzi kwamba inawezekana kwa wasimamizi wa mkoba wenye ujuzi kushinda masoko fly katika uso wa hii pervasive hekima ya kawaida kwamba portfolios dhamana inapaswa indexed. "Mfuko wa pensheni wa sekta ya umma unaotumia fedha za kifedha na watu binafsi wanaotumia fedha za kifedha za kifedha, ""Piketty"" alisema." Ili kusoma ukaguzi mwingine wa Capital katika karne ya ishirini na moja na Thomas Piketty, bonyeza hapa!