Consider a house, the builder sells it once, but it gets bought and sold on average every 7 years subsequently.
There's an entire industry of artists making art to sell to the Richie Riches and Willy Wealthies of the world, and this has been going on since antiquity. Why do you think all that medieval Italian art was created? It was rich Italians patronizing the artists.
The same with real estate. In the meantime, while someone owns a house, they gotta pay others for insurance, repairs, maintenance, taxes, etc. Even buying the house will cost you 6% going to the starving real estate agent. Owning a house is very expensive, not counting the purchase price.
Meanwhile, the people spending all that money are the same people setting things up to ensure that surplus flows back to... themselves. So the wealthy people spend money, the people who manufacture their stuff and provide their services get as little surplus as possible without inciting them to riot, and the remainder goes right back to some other wealthy person, and then the process repeats.
There's no guarantee that surplus/welfare/utility flows along with the money, and it should be obvious to any observer that it definitely does not in practice.
The tired old argument that wealth accumulation doesn't really exist because the money all eventually goes "back into the economy" has always been an insulting hand-wave that is neither a principled model nor in agreement with basic facts about the economy.
The government, on the other hand, gets money by taking it.
Its missing, because it is mostly not true.
The wealthy predominantly get wealthy by getting other people to create wealth, and taking it from them via contracts relying on imbalances of power and econonic coercion (in a fairly benign modern capitalist system; is less benign, less modern, emerging (or pre-) capitalist systems, the coercion is often jist direct threat or application of force rather than the economic coercion of the inherent precariousness of the working class in capitalist society.
Everybody in a business is creating the wealth of the business, and they get their share of the created wealth in the form of pay and benefits. Unsurprisingly, their compensation is in proportion to the value they add (i.e. the wealth their contributions create).
It is not a system based on forcing anyone. The cooperation is voluntary, with their compensation set by supply+demand.
Power imbalance does not make for informed consent.
But they aren't. Only 1.5% work for minimum wage.
1/100 and 1/1000 is different, but the difference isn't that big.
Your overall point didn't make any sense though. "Lots of people don't earn minimum wage" doesn't mean that there isn't any power balance.
There is no power imbalance. If a worker produces a lot more value than he costs, he simply goes to another company that bids higher for him.
People who don’t work for minimum wage are still facing the same basic constraint.
That's clearly not true. It's just ussually very hard to quantify how much wealth every individual is creating and it becomes even harder as you go up the chain of hierarchy.
> Unsurprisingly, their compensation is in proportion to the value they add
Well... that's a strong statement and generally incorrect, at best their compensation if bounded by the value they add (not that it's easy to measure in most roles). Supply+demand (as you said) is what determines compensation in 95%+ of all cases.
Supply+Demand certainly does determine employee compensation. But consider that there is no demand for workers who would cost more than the value they add. If the worker was producing far more value than he was paid, then the worker will be enticed away by some other business offering him more money.
So, you can see how S+D nudges employee compensation towards being paid according to what value they produce.
In general yes. But as as some of the venture capital funded growth companies have shown us in recent years these values can stay detached for quite a while.
But yeah over longterm I'd you to be mostly right.
Wealthy people accumulate wealth by many means. Creating wealth is only one of those means. Nor is wealth creation incompatible with the model I described.
> The government, on the other hand, gets money by taking it.
Who said anything about the government?
But if you want to argue that point, the government may create wealth just like any private individual or enterprise. In fact, it does create quite a lot of wealth, in the form of public services and overcoming various incentive problems of private industry operating in free markets.
Of course, governments do levy taxes in order to fund their activities. But you can't seriously argue that tax revenue is "taken" from the economy and also argue that wealth accumulation does not exist because wealthy individuals' money is not "taken" from the economy.
These don't apply to all big ticket items, but since you mentioned houses, I thought I'd flesh out the picture on who benefits from buying/selling activity.
It's worth noting that all of these people get paid, regardless of whether the home seller made money or lost money on the home (or how much). So in a strong market, they will get a small share of the gains. But in a down market, the seller may make nothing, while these service providers all get paid.
Only if you’re buying directly from the business, which you’re usually not. Usually you’re just buying from another shareholder (could be another individual, a mutual fund, a hedge fund, whatever).
The proceeds may indeed end up filtering into the rest of the economy (I may sell you the stock to pay my mortgage, the hedge fund pays their traders), but the money doesn’t fund the business of the traded company.
> the money doesn’t fund the business of the traded company.
Not directly, but indirectly it does. It makes the stocks valuable so the company can create shares and people will buy them. You know, like those stock options employees get.
Sure, but that’s still a small fraction of most trades most of the time. When companies sell stock (long after their IPO) the sales kind of have to be dripped out as a small percentage of the trading volume of the stock or it would negatively affect the price (more than considered acceptable). If a company or its insiders are most of the sellers by volume (again, if a company has been public a while), that’s a bad sign for the company.
> Not directly, but indirectly it does.
Also yes, but I would quibble that this is moving the goal posts from your original statement :). “The money goes to finance the business” seemed like a pretty direct declarative statement that didn’t touch on the nuance of “buying stock -> pushes price up -> makes debt cheaper for company/makes further stock sales attractive”.
I get the point you’re making and don’t entirely disagree. But in a proud HN tradition it read as a confident and straightforward declaration that describes the (IMHO) minority case, but not the more common case and sweeps important nuance aside.
Please don’t take that to mean I thought your thoughts or understanding were also lacking in nuance, I didn’t. But I figure there will always be people coming through these threads who don’t know the nuance, they’ll read the highly upvoted top comments and move on, thinking they’ve improved their understanding, and they will be led astray, so I was responding to the words as-written.
BTW, understanding how and why free markets work is not very intuitive. It took a long time for me to understand it, and long conversations with my dad who had a PhD in economics. About 98% of what lay people implicitly believe about economics is intuitively obvious, but quite wrong.
The old hoary "rich people hoard money" is one of those tropes.
could somebody expand on this please? as far as I understood it, companies like Apple don’t issue shares very often. How does the share price going up go to their business unless they issue more shares (diluting existing shareholders)?
However, with Apple and similar companies - they buyback A LOT more of the stock than they issue in SBC.
This is a similar phenomena as the stock market. "Why does the stock market exist" is an interesting question. The textbook answer would be: it allows companies to sell pieces of themselves to the public in order to raise capital. The caveat to this answer is, 99.99...9% of transactions on the stock market every day do not land money back in the company's checking account; the money lands with the person who owned the stock previously. Because of Federal Reserve Guaranteed Inflation, that person probably, usually, over long enough periods of time, paid less for it than the current buyer, and five million exchanges down the chain for this physical stock certificate is the company, during their IPO (or when they release more stock), who made just a bit of money.
There's nothing intrinsically negative in what I described above; its just "markets". In fact, here's the counter-argument to the point the article makes about it being negative: Why would I, as an Investor, purchase a slice of the pizza delivery app Sliceline at IPO if I cannot make a return on that investment? Framework, the company making fully upgradeable and repairable laptops, needs funding; why would I invest in them if not to see a return on investment? I'm a homeowner; maybe I shouldn't purchase a painting from a struggling local artist; after all, it probably won't see a return on investment.
I intentionally slid down the slope of examples there to prove a point. Imagine you Have Money; maybe a lot of money, let's call it N dollars. How you spend that N dollars communicates your morals, ethics, and values; it defines what your future looks like, and at large enough values of N, progressively starts defining what the future of our society looks like.
A recent tweet, which I haven't found but you can search for, paraphrased: "In ten years, my husband's salary has increased 90%, while mine has increased 18%. I've spent most of that time curing cancer; he's been optimizing ad click rates."
What we're talking about is a phenomena I'd label as The Assetization of Everything. The vast majority of the monetary expenses wealthy individuals and corporations make is viewed through the lens of return on investment. Its very rare to see a corporation, or even wealthy individuals, say "we believe in X, we believe X is good for our society, so we are giving X $10M". "Investors" would ask: Wait, are you getting stock? Is it a loan? Can you write it down on your taxes? What's going on? Yet, anyone is totally able to do this. Its not because of some law, though corporate fiduciary duty isn't helping. Federal Reserve policy did accelerate it, but its not the cause. The cause is Cultural. It can't be fixed.
We, the world, are approaching the endgame of this very quickly. It won't be pretty. We are not allocating even adjacent orders of magnitudes enough resources toward solving problems that represent existential threats to, at minimum, our way of life; maybe society as we know it; possibly civilization; unlikely, but, the human race. Its not going to start with any of the traditional culprits though; AI, global warming, killer virus, whatever. It'll start with something that seems rather inane: it'll get harder and harder to find investments which generate returns. Put another way: deflation; we had an era of ridiculous prosperity where we could have allocated resources to stave off the coming actual crisis, but we didn't, and now no one wants to invest in solving them.
In the stock example, companies are also wealthy entities that hold cash when interest rates are cheap. For example, in 2017 (when rate targets were just above 0%) Apple had hundreds of billions in cash in Ireland and other tax haven nations. When Abenomics began in Japan and the Bank of Japan introduced zero interest rates and quantitative easing and yield curve control, one of the first things that happened was that companies started building huge money stores. When inflation remains stubbornly low, there isn't a strong need to get rid of your cash because it isn't losing a lot of value and you take little risk. You may as well hold on to it.
You're right that these economic activities are better than nothing but they aren't the kinds of activities that puts a generation of people to work and start building the kind of wealth that supports a family.
> companies started building huge money stores.
They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested.
> You may as well hold on to it.
Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest.
Not really, they'd rather buy treasuries and deposit at the FED for a risk-free 4-5% return and it shows in FRED data; roughly $2.5 Trillion dollars are currently held at just Fed's overnight repo facility. In return when banks do want to lend it out, poor people (often with bad or average credit) get ludicrous interest rates like 15-25%.
If neutral rates were higher then people with cash who want to invest would be more incentivized to buy a bond instead of a stock. But because the rate is higher the issuing company has to make at least that percentage to break even let alone make a profit. So they will need to make more widgets, which means they have to hire more people.
The down side of course is that rates are so high that companies can’t make enough money to pay back debt holders so they default and fail and have to fire everyone.
70% of the money supply in Germany is literally sitting in checking accounts. If people actually saved money by lending it via certificate of deposits according to classical economics then this number would be much lower.
>They don't have Scrooge McDuck cash vaults, either. Their money "store" is all invested.
The parent said cash hoarder to cash hoarder and that is true when you buy stocks or art and neither consume the newly obtained money nor lend it out.
>Even if the money is deposited in a bank, it doesn't stay in the bank. The bank loans it out. That's how banks make money. You deposit money, they loan it out to someone who pays them interest.
As I said above, the money isn't lent out, new money is created with loans and the money that is being created is also kept in checking accounts so nobody is bringing their money to the bank in the way you imply. Money in checking accounts is essentially dead money. It is like the money in Scrooge McDuck's vault.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
What is more often considered bad is "inequity", which is what prevents a lot of people from earning a good, decent life. Some people work very hard in life and don't make any major bad decisions, and still have a hard life. Other people work little and have a good life. There's both inequality and inequity in this picture, but they're not the same thing.
What people object to is not mere inequality: inequality is expected to exist anywhere money exists. What people object to is "excessive inequality", or distributions of wealth where the Pareto coefficient is "too extreme". The reason why this is bad is because it effectively makes the "American dream" impossible for nearly everyone, in the extreme case.
Investing in stocks does provide jobs and income to others. When you buy stocks, the money goes to finance the business.
When you buy art, the money goes to the artist.
And so on.
Consider if an artists creates a painting, and sells it to a rich dude for $100,000. Who is harmed by this? I don't understand all the "inequality is bad" axioms that people seem to accept uncritically.