Thursday, September 24, 2015

Are Rentiers Valuable?

A few weeks ago I had a short conversation with someone who believed that "unearned income" from asset ownership should be taxed nearly completely away. Why, my interlocutor asked, are speculators and those who live on interest entitled to that money? He said that they hadn't produced anything to earn their money and so should have to give nearly all of it to the poor.

What is "unearned income?" Wikipedia defines it as "income received by virtue of owning property (known as property income), inheritance, pensions and payments received from public welfare. The three major forms of unearned income based on property ownership are rent, received from the ownership of natural resources; interest, received by virtue of owning financial assets; and profit, received from the ownership of capital equipment."

This definition lends itself to a moral distinction between earned income (which is justly acquired since some kind of physical discomfort was required to get it) and unearned income (which doesn't require any work in the present). This distinction is lost on me personally because someone at some point had to work to acquire an asset. It's true that heirs have assets transferred to them without work, but the fact that the maxim "shirtsleeves to shirtsleeves in three generations" is about 2000 years old suggests that their unearned wealth will go to others in pretty short order.

Those who make a living from unearned income are often referred to as "rentiers." Recalling that connection reminded me of Keynes' comment in The General Theory about the "euthanasia of the rentier." Here's Keynes:
Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.
The problem here, of course, is that capital is scarce. There is "genuine sacrifice" in the creation of capital goods and there always will be. Capital creation can only happen if consumption is foregone. We can't conjure factories, delivery trucks, warehouses, and education out of thin air, but this conjuring is the only way for "no genuine sacrifice" to be made in the creation of capital.

Keynes' General Theory was published in 1936, but his notion of rentiers as exploiters is still with us. In a January 2014 column, Paul Krugman discusses the euthanasia of the rentier and concludes:
What Keynes didn’t say, but now seems obvious, is that the rentiers are unlikely to accept their euthanasia gracefully. And therein, I’d argue, lies the ultimate explanation of the persistent clamor for monetary tightening despite weak economies and low inflation. I’ve described on a number of occasions how tight-money advocates are constantly shifting their arguments — it’s about inflation; no, it’s about sound market functioning; no, it’s about financial stability — but always with the same bottom line: rates must rise now now now [sic]. 
Well, what I think we’re hearing is the sound of rentiers and those who, explicitly or implicitly, work for them, demanding their natural right to earn good returns even if the resource they control isn’t actually scarce anymore. They are not willing to go gently into their euthanasia.
So Krugman apparently believes that capital is in fact not scarce anymore. There is no reason to pay interest on bonds because the funds for those bonds are superabundant. In the crudest way, I suppose he's right. The Federal Reserve could just create an infinite number of dollars to "invest" in financial markets, but this would do nothing to increase the quantity and quality of capital goods (both physical and intangible). It may be "costless" to increase the number on an electronic balance sheet, but it can't be costless to create capital. Either Krugman misunderstands the connection between financial markets and real production, or he believes Keynes' condition for euthanizing the rentier has been met.

In discussing the euthanasia of the rentier, it's important to remember who these rentiers are: retirees, investors, land owners, and copyright and patent holders. Whether directly or indirectly, these rentiers, acting in markets, provide a tremendous service to society: they are incentivized by the profit mechanism to ensure that capital is directed to its best and highest-valued use. It's true that the real world doesn't correspond perfectly to an idealized model, but market imperfections are essentially profit opportunities for entrepreneurs to earn money by correcting the market failure (see my examples here). Recognizing the value of the rentier's function and the impossibility of free capital would go a long way in correcting popular errors about taxation and other highly politicized issues.

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