Improperty and the Rich

Of course, it is much easier to get hold of these assets if you already have plenty of money, but the message is basically correct. Many countries have seen the rich, particularly the top 0.5%, taking a much bigger share of total national income in recent decades by boosting their passive income. In my own country, the UK, the top 1% now get over 12% of national income, whereas 40 years ago they only got 7%. Wealth has concentrated at the top to an astonishing degree: at L576 billion, the combined wealth of the richest 1,000 people in the UK could fund its beleaguered National Health Service for over 4 years. But then, in a world in which the 62 richest people have as much wealth as the poorer half of the earth’s population (all 3.5 billion of them), perhaps we should not be surprised.

We are encouraged to admire the rich and to see them as especially talented wealth creators, as “high net worth individuals” (HNWIs), but as I argue in my book Why We Can’t Afford the Rich, if we take a closer look at what passive income entails, we can see this is a gross mystification.

So what is passive income, and where does it come from? It is a neutral sounding name for unearned income, gained by controlling existing assets that others do not have but need or want, and who can therefore be charged for their use. Those who receive it are “rentiers.” The simplest case is land. As it already exists, there are no costs of production, so rent is not a payment for anything the landlord has contributed. As Adam Smith said, landlords “love to reap where they have not sown.” So unearned income can only be at someone else’s expense. If someone receives L1,000 in unearned income, that sum of money can only have any value if there are goods and services produced by others that it can buy. There is no such thing as a free lunch. As John Stuart Mill argued:

“Landlords grow rich in their sleep without working, risking or economising. […] If some of us grow rich in our sleep, where do we think this wealth is coming from? It doesn’t materialize out of thin air. It doesn’t come without costing someone, another human being. It comes from the fruits of others’ labours, which they don’t receive.“

The get-rich-quick books do not encourage you to think about where the unearned wealth comes from: it seemingly comes out of thin air, provided one makes “smart” decisions.

The same applies to rent for the use of buildings. Anything the tenants pay in excess of construction, maintenance, and management costs is unearned income for the owner. Likewise capital gains: if some assets that you own happen to inflate in value, as housing and shares have done for many years, and you can realize those gains, this too is a free lunch at others’ ex- pense. In 2015 many Londoners’ houses increased in value by more than their annual earnings. They may have congratulated themselves on their smart “investments,” but they had basically siphoned off wealth produced by others. Capital gains produce hidden transfers of wealth from the asset-poor to the asset-rich.

Interest on loans is money’s rent—a payment for the use of an existing asset. Unless the loan funds investment that creates something new, the interest is a deadweight cost, something for nothing. Most bank-lending in Britain and many other countries is not for investment in new productive ventures but merely against existing property, so the interest does not compensate for the creation of anything new. The massive increases in private debt that the financial sector—encouraged by the governments—has created since the 1980s has further swollen the flow of unearned income going to rentiers and rentier organizations.

Then there are transferable shares. Shareholders may like to think of themselves as investors, but the vast majority of share transactions in any given time period take place in the second market, and so the money paid for them goes to previous owners, not the company. No capital has been provided, no real investment has taken place. All that has happened is that the new owners have bought an entitlement to a stream of unearned income (dividends) and the possibility of getting gains from buying and selling the shares.

Economic rent can come from other sources than land or building: any asset whose supply can be controlled by a small number of owners offers this possibility. Intellectual property has become a huge source of economic rent. So are such internet-based platforms as Google, Uber, or Facebook, which have become “natural monopolies.” Asset markets in general are a major source of rent because they behave differently from markets for everyday products like bread. When the price of shares rises, it tends not to prompt an increase in the supply of shares, for this goes against the interest of share owners, indeed share buy-backs have become a common source of unearned income as a way of pushing up the price of shares. “Financialization” is heavily based on rent-seeking.

The term “investor” has an impressive aura: who would not want investment? Surely the investor is a kind of social benefactor, and therefore worthy of respect and gratitude? But note how the word “investment” covers two very different things that needn’t go together. First, it can refer to wealth creation, where the investment funds new ways of doing things, new infrastructure, new technologies, products, and training. Second, “investment” may merely mean anything that yields a financial return to the owner, that is, a wealth extraction. Often an investment in the first sense will also give the investor a return, but it is also common for investment in the second sense to have no connection to wealth creation, and merely be parasitic. The use of the same word for these two very different things is a brilliant source of mystification.

Here is the key point: mere ownership produces nothing, and so any return to an owner merely for access or use is a deadweight cost on the economy. A rentier economy is not only unjust but dysfunctional. Most people, by contrast, can only get an income by working—by contributing to the production of goods and services that users want and that do not already exist, whether it is a loaf of bread, a computer app, or tomorrow’s school lessons. Merely having “human capital” is not enough: it has to be put to use to earn anything.

Passive or unearned income comes from what John Atkinson Hobson, writing nearly a century ago, called “improperty,” that is, assets that are held not for use by the owner but for extracting payments from those who lack but need or want to use them. By contrast, property refers to possessions that are used by the individual or group owning them, such as a person’s home, a self-employed worker’s tools, or a cooperative’s equipment. A similar distinction was made by R.H. Tawney, who used the term “property without function” for improperty. Property is a good way of enabling people to live well, giving them control over what they need; improperty allows the strong to take advantage of the weak. In the UK, rampant house price inflation coupled with the promotion of buy-to-let landlords has reduced home ownership and produced “generation rent” and soaring numbers of young people having to live with their parents.

It might be objected that John Stuart Mill’s reference to rentiers getting rich in their sleep does not fit with the fact that many of today’s wealthy belong to the “working rich,” with most of their income coming as salary rather than in rent or interest or dividends. However, the working rich in the top 0.1 percent mostly either work for rentier organizations that collect and seek rent, interest, dividends, capital, and speculative gains, or control key positions where they can determine their own pay and inflate it with economic rent. This is most obvious in the financial, insurance, and property sectors where many rich people work, but companies in the non-finance sector have made an increasing share of their profits in finance by “investing” in securities as well. In the UK in 2008, 69 percent of the 0.1 percent worked in finance and property, and 34 percent were company directors. Twenty-four percent of those in the rest of the 1 percent were company directors too.

During the postwar boom, workers’ share of the gains from labor productivity remained roughly constant, but over the last 30 years in most OECD countries, labor has got a declining share of such gains, with an increased share going to those at the top, particularly the 1%.9 Some commentators wondered if this was an effect of new technology favoring higher-paid workers, but as Thomas Piketty noted, if this were the case one would expect wage shares across the top 10 or 20 percent to have increased too.10 Rather, it is a consequence of the weakening of organized labor by globalization and the shift of power to capital, shareholders, and other rentiers. In the US in the postwar boom, CEO pay was “only” 24 times that of the average worker. By 2005 it had reached nearly 300 times as much, and by 2012, 8 CEOs in the US were getting over 1,000 times the average pay.11 These increases reflect not some remarkable improvement in their performance but merely their increased power.

In 1936, Keynes called for “the euthanasia of the rentier, the functionless investor,”12 but rentiers have flourished since the 1970s, gaining enormous political power; neoliberal policies from the World Bank downwards promote rentier capitalism. Later this month, in Davos, we will have to endure the annual meeting of the World Economic Forum, where plutocrats meet with fawning politicians to extend their rent-seeking, while reassuring the public that they have the world’s best interests at heart. It is time to challenge them and to make Keynes’ expectation come true. We truly cannot afford the rich.