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> One received his wealth through inheritance and really isn’t doing much with it Seems very naive - what would doing a lot with it even mean? It's definitely

> One received his wealth through inheritance and really isn’t doing much with it Seems very naive - what would doing a lot with it even mean? It's definitely not under their mattress and even if it's sitting in a bank at 0.1% it's being invested by the bank. Otherwise it's going to be in some mix of stock, bonds, and private investments. Don't see how that's much different than the entrepreneur who sold their company for $X,000,000 and doesn't reinvest all of it into their next company

Hermel 11y ago
It's the difference between dumb and smart money. Dumb money is passively invested, while smart money is actively invested into endeavors like startups, where the investor can make a difference beyond merely providing money.
- sokoloff 11y ago
  That's not my definition (nor the typical definition I think) of "dumb money". To me, dumb money is late money chasing a piece of the action at stratospheric valuations, or chasing a scheme the investor has no hope of understanding. Money invested in AAPL/AMZN/FB is no more or less passive and no more or less "dumb" than money invested in VTSAX, IMO. In other words, I can "hire" the active managers of those companies on my behalf as an investor.
- kyleblarson 11y ago
  And lose 100% of their "smart money" invested in said startup about 90% of the time.
  - verbify 11y ago
    But because of biases, we usually focus on the 1% of the time they make an absolute fortune. Usually more due to dumb luck than actual savviness.
- tbrake 11y ago
  So - and I'm only halfway facetious here - an entropy tax? I wonder if it's useful or interesting to think about markets in terms of energy but confess to not having the economic or physics background to make it a reality.
- morgante 11y ago
  That's not the typical definition of dumb money. Dumb money is money from people who actively invest it dumbly. For example, buying into pets.com because the internet seems cool.
- allengeorge 11y ago
  I think the connotations you're ascribing to "dumb money" and "smart money" apply only to investor financing in startups. IIRC, active investing is an overwhelmingly "dumb" way for the average individual to invest their own cash.
- UK-AL 11y ago
  Didn't venture capital and angel investors have terrible returns for the average investor? Might be different now.
- douche 11y ago
  That would be the exact opposite of my definition of smart and dumb money. How many people have lost their shirts actively investing in business ventures, versus people who invested in boring, long-growth dividend-paying stocks?
JoshTriplett 11y ago
> what would doing a lot with it even mean? Doing whatever the person saying that phrase wants, which clearly takes precedence over the goals of the person who actually made the money.
TheOtherHobbes 11y ago
if it's being invested by a bank or a wealth manager it's going to be invested in existing companies, whose operations will be squeezed and distorted to provide the maximum possible return as fast as possible. This is more likely to kill jobs and prosperity than it is to produce them. It's also one of the prime causes of market bubbles. If it's being actively invested, the investor has the opportunity to build new companies. If it's redistributed by the government, the government can spend it on improving critical infrastructure, which is an easy way to create jobs and improve economic activity of all kinds. It can also invest it in new tech and R&D, which eventually trickles down to new opportunities for innovation.
- vezzy-fnord 11y ago
  I think you're trying to hint towards the Financial Instability Hypothesis, but you're misstating it. You seem to be implying that any credit-driven financing at all is inherently distortionary. trickles down Trickle-down economics works for government spending, eh?
- nickles 11y ago
  > if it's being invested by a bank or a wealth manager it's going to be invested in existing companies, whose operations will be squeezed and distorted to provide the maximum possible return as fast as possible. What do you mean by that? Existing companies raise capital to fund things like R&D, Capex, and entrances into new markets. All of these promote economic and technological growth and generally result in the creation of jobs. > This is more likely to kill jobs and prosperity than it is to produce them. It's also one of the prime causes of market bubbles. I'm not sure why you think investment causes job destruction. It's quite likely that there is less capital (for production) currently than would exist at the so called "golden level of capital". Increased investment would actually help rectify this (at the cost of current consumption). See a model like the Solow growth model for more information on this. > If it's being actively invested, the investor has the opportunity to build new companies. Unfortunately, many people have neither the desire nor the capability to successfully build companies and are able to enjoy returns on their money precisely because financial markets exist to invest in. > If it's redistributed by the government, the government can spend it on improving critical infrastructure, which is an easy way to create jobs and improve economic activity of all kinds. It can also invest it in new tech and R&D, which eventually trickles down to new opportunities for innovation. What makes the government better at job creation and R&D (with the exclusion of basic research) than the private sector? Greece has shown that governments can, in fact, allocate resources rather poorly [1]. [1] http://www.businessinsider.com/kyle-bass-chief-bank-economist-harry-potter-can-fix-greece-2011-2 http://www.businessinsider.com/kyle-bass-chief-bank-economis...
abrezas 11y ago
It isn't at all different. The amount of money the entrepreneur didn't invest into the next company or spent, is the amount he will be taxed as wealth. This way, the entrepreneur has incentive to spend it or do more investments instead of keeping it in the bank where it would be taxed. This incentive leads to inequality decreasing by the economy being more active.
- VLM 11y ago
  You'll have a lot of fun preventing people from "investing" in ETF commodity funds like GLD which is basically stuffing gold in a mattress. Going a step up, over a reasonable short term, true blue chip stocks are almost gold in terms of stability. Tax them or not?
- Lawtonfogle 11y ago
  I spent my money to buy dollar bills. A overall poor investment because of the expected lost, but an investment all the same. Money is always invested, even if you have it invested in the generic dollar instead of some other product. While it is common to think of the dollar as not being an investment, I find considering it an investment that is constantly losing value due to inflation to work better in my mental model.
- sportanova 11y ago
  So you're saying that everything not spent or invested into a private company (that you actively manage?) is subject to a wealth tax. Seems like a risky idea because you're putting enormous incentives on increasing riskier investments. But you do realize that whether I put my money into a bank, or a stock, or anything other than a non-private company, it's not just sitting there, being dumb?

Hermel 11y ago

It's the difference between dumb and smart money. Dumb money is passively invested, while smart money is actively invested into endeavors like startups, where the investor can make a difference beyond merely providing money.

sokoloff 11y ago
That's not my definition (nor the typical definition I think) of "dumb money". To me, dumb money is late money chasing a piece of the action at stratospheric valuations, or chasing a scheme the investor has no hope of understanding. Money invested in AAPL/AMZN/FB is no more or less passive and no more or less "dumb" than money invested in VTSAX, IMO. In other words, I can "hire" the active managers of those companies on my behalf as an investor.
kyleblarson 11y ago
And lose 100% of their "smart money" invested in said startup about 90% of the time.
- verbify 11y ago
  But because of biases, we usually focus on the 1% of the time they make an absolute fortune. Usually more due to dumb luck than actual savviness.
tbrake 11y ago
So - and I'm only halfway facetious here - an entropy tax? I wonder if it's useful or interesting to think about markets in terms of energy but confess to not having the economic or physics background to make it a reality.
morgante 11y ago
That's not the typical definition of dumb money. Dumb money is money from people who actively invest it dumbly. For example, buying into pets.com because the internet seems cool.
allengeorge 11y ago
I think the connotations you're ascribing to "dumb money" and "smart money" apply only to investor financing in startups. IIRC, active investing is an overwhelmingly "dumb" way for the average individual to invest their own cash.
UK-AL 11y ago
Didn't venture capital and angel investors have terrible returns for the average investor? Might be different now.
douche 11y ago
That would be the exact opposite of my definition of smart and dumb money. How many people have lost their shirts actively investing in business ventures, versus people who invested in boring, long-growth dividend-paying stocks?

JoshTriplett 11y ago

> what would doing a lot with it even mean? Doing whatever the person saying that phrase wants, which clearly takes precedence over the goals of the person who actually made the money.

TheOtherHobbes 11y ago

if it's being invested by a bank or a wealth manager it's going to be invested in existing companies, whose operations will be squeezed and distorted to provide the maximum possible return as fast as possible. This is more likely to kill jobs and prosperity than it is to produce them. It's also one of the prime causes of market bubbles. If it's being actively invested, the investor has the opportunity to build new companies. If it's redistributed by the government, the government can spend it on improving critical infrastructure, which is an easy way to create jobs and improve economic activity of all kinds. It can also invest it in new tech and R&D, which eventually trickles down to new opportunities for innovation.

vezzy-fnord 11y ago
I think you're trying to hint towards the Financial Instability Hypothesis, but you're misstating it. You seem to be implying that any credit-driven financing at all is inherently distortionary. trickles down Trickle-down economics works for government spending, eh?
nickles 11y ago
> if it's being invested by a bank or a wealth manager it's going to be invested in existing companies, whose operations will be squeezed and distorted to provide the maximum possible return as fast as possible. What do you mean by that? Existing companies raise capital to fund things like R&D, Capex, and entrances into new markets. All of these promote economic and technological growth and generally result in the creation of jobs. > This is more likely to kill jobs and prosperity than it is to produce them. It's also one of the prime causes of market bubbles. I'm not sure why you think investment causes job destruction. It's quite likely that there is less capital (for production) currently than would exist at the so called "golden level of capital". Increased investment would actually help rectify this (at the cost of current consumption). See a model like the Solow growth model for more information on this. > If it's being actively invested, the investor has the opportunity to build new companies. Unfortunately, many people have neither the desire nor the capability to successfully build companies and are able to enjoy returns on their money precisely because financial markets exist to invest in. > If it's redistributed by the government, the government can spend it on improving critical infrastructure, which is an easy way to create jobs and improve economic activity of all kinds. It can also invest it in new tech and R&D, which eventually trickles down to new opportunities for innovation. What makes the government better at job creation and R&D (with the exclusion of basic research) than the private sector? Greece has shown that governments can, in fact, allocate resources rather poorly [1]. [1] http://www.businessinsider.com/kyle-bass-chief-bank-economist-harry-potter-can-fix-greece-2011-2 http://www.businessinsider.com/kyle-bass-chief-bank-economis...

abrezas 11y ago

It isn't at all different. The amount of money the entrepreneur didn't invest into the next company or spent, is the amount he will be taxed as wealth. This way, the entrepreneur has incentive to spend it or do more investments instead of keeping it in the bank where it would be taxed. This incentive leads to inequality decreasing by the economy being more active.

VLM 11y ago
You'll have a lot of fun preventing people from "investing" in ETF commodity funds like GLD which is basically stuffing gold in a mattress. Going a step up, over a reasonable short term, true blue chip stocks are almost gold in terms of stability. Tax them or not?
Lawtonfogle 11y ago
I spent my money to buy dollar bills. A overall poor investment because of the expected lost, but an investment all the same. Money is always invested, even if you have it invested in the generic dollar instead of some other product. While it is common to think of the dollar as not being an investment, I find considering it an investment that is constantly losing value due to inflation to work better in my mental model.
sportanova 11y ago
So you're saying that everything not spent or invested into a private company (that you actively manage?) is subject to a wealth tax. Seems like a risky idea because you're putting enormous incentives on increasing riskier investments. But you do realize that whether I put my money into a bank, or a stock, or anything other than a non-private company, it's not just sitting there, being dumb?