4 ms·

> If r (the rate of return on capital) is less than g (the growth in output) that means that people have no incentive to build wealth or become more intelligent

by bjourne 10y ago

> If r (the rate of return on capital) is less than g (the growth in output) that means that people have no incentive to build wealth or become more intelligent to deploy that capital more profitably. If I'm never going to make more than the growth in output, why bother with capital? The idea is that you consider yourself a smart and educated investor. Therefore, you are confident that even with r = g, your particular investment is wise and will yield a huge profit. > So yeah, capitalism may be inherently inclined to wealth inequality because some people outperform. But do you really want it another way? You can get a rate of return that will consistently be higher than the growth of the economy by dumping your money into an index fund. I would consider that more like taking advantage of other people's work than "outperforming" anything.

arkis22 10y ago
How can it be a huge profit if r = g? You'd need to invest more in g to increase r by an equal amount. The fact that you can consistently get higher growth in an index fund than GDP is just a symptom of r > g. It incentivizes you to save. But this simple example also ignores volatility in stocks, GDP can drop by 3% and index funds can drop by far more. Also is it really taking advantage of other peoples work if they go through a public offering and offer to sell you the stock of their own free will?
- bjourne 10y ago
  As I said, because you are such a brilliant investor! Think of the economy as a casino and the investor as a gambler. The casino flips coins. You can bet $1 for heads or tails and if you guess right, you win $2.00.01. This is r > g. Clearly, it is nice to have dollars spare so you can bet in this casino. For the casino, it is not so nice. In another casino you can also bet on coin flips, but you only get $2 for winning bets. On average, gamblers are neither winning nor losing money. This is r = g. Gamblers still continue to play because they think they have figured out how to get an edge. In real world casinos, r < g but people still happily play. And perhaps the game isn't coin flipping but something skill-based like chess played against other gamblers? I hope you see how r = g wouldn't stop investment money from flowing in the economy.
  - arkis22 10y ago
    The gamblers that think they have an edge with r = g in your example are suckers wasting their time. Would you agree?
    - bjourne 10y ago
      On average they are. However, if the game was skill based, like playing chess for money instead of coin flipping, then it would be easy for gamblers to get an edge by being skilled enough. If we consider investing more like playing chess than coin flipping, then in the r = g scenario, the economy would reward smart investors with huge profits. Dumb investors would lose all their money. As it should be.
      - arkis22 10y ago
        So your analogy is smart chess players playing against stupid ones, but both players can only bet a dollar and win 2? That scenario only "works" if you have a limitless supply of suckers. Sooner instead of later the worse players will realize they need to be able to win more than a dollar to compensate for their risk. The result is an unvirtuous cycle where the bottom players keep dropping out because their odds are getting worse and worse.
        bjourne 10y ago
        Given that people happily play on in casinos where the odds are significantly worse than even, I think it is safe to rely on the universe providing us with an infinite supply of suckers. Anyway, a fairer stock market wouldn't have to be a completely zero-sum game. It would just not have to be as heavily tilted in favor of the gambler/investor as it is today.
        arkis22 10y ago
        The smart people that go into a casino aren't expecting to come out ahead, they walk in knowing they're probably going to burn a couple hundred bucks. They also get to leave, which is why they're willing to play at worse odds for a short time. Given that, I don't think its safe for you to rely on an infinite supply of suckers. What if they want to go to a different casino that gives them better odds, will you force them to stay? If they can't leave they'll figure out who they shouldn't play against because they'll lose. So now are you forcing them to play? Now you're either micromanaging which ones should play against each other to make sure nobody ends up broke, or you're actively forcing them into poverty. Is this a casino you'd like to visit?

by bjourne 10y ago

arkis22 10y ago

How can it be a huge profit if r = g? You'd need to invest more in g to increase r by an equal amount. The fact that you can consistently get higher growth in an index fund than GDP is just a symptom of r > g. It incentivizes you to save. But this simple example also ignores volatility in stocks, GDP can drop by 3% and index funds can drop by far more. Also is it really taking advantage of other peoples work if they go through a public offering and offer to sell you the stock of their own free will?

bjourne 10y ago
As I said, because you are such a brilliant investor! Think of the economy as a casino and the investor as a gambler. The casino flips coins. You can bet $1 for heads or tails and if you guess right, you win $2.00.01. This is r > g. Clearly, it is nice to have dollars spare so you can bet in this casino. For the casino, it is not so nice. In another casino you can also bet on coin flips, but you only get $2 for winning bets. On average, gamblers are neither winning nor losing money. This is r = g. Gamblers still continue to play because they think they have figured out how to get an edge. In real world casinos, r < g but people still happily play. And perhaps the game isn't coin flipping but something skill-based like chess played against other gamblers? I hope you see how r = g wouldn't stop investment money from flowing in the economy.
- arkis22 10y ago
  The gamblers that think they have an edge with r = g in your example are suckers wasting their time. Would you agree?
  - bjourne 10y ago
    On average they are. However, if the game was skill based, like playing chess for money instead of coin flipping, then it would be easy for gamblers to get an edge by being skilled enough. If we consider investing more like playing chess than coin flipping, then in the r = g scenario, the economy would reward smart investors with huge profits. Dumb investors would lose all their money. As it should be.
    - arkis22 10y ago
      So your analogy is smart chess players playing against stupid ones, but both players can only bet a dollar and win 2? That scenario only "works" if you have a limitless supply of suckers. Sooner instead of later the worse players will realize they need to be able to win more than a dollar to compensate for their risk. The result is an unvirtuous cycle where the bottom players keep dropping out because their odds are getting worse and worse.
      - bjourne 10y ago
        Given that people happily play on in casinos where the odds are significantly worse than even, I think it is safe to rely on the universe providing us with an infinite supply of suckers. Anyway, a fairer stock market wouldn't have to be a completely zero-sum game. It would just not have to be as heavily tilted in favor of the gambler/investor as it is today.
        arkis22 10y ago
        The smart people that go into a casino aren't expecting to come out ahead, they walk in knowing they're probably going to burn a couple hundred bucks. They also get to leave, which is why they're willing to play at worse odds for a short time. Given that, I don't think its safe for you to rely on an infinite supply of suckers. What if they want to go to a different casino that gives them better odds, will you force them to stay? If they can't leave they'll figure out who they shouldn't play against because they'll lose. So now are you forcing them to play? Now you're either micromanaging which ones should play against each other to make sure nobody ends up broke, or you're actively forcing them into poverty. Is this a casino you'd like to visit?