The structure and details of investing is one place pop “economists” seem to love to be ignorant. For example, we have the eminent Thomas Piketty, who says the return on investment in capital exceeds the overall rate of growth of the economy. We’ll get into that in more detail in a minute, but first let’s start with a great example of what he’s missing: the potential downsides of investment.
This is a great example of the danger of Piketty’s over-aggregation. The rate of return on capital investments (r) can be and frequently is negative. Piketty only manages to push his absurd “r > g” nonsense by ignoring the many times investors lose their principal.
It’s worth noting that in the free market, investing requires entrepreneurial skill and awareness. There are no guaranteed gains, and losses are suffered by those making the bad investments. Vapid, biased writers like Piketty ignore the fact that investors socializing their losses is not a phenomenon based on the free market. It is government intervention to ensure that certain preferred investors keep their wealth at the cost of the taxpayer and certain disfavored investors.
But let’s note the absurdity of “r > g” on its face. If strictly true, then the return on capital will eventually exceed the entirety of the economy. If not strictly true, well, there goes Piketty’s thesis anyway. In fact, it is government intervention to protect investors that allows r to exceed g for any extended period at all.
Even worse, in a free market, anyone is perfectly able to invest in capital goods should they desire to do so. The returns on capital investment are available to everyone. Current wage rates in most of the world are well over bare subsistence, complainers and spendthrifts be damned.
It is another type of government intervention that makes capital investment less available to the general public. For example, zoning laws prevent people from starting small businesses. Workplace regulations make it more difficult for small workshops and such to appear, while large, established businesses can easily defray these costs. It is not the free market that Piketty and his ilk should be protesting, it is the vast structure of government regulations that protect cronies and prevent the poorer public from investing they should be opposing.
But let’s return to the issue of investing for the moment. Practically every major school of economics minimizes the effects and necessity of entrepreneurship. But entrepreneurial instinct, or knowledge, or awareness, however you want to describe it, is necessary for investors to choose investments that are likely to result in profit, as opposed to those that are doomed to failure. To continue with the Simpsons theme–we must beware of investments that look like this:
In the free market, people must save wealth earned from voluntary exchange to invest. Investors must choose the correct places and projects for their investments or they risk losing their savings. Good investors have earned their rewards by their judicious saving and their care in choosing investments. Bad investors find themselves back in the position of needing to earn their livings another way soon enough.
It is government intervention, not the free market, that allows cronies to socialize their losses and pocket their profits, and prevents the less wealthy from investing effectively.