№ IX
The twelve plates
A fortune and an income are not the same kind of thing, and much confused argument about who has what begins by forgetting it. This volume is about the stock — wealth held rather than earned: the distinction between a stock and a flow, the capitalization that binds them, the great fortune that ceases to reward work and becomes a position, and the contest, beneath the calm figure of a net worth, over who holds a claim on what others produce.
a great fortune wears the look of the stored reward of work, saved and earned and deserved — but past a certain magnitude, is it more than a standing claim on the labor of others, a position that the language of earning merely dignifies?
There is a difference between what a person earns and what a person owns, and almost every confused argument about money loses sight of it. What one earns is a flow — a stream arriving over time, so much a week or a year — the wage of labor, the yield of property. What one owns is a stock — the whole accumulated mass of one's possessions at a single moment, that simply stands there, neither arriving nor departing but held. Irving Fisher, who did more than anyone to make the distinction exact, likened the two to the water in a reservoir and the streams that feed and drain it: the stock is the level at an instant, the flow the movement across an interval, the one measured in dollars and the other in dollars per year. They differ in kind, as a lake differs from a river, and cannot be directly compared. This volume is about the stock — about wealth as a thing held rather than a thing earned — and about how much follows, in economics and politics alike, from keeping the difference clear, or letting it blur.
The two are different, but not unrelated, for they are bound together by the operation that converts each into the other. A flow of income, capitalized — divided by the rate of return that prevailing conditions allow — yields the stock of wealth that would generate it: an asset paying a hundred a year, where capital earns five percent, is worth two thousand — the price at which its income changes hands. Conversely a stock, multiplied by that rate, yields its flow. This is how fortune and income shade into each other, and a thing owned becomes a source of things earned. But the conversion carries a quiet lesson the rest of the volume will draw out: the value of the stock is not a primitive fact but a derived one, the capitalized worth of an expected flow, depending at every point on the rate of return — so that the size of a fortune moves when the rate moves, though not a brick of it has changed. Wealth, measured in money, is the shadow that a stream of future income casts in the present.
With the distinction in hand, an old and consequential asymmetry appears: the difference between living by what one earns and by what one owns. The worker's income is a flow with no stock behind it — or only the small stock of his savings — and it ceases when he does. The owner's income is the flow his stock throws off, and continues whether he works or not, for it is the property, not the person, that earns it. Between these two ways of getting a living lies much of the moral weight wealth has always carried. The first is plainly tied to effort and desert; the wage is the price of labor, and stops with it. The second is tied to effort only at its origin, if at all, and not at all in its continuance: the rent of land, the interest on a bond, the dividend on a share accrue to their owner while he sleeps, and accrued, in the older world of inherited estates, before he was born. The stock, once assembled, earns on its own account.
And it is here that the stock reveals the character this volume means to examine. A modest stock of wealth is transparently the stored residue of a flow: the savings of a working life, plainly earned, set by against the future. But a great stock is a different creature. It is too large to have been saved from any plausible stream of earnings, and is sustained and swelled not by its owner's exertions but by the returns it commands and the inheritances that pass it on; it has become, in a word, a position — a standing claim on the income that the rest of society produces, exercised through ownership and maintained without work. The same word, wealth, covers both the householder's nest egg and the dynastic fortune that is a power in the land, and the failure to distinguish them — treating all wealth as the first kind, the simple reward of thrift — is among the most useful confusions in political economy. Both, moreover, share a deeper feature, which is the true subject of the volume.
For the income that a great fortune yields wears the same disguise as every other return in this work. A price is a verdict on a hidden contest, mistaken for a fact of nature — and the return to wealth, the flow that the stock throws off, is a verdict of just this kind. It presents itself as the natural reward of capital, the yield saved-up resources earn by their productivity, as deserved and as given as the wage labor draws. But the return to a great fortune is, in the main, not the wage of any present labor and not, on inspection, the reward of any past abstinence either, since the fortune was rarely saved into being; it is the income of a position, the share of the social product that ownership commands, its rate set not by nature but by the long contest over how that product is divided between those who work and those who own. To read the rentier's income as the natural fruit of his capital is to mistake the spoils of a distributional contest for a law of the economic world.
And the position, once seen for what it is, behaves quite differently from a reward. A reward for work is bounded by the work; a position compounds. A price is a verdict on a hidden contest, mistaken for a fact of nature; and the contest the stock records is one the stock itself tends to win more decisively over time, for where the return on wealth exceeds the growth of the economy — as Thomas Piketty has argued it usually has — fortunes gain on earned incomes, the past gains on the present, and wealth grows more concentrated than the flow from which the older theory imagined it to spring. Great wealth is, moreover, never merely a claim on goods: it is security where others have none, freedom where others are bound, influence in the councils where the rules are written — a standing in the order of things the bare figure of a net worth does not begin to convey. The stock that looks like stored-up earning is, at the top, a structure of power, transmitted by inheritance and enlarged by return, whose connection to the labor of its holder may be remote, ancient, or none.
The stock earns its place among the quantities as the one whose confusion with a flow does the most public mischief. The arguments that fill the newspapers — that the rich already pay most of the income tax, that a billionaire "made" so many dollars in a year when his shares rose — turn, again and again, on treating a stock as a flow or a flow as a stock, and the muddle is rarely innocent, for each confusion tends to serve a side. The volume on the surplus has already traced the residual that ownership claims over the wages of labor; the volume on the margin, the productivity theory by which the claim is dignified as a reward; and the stock is where the residual, accumulated and capitalized, hardens into a permanent position. To insist on the difference between stock and flow is not pedantry but the precondition of thinking clearly about who, in a society, has what — and why. None of which denies that much wealth is honestly earned and prudently saved, or that the security a stock affords is a good worth spreading; the point is only that the return to the stock is no fact of nature, and the stock no simple ledger of desert.
The twelve plates follow wealth from the accounting that defines it to the power that it becomes. They set out the reservoir that distinguishes the stock from the flow and the claim that a great stock becomes; the multiple by which a flow is capitalized into a fortune and the ledger on which a fortune is reckoned; the windfall of the capital gain and the patrimony that passes the stock undiminished to the next generation; the levy by which a society might tax the stock rather than the flow and the coupon by which the owner lives on the flow his stock throws off; the concentration that gathers wealth into few hands and the buffer it provides against a hostile world; the saving that is supposed to build the stock, and seldom does at the heights where it matters most; and, at the last, the estate — whether a great fortune is the reward of contribution or a position in society, and what the accumulation of such positions does to a commonwealth of equals. The stock looks like earning, stored. It is, at the top, a place in the world. The argument remains open.