Over the last 30 years, the Dow Jones Industrial Average has increased by about 1072%. In other words, if you had had an investment that just tracked the DJIA, not one that tried to “beat the market,” as they say, your investment would have multiplied by about 12 times during that period. An investment like that would have an annual rate of return of about 9%. So let’s say you can beat the market a little, and get an annual return of 10%. That’s not too hard, really.
Suppose you start with $1000. In 10 years you would more than double your money. In 30 years, your investment would yield about $17,000 – quite a bit of money, of course, but hardly a fortune. On the other hand, if someone else started with $500,000, and invested it in such a way as to produce the same annual return – 10% – he would also more than double his money in 10 years. He would then have about 1.3 MILLION DOLLARS. In other words, he would make 50 TIMES in 10 years what you made in 30 years.
The mathematics of money are something the average America hardly gives a thought to. Finance, which was less than 3% of our economy in 1950, is now well over 8%, and growing. In a way, it’s amazing that wealth doesn’t get more concentrated in the hands of a few. Think about it. The average American household takes in about $61,000 per year. Over 10 years that would be $610,000. But someone with investments totaling 10 million dollars, having an annual return of 10%, takes in 1 MILLION DOLLARS EVERY YEAR WITHOUT LIFTING A FINGER, or depleting the original investment. And some people have much more than that. Jeff Bezos, the CEO of Amazon, has a net worth of more than 100 BILLION DOLLARS. If all of that wealth were merely in a money market account, drawing 1.8% interest, he would take in 1.8 BILLION DOLLARS EVERY YEAR. It hardly needs to be said that his annual return is much higher than that.
When you have lots of money, making lots more is a no-brainer. You can’t help it. In the classic movie Brewster’s Millions, Richard Pryor’s character, Monty Brewster, is given 30 million dollars. If he can spend it all within 30 days, he will inherit 300 million. But there are lots of conditions. He cannot simply give the money away. At the end of the 30 days, he must not have any assets (except the ones he already had before). He cannot simply buy expensive objects and destroy them. He cannot hire people at incredible wages and get no service of value from them.
Brewster of course quickly finds ways to spend large amounts of money, such as renting an expensive hotel suite and making bad gambling bets. He even starts his own campaign for mayor. But his friend Spike, who isn’t “in the loop” about what’s going on, is busily investing what isn’t being spent. The result is that Brewster is making money faster than he can spend it. That’s not so implausible when you consider that to spend $30 million in a month, you’d have to spend $41,700 PER HOUR, every hour, 24 hours a day. As well as the additional money the unspent money is making, every hour, 24 hours a day. And this was in 1985.
Brewster succeeded, barely, and inherited the $300 million. Now, with a 10% annual return, he would be taking in $82,000 A DAY, every day. In a year, he’d make $30 million. Even if he spends $10 million EVERY YEAR, within 10 years his unspent money will have more than doubled. He will now have $619 million, which at a 10% annual return will make about $62 million per year, about $170,000 a day. And so on.
My point is that when you already have lots of money, it’s hard NOT to make lots more. If you don’t spend it hand over fist, it just grows and grows. Even if it’s just sitting in a bank account, it’s growing. The better money markets currently pay about 1.8% interest. On $619 million dollars, that’s more than $11 million a year. But then no one with that kind of money puts it into a mere bank account.
Where does all of that new wealth originate? How can interest just “appear”? How can equities just “grow” in value? These are questions the average American seldom asks. A common assumption, heavily promoted by propagandists, is that all of this wealth comes from the sweat of hard-working human beings. It’s a fanciful idea, and a little consideration shows how flawed it is. In 1800, America was a largely agricultural country. Most productive labor was performed by humans and animals. The real GDP per capita was only about $1000. Today, agriculture is only a small part of our economy, and even that is highly mechanized. Our real GDP per capita is more than $40,000. Clearly, the average American doesn’t work 40 times as hard today as he did in 1800. That’s what scientific advancement and technology have given us.
Of course, someone owns all of that productive technology. Not workers, generally. Workers are not owners. Workers collect wages. Owners collect profits. Since the vast majority of productive work comes from machines, it is not surprising that owners reap great rewards from that machine labor.
Since technology is responsible for most production, some people are surprised that our economy doesn’t grow faster. In the mid 20th century, our economy grew rapidly, often at rates of 5-8% per year. These days it’s generally more like 1-4% per year. If scientific advancement and automation are giving us production, why doesn’t more automation give us more growth?
The problem is that machines are not consumers. They don’t actually buy anything. Production is the value of goods and services PURCHASED. A machine might crank out 10 million Barbie dolls in a month. But if no one buys them, no production has occurred. It’s not about how much stuff is made. It’s about how much is bought. When large numbers of people aren’t paid very well, they don’t have much disposable income to buy stuff. This is exactly why our economy struggles along, even with increasing automation. The machines can “produce” as much as we want. But someone has to have the money to buy that stuff.
A thriving middle class is the key to strong economic growth. In the mid 20th century, when growth was so strong, labor unions were also strong. America was a manufacturing powerhouse, and many of those jobs were union jobs. Many households were single breadwinner, yet were often doing better than many 2-breadwinner households today. Today we have much better technology, able to generate far more wealth. Real GDP today is 3 times what it was in 1950. But owners collect a much higher percentage of that productive wealth. And a few owners can only consume so much stuff.
Of course, owners still need human workers for many critical tasks. Agriculture and manufacturing, though, are increasingly automated. Most of our economy now consists of service jobs, and many of those don’t pay well – hamburger flippers, maids, supermarket stockers, receptionists. This is exactly why an increasing percentage of production is going to finance. Our economy is increasingly top-heavy. And this is bad for the economy as a whole. But individual owners and CEO’s do not base their actions on the economy as a whole. Their goal is to maximize profits, which means cutting labor costs. The system creates a downward spiral. It’s inherently unstable.
Very likely, long before the downward spiral leads to collapse, we will see accelerating automation that will force a revolutionary restructuring of our economy. Up until now we have been pretty good at skirting around an inescapable reality – that the vast majority of productive work is done by machines. Since the machines are not owned by workers, workers are increasingly squeezed out of the rewards. When “work” as we have known it becomes largely obsolete, this reality will be unavoidable.