Tag Archives: economy

Mr. Darcy & American Aristocracy

So apparently Romney pays around 13% a year in taxes on an income of over 20 million dollars.  Paul Ryan paid 20% on $323,000 in 2011.  And many of the most wealthy people in the United States, billionaires even, are paying less than 10% (CNN).

This is because wealthy individuals gain most of their income through return on investments, quite often in the form of capital gains which is taxed at a lower rate.  This is because not all real income is real income.  Some of it cannot be spent on whatever the new owner of fake income wants to buy.  And much of it cannot be deposited in a savings account because it can spontaneously combust.

Lately I have had a strong sense that I live in an immoral society—tt assails me like a stiff wind—not because everything about America is awful, indeed I love my country, but because we are thoroughly corrupt in at least this respect: as a society we have decided to favor, and to create, an upper-class.

Until quite recently, the English aristocracy was alive and well, and dominated English society.  I love Victorian movies and books (I’m still a hardass though!) and recently my curiosity was piqued by the constant discussion of income, “Mr. Darcy has 20,000 pounds a year!”  Do they mean wages, capital gains, or what?

I looked into it, and it turns out that to be an English aristocrat you usually had to make over $3 mil. a year (adjusted for inflation).  They did not acquire this income through business ventures, mercantilism, wages, or through any great talent on their part really.  It came from speculation, investments (most often chosen by others), and rents from large estates and tracts of land — it came from pre-owned wealth.   The Duke of Marlborough, one of the richest aristocrats of the time, pulled in $52.5 mil annually.  To put that in perspective, Warren Buffet pulled in $62 mil. last year, also from pre-owned wealth (admittedly cleverly invested wealth, likely more cleverly I imagine than the Duke of Marlborough).

But Victorians considered the Duke’s income as real income while we pretend it is not, at least not as real as income made from wages.  Indeed, wages, the money received based on time, skill, expertise, and effort, should be taxed heavily.  That stuff simply should not be incentivized.  Don’t these people know they should already have wealth to invest?  Rather, aristocrats sitting on pots of gold and passing it down to their children…that is the stuff civilizational dreams are made of.

So if you love this American economy
Than vote for Mitt Romney
And I won’t forget the men who died
So I could make money,
And I’ll gladly stand up
For freedom
To speculate at low tax rates
Cause their ain’t no doubt I love this land
God bless the USA

(Based on the chorus of Proud to be An American)

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The Island of Yap

As I studied economics, I ran across this story a number of times.  Perhaps you have heard it.  It helps me think about the nature of money and valuation.

The indigenous people on the island of Yap developed money that consisted of enormous round slabs of limestone, up to 12 feet in diameter, with holes in the middle.  Limestone was not found on Yap, but on a neighboring island.  Quarry and transport costs accentuated its value.  Of course, nobody owned very many of these huge stones, called rai, but they did change hands for dowries, or as a last resort after a failed crop (though hopefully your crop was the only one that failed, otherwise you might be facing rai inflation).

But rai did not change hands per se.  They were too big.  Instead, when you acquired rai, it was merely acknowledged that the stone now belonged to you.  You left it in the town square, or marking the path, or wherever it lay.  It was yours and everyone knew it.  Now you had enduring stored value, ready for you when you needed it.

Once, while transporting a large rai stone, it fell into a deep part of the sea.  Oh no!  But after some discussion, everyone concluded it must be down there somewhere, and so it continued to be exchanged as if it was regular rai.  It is still traded, though nobody has seen it for over 100 years.

It seems to me that the brilliance of modern finance is to say, “Why are we going through the trouble of mining and transporting these stones (or in our case, precious metals) in the first place?  Seems like a waste of time.  Instead, why don’t we pretend that all our rai are already lying on the bottom of the sea?  We’ll just use banks, accountants, and ledgers to keep track of it all, just like we were doing already, but in order to lessen the impact of cycles of inflation and deflation, let’s create a quasi-governmental organization (the Fed) to control how much fictional rai at the bottom of the sea we are allowed to think exists.”  Brilliant.  If we are all going to play make-believe, we might as well ensure our make-believe world is as stable as possible.