The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Vilx- on February 08, 2014, 02:06:01 PM
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There's a question I've been rolling over in my head for a while now and I just cannot seem to find a good answer to it. Is it ethical to make money off of something simply because you own it? Let me explain what I mean by this:
The reason why I'm asking this is because "making money from something you own" seems to be a cornerstone of Mustachianism (and indeed of becoming rich at all). Practically everyone who has lots of money has it because of something they own. Some people have real estate, others own shares in some companies, but the basic idea is always the same - you own something that continuously generates income without you needing to lift a single finger.
And this rises a little red light in my head because it smells a lot like freeloading. In the extreme case, you're just sitting at home, playing computer games, and enjoying the good life. You're not producing anything. You're a parasite. Everyone else works to sustain your lifestyle except for yourself.
Of course, such extremes are rare - most early-retired people do something productive simply for the fun of it - but the numbers are still there. If you produce less than you receive, you're a freeloading parasite. Something like that is only possible because someone somewhere receives less than he produces. After all, the sum of all things produced and received is zero (if you produce something but don't give it away, then you can consider that you've received it yourself).
Owning stock - the most common form of "money-generating-ownership" because it's the easiest - has another problem that I can see. It's commonly considered that investing in the stock market is good, because it gives money to the companies who can then use it to grow. But you don't buy shares from a company (not usually, anyway). You buy them from another shareholder. Who then uses your money to buy other shares which he/she considers more valuable. The money never gets to any companies, it just stays in the stock market. The most that other companies see from that money is when some shareholder decides to use some of your cash in order to get a meal at McDonalds. In other words, small amounts for everyday consumption. But most of it just stays locked in the system.
You could, of course, be more mindful and only buy stock from small startups, where the original shareholder is the founder and then you know that he will use this money to actually advance his business... But that's high-risk low-return investment; the complete opposite of what MMM advocates. It'll take years for those shares to make any income, if ever.
I feel like there's some piece of the puzzle missing here, it cannot be so... but what is it?
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And this rises a little red light in my head because it smells a lot like freeloading. In the extreme case, you're just sitting at home, playing computer games, and enjoying the good life. You're not producing anything. You're a parasite. Everyone else works to sustain your lifestyle except for yourself.
You are consuming, however - supporting farmers who grow food, the people who provide power, the people who make the computers.
And without people investing money, how would the economy function at all?
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What is the difference between buying stock in a small company versus a large company? You seem to make an assumption that one will use the money and the other does not use the money but that isn't true, both use the money. So why is one more or less ethical than the other? You make another assumption that the money stays in the stock market, and that isn't true, you've bought portion of ownership of that company and are using your capital to aid in the growth of that company regardless of size.
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This is indeed an ethical concern in many countries, although I've never heard it voiced in the U.S. before.
I think I look at it this way. The things that it would actually benefit the world for me to do are not the same, by and large, as what employers would pay me to do. I could get a job doing all kinds of things -- working at Starbucks, running a company that produces widgets, whatever -- but the good I produced would be fairly small. I don't think we actually need more consumption and production in Western countries on this planet. I'm not convinced I'd be adding to the greater good just by having a job. I'd get money, but for doing anything worthwhile? I dunno. It might even be argued that if I can support myself without a job, I shouldn't be taking up a job that someone else might genuinely need to support themselves and maybe their family.
But if I feel adding to the greater good is important, I can use the time I save by not having a paid job, and work for the stuff that is important. I can fight unjust laws, try to restrain polluters, clean up wilderness, work in soup kitchens, advocate for causes, send money to worthwhile organizations, build houses for the poor. Surely that's a lot more worthwhile than making more widgets or serving more coffee?
As for what others do, or should do, with their money -- I can have my opinions, and I can advocate for my position, but ultimately my primary responsibiity is to live my own life the way I feel is right.
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And this rises a little red light in my head because it smells a lot like freeloading. In the extreme case, you're just sitting at home, playing computer games, and enjoying the good life. You're not producing anything. You're a parasite. Everyone else works to sustain your lifestyle except for yourself.
Um, no. I will not be producing anything, I will have already produced what I need to live.
If I'm on a desert island, I can grow and harvest bananas each day for food. I can also work extra hard for a few years and grow and harvest so many bananas that I can't eat them all in my lifetime. At this point I no longer have to work for food anymore. I can stop harvesting bananas, and I am no longer "producing" anything. That's not unethical.
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You are not being paid because you own it, you are being paid because you took the risk to buy it and are responsible for it. First, lets look at a simpler example than stocks: real estate.
As the landlord you are providing a place for someone to live and are responsible for the property. The landlord holds the risk if the house is destroyed (i.e. fire) or loses value.
As the tenant you are paying for right to live in that house but you are also paying to not be responsible for the house. The tenant pays for not having "skin in the game" and can walk away when the lease is up.
You can look at stocks in a similar manner:
As a stockholder you are buying a share or partial ownership of the company in exchange for money. You are now partially responsible for the running of the company (shareholders elect board members who hire management teams) and your initial investment could be lost if the company goes under. For growth companies you are looking for your ownership to be worth more in the future than it is currently (this is your example of selling a stock for a higher price). More mature companies will pay a dividend back to their shareholders (a percentage of the profits) to reward shareholders for holding their stock.
The company gets a couple benefits for being publicly traded. It can raise more capital by offering more shares to the public (trading ownership for cash). Companies also benefit by having a higher stock price b/c it allows them to borrow more money from banks for future project that hopefully increase profits. The latter is the motivation for offering dividends since it rewards shareholders and encourages them to hold on to the stock.
I used a lot of generalizations so don't take this as gospel for all companies. My point is that is not evil to "own" assets like stocks or real estate because ownership carries risk and through managing risk you get paid.π
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Great topic! I also had some ethical issues with this before adopting an investor mindset, but I don't anymore. If you view people in the world as free agents you do business with, they have their own reasons for paying you money. So in a simple example you loan money to an individual and they pay you interest. To them, it is a better deal to get the money now and pay a little more later. So as long as you are not tricking them, it's a fair deal. Some people think that it is easy to take advantage of a person in need this way, though.
About stocks, I think a lot of the income is dividends, which is a share in the profits. I agree that a lot of people just buy and sell and it seems arbitrary, but they are all choosing to do it. So if somebody "wins", it's OK because everybody agreed to play the game. Mustachians don't typically invest this way anyway, they hold there stocks for the long run.
Another topic, say you write a book and now you own it. Is it wrong to get royalties since you are not working on it anymore? I don't think so. Royalties can be seen as delayed payment for the original work.
There are problems, of course. Say a person acquires ownership of a natural resource by being the first to "claim" it. I'm not sure it is fair for them to keep all the profits, since they are extracting the value, rather than creating it.
You could apply that quote about democracy to the free market: Capitalism is the worst system of all, except for all the others!
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YES. It's yours. If you own it as a result of your hard work, you've "produced" all your life to earn this thing you own. If I've saved my earnings and acquired an income producing asset rather than mindlessly spending my money on crap, why should I not be able to benefit from all that hard work and, dare I say, sacrifice it took to acquire the asset.
Even if I inherited the asset, I still have the same answer. Someone did something to own it through hard work, sacrifice, stealth investing, etc. I still think it's perfectly ethical to earn money for allowing someone to use it.
The only way I think it would feel unethical is if I acquired the asset in an unethical way, but that's another story.
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Not parasitic, maybe more symbiotic. The investor is providěng liquid assets for growth of business. The investor's "take" from dividends and sales then goes back into the market as they use the money to buy groceries, housing and other goods and services. Therefore, just by being willing to invest the money instead of stuffing it in a mattress, they're feeding the machine from two sides.
I don't see it as unethical at all. As some others pointed out, there are many legitimate ways to make money, and legitimate ways to spend it. Taking the concept to the level of absurdity, most of us could be found to be unethical based on the level and source of our earning and spending choices.
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Not parasitic, maybe more symbiotic. The investor is providěng liquid assets for growth of business. The investor's "take" from dividends and sales then goes back into the market as they use the money to buy groceries, housing and other goods and services. Therefore, just by being willing to invest the money instead of stuffing it in a mattress, they're feeding the machine from two sides.
Yes. In the US, many people think consuming is what drives the economy and you should spend what you make. I, and many others, think investing the surplus is a much better option than spending it on crap or sticking it in a safe.
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Thank you for all the responses! So far I've found two that hold traction with me.
One is Argyle's suggestion that to be ethical you should try to do as much good with your income & time as possible, so that you wouldn't really be a freeloader. That sounds good. The system can be abused, you can become a parasite - but you don't have to.
The other is ice813's suggestion that you get paid for accepting the risk. It's your neck on the line out there, and that's what you get paid for. Fair enough.
I've also myself come up with another way of looking at landlording and other types of rentals - it can be seen as providing a service, which is of use to someone else. Hmm... I suppose that investing can be seen the same way - you're renting out your money to the company.
As for the rest of explanations - think of it this way - imagine there's a huge cast iron pot into which all goods and services go. When you produce something, it goes in the pot (and you get money). When you consume something, you take it from the pot (and give up some of the money you have). Now, money-for-ownership allows you to put in a little bit of stuff in the pot, and then take out much, much more. Because some people need to keep giving you a portion of their money which they got from the pot. So for these people, they will be able to take out less from the pot than what they put in there.
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I've also myself come up with another way of looking at landlording and other types of rentals - it can be seen as providing a service, which is of use to someone else. Hmm... I suppose that investing can be seen the same way - you're renting out your money to the company.
This.
You have no idea how many tenants thank me profusely for providing them clean, safe housing, taking care of maintenance issues right away, etc. They've dealt with terrible landlords all their lives and are grateful to have one that provides them a great service.
Yes, I am making money on it. And they're quite happy about it. Win-win.
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As for the rest of explanations - think of it this way - imagine there's a huge cast iron pot into which all goods and services go. When you produce something, it goes in the pot (and you get money). When you consume something, you take it from the pot (and give up some of the money you have). Now, money-for-ownership allows you to put in a little bit of stuff in the pot, and then take out much, much more. Because some people need to keep giving you a portion of their money which they got from the pot. So for these people, they will be able to take out less from the pot than what they put in there.
Except investing is more like buying a portion of the pot, which you can afford because you put something into the pot and didn't waste the returns. You offer others the opportunity to thrive as you did, and in turn their own choice to buy a portion of the pot or not. You cannot control their choices-- you can only control your own.
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Except investing is more like buying a portion of the pot
Is it? I see it as lending your money to someone else, who then has to pay you back, little by little, for their entire lives (dividends). Perpetual loan. In the long term you get back your entire loan but they still need to pay you more and more...
Selling/buying shares doesn't touch the pot at all. No goods or services get produced or consumed.
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As for the rest of explanations - think of it this way - imagine there's a huge cast iron pot into which all goods and services go. When you produce something, it goes in the pot (and you get money). When you consume something, you take it from the pot (and give up some of the money you have). Now, money-for-ownership allows you to put in a little bit of stuff in the pot, and then take out much, much more. Because some people need to keep giving you a portion of their money which they got from the pot. So for these people, they will be able to take out less from the pot than what they put in there.
How about this: Whoever builds a place to live puts something really big into the pot. Then they can sell it to someone who is responsible for maintaining it. That person can sell it to someone else, or rent it out. Owners have to put a lot of things in the pot in order to save enough money to buy the house. So I don't think they get to take more out of the pot than they put in.
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In the long term, you might get all the money back. If you build a house for $200'000, and then rent it out for $1000/month, it will take you about 17 years to get it all back. OK, with maintenance added, it'll probably be closer to 20. Anyways, not that much. After that, you're taking out more than you've put in.
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In the long term, you might get all the money back. If you build a house for $200'000, and then rent it out for $1000/month, it will take you about 17 years to get it all back. OK, with maintenance added, it'll probably be closer to 20. Anyways, not that much. After that, you're taking out more than you've put in.
That's true, but nobody would build or buy any houses if they couldn't eventually get more out than they spent on the house. If you build a house that costs X to build, you have hopefully added quite a bit more than X to the pot. You can sell the house and get paid in a big chunk, or rent it out and get paid in smaller chunks. Eventually the house will need to be repaired or will deteriorate. So you can't just get paid forever without putting more into the pot at some point.
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In the long term, you might get all the money back. If you build a house for $200'000, and then rent it out for $1000/month, it will take you about 17 years to get it all back. OK, with maintenance added, it'll probably be closer to 20. Anyways, not that much. After that, you're taking out more than you've put in.
You aren't taking out more than you put in, because you're providing a service. You're adding value along the way. And there's the whole time-value of money thing.
What you are doing is getting compensated for the value you provide. If you don't provide any value, you don't get any return. If you have a falling down shack no one wants to rent, you won't get a return. If you have a nice house, provided at a good value to tenants, that they willingly pay, you are getting paid according to that value you provide.
If you got a great deal on the property, and get paid back in 10 years, or got a mediocre deal, and are paid back in 20 years, or a poor deal, and are paid back in 100 years, does that change the value that you're providing to those tenants?
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Yes, I agree. For renting a house there is the service aspect, which counts as adding to the pot.
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Yes, I agree. For renting a house there is the service aspect, which counts as adding to the pot.
Okay. So now if you own part of a business, and that business is providing a service (even if you are hiring other people to provide that service - so now they have a job, as well as the customer being happy with the service they're paying for), that seems - to me - to be creating value as well.
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Hmm... not sure I can make the mental jump here yet. In this case it's not me who's creating this service, it's my employees. And they're giving me a part of what they earn. Now, if I was actively leading the employees, I could see this as extending a service to them (leadership), but if I'm just a passive shareholder... What service am I providing to the company that they should pay me for?
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What service am I providing to the company that they should pay me for?
Capital. Say a person has a great business idea, but they need some money to buy some equipment and to pay expenses until they make a consistent profit. The shareholders invest to provide the capital, which the owner does not have.
Same if an existing business wants to expand, but doesn't have the funds to do it.
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Hmm... not sure I can make the mental jump here yet. In this case it's not me who's creating this service, it's my employees. And they're giving me a part of what they earn. Now, if I was actively leading the employees, I could see this as extending a service to them (leadership), but if I'm just a passive shareholder... What service am I providing to the company that they should pay me for?
Liquidity. The original owner built the business, in the hopes of some day selling part of it. You bought part of it, providing liquidity to the original owners and any subsequent owners. In other words, someone out there wanted cash now, in exchange for giving up future dividends/profits.
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You aren't taking out more than you put in, because you're providing a service. You're adding value along the way. And there's the whole time-value of money thing.
This.
Also Vilx-, what if you rephrased your question to "Is it ethical to make money from something you earn?". Lots of folks have assets that they've worked hard to own. I suspect there are very few trustafarians here. Why shouldn't they enjoy the fruits of their labors?
[MOD EDIT: Final two sentences removed. No need to get personal, it's a theoretical discussion Vilx- is trying to wrap his/her head around.]
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Hmm... not sure I can make the mental jump here yet. In this case it's not me who's creating this service, it's my employees. And they're giving me a part of what they earn. Now, if I was actively leading the employees, I could see this as extending a service to them (leadership), but if I'm just a passive shareholder... What service am I providing to the company that they should pay me for?
In addition to what bikebum and dragoncar said, let's look back at the rental property, since you seem to like that one, but can't leap yet to the business.
So let's say I have the rental, but now I hire an employee to manage it. I do no work now, but collect the rents (and don't even actually collect them, they're just passed on to me). Did it somehow go from ethical to unethical to do this, because I created a job for someone else to do it? If anything, that seems even better than doing it myself. Now I'm providing value to the tenant via safe, affordable housing and also now a job/income to an individual to help those tenants deal with maintenance requests (perhaps faster than I could), find new tenants, etc.
Is that okay to you? If not, why not? If yes, then why is a business different? I'm creating value by having this company that a) provides jobs and b) provides a useful product or service to its customers. Whether I'm physically doing it myself or using my capital to allow it to be done (without my providing that money to create the product, there would be no job to sell it and no pleasure derived from the customer who would want to buy it but couldn't), either way I am providing value.
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Hmm... not sure I can make the mental jump here yet. In this case it's not me who's creating this service, it's my employees. And they're giving me a part of what they earn. Now, if I was actively leading the employees, I could see this as extending a service to them (leadership), but if I'm just a passive shareholder... What service am I providing to the company that they should pay me for?
You could say the same for owning a rental house. It is possible to own a rental home without actually managing it at all. You hire an employee to manage it and service it. You simply decide to own the home and have someone else work to keep it up.
Eventually you decide that the home isn't worth having all your eggs in and decide to find another person willing to buy half the home, reduce your risk and place capital elsewhere. You have now just sold "stock" in your rental home. Now instead of only one person owning the home, two people now own the home.
And this is all a passive investment, and no one would have had the job of managing the home or servicing it without the capital to do so.
You might be able to see it better if you remove money from the equation. Where you are a great musical instrument maker. You create all sorts of wonderful instruments, and then another man comes and offers to pay you regular dividends from his business for giving him these instruments. You decide it's a good deal, receive enough from him and decide you don't ever need to make any more instruments. Capital is necessary and is definitely worth something. And without that capital, there would have been no business, no jobs, and no dividend returns.
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So the service to the employees is... providing the company itself. Giving them a job. Because without me, they would have their skills, but nowhere to use them. Well, that makes sense.
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You aren't taking out more than you put in, because you're providing a service. You're adding value along the way. And there's the whole time-value of money thing.
This.
Also Vilx-, what if you rephrased your question to "Is it ethical to make money from something you earn?". Lots of folks have assets that they've worked hard to own. I suspect there are very few trustafarians here. Why shouldn't they enjoy the fruits of their labors?
[MOD EDIT: Final two sentences removed. No need to get personal, it's a theoretical discussion Vilx- is trying to wrap his/her head around.]
Note Moderator: Sorry, this was not intended as such. Would you consider IM-ing me on this?
[Mod Note: PM sent, as requested. :) ]
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So the service to the employees is... providing the company itself. Giving them a job. Because without me, they would have their skills, but nowhere to use them. Well, that makes sense.
That is how I see it. And if they don't want to work for you, they can try to find someone else to work for, or create their own business.
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It's called Capitalism. Old man Marx wrote a book about it. Not much of an economist the guy but has it nailed down nicely in terms of its amoral (note: not immoral) nature.
You buying shares in a company makes you a capitalist - that's all it takes. We usually buy index funds to hedge against entrepreneurial risk with the trade off of having to believe in ongoing economic expansion - which has worked out so far.
Any attempt to find the morally good in investing will only end up providing an ideological justification and therefore is political in nature.
If there is any argument for capitalism it is that is has so far turned out to be the nemesis of tyranny.
Good enough for for me to keep participating on the winner's side.
Peter
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With most of the people I know, if they have passive income, it is usually due to much research, knowledge, time, effort and work on their part, not including the effort it took to make the money initially to invest in the first place. Not too many people out there just sit eating bonbons and watching TV and end up with a large amount of passive income. It takes a fair amount of effort to choose the right properties in the right areas and find and maintain good management and maintenance or research the companies and market conditions in order to not take too high a risk in stock investing. And "passive" doesn't mean you do nothing. You need to stay on top of quarterly earnings reports and knowledge of the companies you are invested in and overall market conditions in order to guard your investment and monitor your property managers. If you don't, your passive investments could quickly turn into losses. If you've put enough effort into making it run smoothly initially, then the workload goes down drastically, so you'll work much less than a normal hourly-wage job.
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No question that a lot of us on these boards are working hard for our capital. Of course that's not always true everywhere. There are numbers of people who've just inherited it and are not spending it quite as fast as it's making more money -- but they didn't lift a finger to be loaded with wealth. And there are many people who work harder than most of us will ever work, but luck and the place they were born were not on their side, and they're working in Brazilian mines or walking twelve miles each way to fetch water every day -- or just taking two buses to get to their job at Wal-Mart -- and sheer hours and effort put in does not pay off for them the way it has for those of us who started out with more advantages.
So I think we have to beware of saying that we're affluent because we're so much more deserving than people who aren't. Sometimes yes, but sometimes no. And owning the land or assets or what have you is not always a sign that one deserves so much more than those who are working for us. Plus it behoves us to treat those people justly, which is not always the case, not in the U.S. and particularly not in parts of Asia and China, where some of us have investments. So I don't think we can always regard our money-making as good for the world. To my mind, we have to be careful of the excesses of the system and be mindful in the ways we make money.
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If your passive income is derived from inherited wealth (or lottery winnings) then I would agree you are a parasite.
I like to think my passive income is derived from many years of hard, productive work. Also, I learned in economics class that S=I, Savings = investment, so without savers (earning interest) there can be no investment.
And what about all those people with jobs (I'm sure you have seen them in Government and private industry) that collect paychecks but do very little and produce nothing of value?
One of the most ethical aspects of me not working and living on my investments and savings is that I am not taking a good job from someone who really needs it. The job market is so tight now, young college graduates are having so much difficulty finding good jobs, I think it is unethical for older people to keep working if they don't need the money.
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I like to think my passive income is derived from many years of hard, productive work.
The problem is that passive income can be made exponential. You can use it to acquire more assets which generate more passive income and so on into infinity. With a fixed amount of hard work you can get limitless income. Not much better than the lottery, really.
That is, unless you consider that your assets are a service to someone as well, as discussed above.
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The problem is that passive income can be made exponential. You can use it to acquire more assets which generate more passive income and so on into infinity. With a fixed amount of hard work you can get limitless income. Not much better than the lottery, really.
You can't get passive income for too long because at some point, you'll be dead. You could pass it on to your kids so they don't have to work for it, but I don't think that is a mustachian thing to do. I think most mustachians make their own money, and teach their kids to do the same. If a mustachian ends up acquiring an excess of money through his/her investments, he/she will most likely put it towards charitable causes rather than keep or spend it. You are right though, that it could be kept in the family through many generations generating more money without work (assuming that is what you are talking about). I think people call this "old money". I don't have kids yet, but my plan is to teach them how to make their own money, and if I have any left when I am about to die I'll will it to a charitable cause.
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Here's my 45 second summary of Macroeconomics.
Production is a function of capital and labor. Y= F(K,L)
Economic summary of my life:
age 22-32: I, stetsterhune, am Labor. Using capital that the company I work for has, my labor produces value ("money"). I get some of this money, the provider of the capital gets some of this money. Seems fair, each of us is worthless alone. With the money I have, I can either consume or I can save. Consumed money essentially disappears. Saved money adds to the world's pot of capital.
age 32+: I, stesterhune, am Capital. I have saved up enough capital, invested in the stock market, that I am now the provider of a small amount of capital in tens of thousands of companies throughout the world and get to receive a small amount of money from the value that the workers of these companies create with their labor and my capital.
The sticky point for people here is the incredibly abstract way in which I've created the capital that I'm living off of in ages 32+. If you work at P&G, I had nothing to do with the creation of any of the capital that you're using. But.... someone did. And at some point, that person sold a bit of that capital so that he could consume something. and he sold it to someone who sold it to someone who sold it to someone who sold it to Vanguard who sold it to me.
If you want to look at this from a moral stand point. If I sold all my stock and used it to consume something, the amount of capital in the world decreases (because the person who bought the stock from me is not investing it somewhere else.) And when there's less capital, then labor is less efficient, so someone, somewhere is working the same amount, but doing it less efficiently and getting less for it because my capital is not there.
I realize how abstractly all these things are happening in real life. But I do truly believe that on some level, this is what is happening.
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This is a really dumb question.
What alternatives do you have, making money off of something someone else owns?
How about I sell your car and keep the money, sell your time and keep the money, and invest your earnings and keep the money? Would that be more ethical?
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This is a really dumb question.
What alternatives do you have, making money off of something someone else owns?
How about I sell your car and keep the money, sell your time and keep the money, and invest your earnings and keep the money? Would that be more ethical?
Don't bring the Government into this! ;)
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This is a really dumb question.
What alternatives do you have, making money off of something someone else owns?
How about I sell your car and keep the money, sell your time and keep the money, and invest your earnings and keep the money? Would that be more ethical?
Don't bring the Government into this! ;)
Good one!
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This is a really dumb question.
It might or might not be dumb: my problem is trying to fathom the state of mind in which it is even a question.
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This is a really dumb question.
It might or might not be dumb: my problem is trying to fathom the state of mind in which it is even a question.
Indeed, it seems pretty obvious to me why it's ethical to earn money off of things you own. As long as you aren't doing forcing people to use it at gunpoint, but are providing them utility that they are willingly paying for, seems like a great thing.
However it is interesting to bring it up as a possibility (not being an ethical thing), and then reading the various arguments that those that disagree (myself included) make in favor of it.
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My chief concern is simply that it allows one to become a parasite. That is, to live in such a way that one takes more from the "pot" than they put in.
If so, then this seems to me to be the root cause of what people call "income inequality". For one person to become rich another has to become poor.
I'll be honest, the whole money-goods loop is still quite foggy in my head, so perhaps this fear is unjustified. I know there are explanations out there that say that investment does the exact opposite. But... I still haven't arrived at the full picture to verify this.
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My chief concern is simply that it allows one to become a parasite. That is, to live in such a way that one takes more from the "pot" than they put in.
That would be people who refuse to work and prefer welfare or crime.
One could argue that those who inherited great wealth didn't work for it, but that problem usually solves itself in a couple of generations in the US.
Otherwise, people making money off of their property did so because they did something to earn that property.
If so, then this seems to me to be the root cause of what people call "income inequality". For one person to become rich another has to become poor.
Horseshit. Just because I earn money does not prevent anyone else from earning it. In fact, it may facilitate others making money. This is true whether I work for pay or just rent out my money for interest or real estate for rent.
I'll be honest, the whole money-goods loop is still quite foggy in my head, so perhaps this fear is unjustified. I know there are explanations out there that say that investment does the exact opposite. But... I still haven't arrived at the full picture to verify this.
How about you do some more learning then?
I'll suggest http://www.amazon.com/The-Worldly-Philosophers-Economic-Thinkers/dp/068486214X/ref=sr_1_1?ie=UTF8&qid=1391974844&sr=8-1&keywords=the+worldly+philosophers (http://www.amazon.com/The-Worldly-Philosophers-Economic-Thinkers/dp/068486214X/ref=sr_1_1?ie=UTF8&qid=1391974844&sr=8-1&keywords=the+worldly+philosophers)
as a great read and an excellent introduction to a host of deep thinkers about how the world, its people and economies really work.
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Otherwise, people making money off of their property did so because they did something to earn that property.
Yes, but afterwards they get infinite returns. If the property would give a fixed amount of returns (even if large), I'd have no quarrel about it. But inifinity?
Just because I earn money does not prevent anyone else from earning it.
No, but as I understand it, the amount of goods and services produced is a finite amount, and it is limited not by money, but by our collective output. In other words, no matter how hard you try, a single person can only produce so much stuff - unless you get better technology. From this point of view, consuming more of these goods and services means that someone else has to get less, right?
How about you do some more learning then?
Thank you! I'll check it out. :)
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Otherwise, people making money off of their property did so because they did something to earn that property.
Yes, but afterwards they get infinite returns. If the property would give a fixed amount of returns (even if large), I'd have no quarrel about it. But inifinity?
But it's *not* infinite. It's limited by a) the price that the customer is willing to pay-- if someone considers it an unfair deal, they can opt *not* to purchase/rent/partake, and b) time. Nobody has infinite time-- they have a choice to take their earned resources and turn them to further earnings, or to spend them. Everyone has that same choice-- that others choose to spend their money foolishly and not put the money to work is not the fault of those who do.
It is, in effect, a feedback loop-- you can take modest earnings and make them produce modest earnings. You can take those further earnings and, by investing them rather than spending them, turn them into above average earnings. You can take above average earnings and do the same again, turning them into excellent earnings. Each step along the way is a choice, and one that is available to anyone. It's only unfair if everyone doesn't have the opportunity to make the same choices.
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@iamlindoro - you say that it's not infinite, but then go on illustrating how to make it infinite. Just re-invest most of your earnings. Your income grows exponentionally, without you needing to do anything. OK, so at some point you will die, but if you've done your part correctly your children will continue where you left off. There is no upper limit.
@Knaak - yes, in this case all is fine. You make something, you sell it. Your "investor's" work is not much different from the contractor's work. He did some finite amount of work (organizing things) and got a finite reward.
I'm talking about the case where the investor doesn't sell the house to his customer but rents it. In this case, the customer just keeps on paying and paying. Eventually he will have covered all your expenses, but it won't stop there. He will continue paying and paying until you die of old age. And then he will continue paying your children. Again - no upper limit. And the loser in this case is the customer. It's basically like a deal - "I make you a house, and then you support me for the rest of my life".
OK, so in real life there will probably be multiple tenants, and the house has some continuous maintenance expenses, but that doesn't change anything. The investor doesn't need to do any work anymore - he can just survive on the continuous income from that little piece work that he did once, 10 years ago.
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I think a better question is, is it a good idea to structure our society in such a way that many of the best incomes are unavailable to most, not because they lack education or skills, but because they lack wealth?
The popular answer seems to be that wealth is available to all, based on merit and productivity. If you don't believe that then it's easy to see how you could view passive incomes as unethical - and it's pretty hard to believe. However, I think the goal should be creating the required meritocracy, rather than a society without passive incomes.
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@iamlindoro - you say that it's not infinite, but then go on illustrating how to make it infinite. Just re-invest most of your earnings. Your income grows exponentionally, without you needing to do anything. OK, so at some point you will die, but if you've done your part correctly your children will continue where you left off. There is no upper limit.
@Knaak - yes, in this case all is fine. You make something, you sell it. Your "investor's" work is not much different from the contractor's work. He did some finite amount of work (organizing things) and got a finite reward.
I'm talking about the case where the investor doesn't sell the house to his customer but rents it. In this case, the customer just keeps on paying and paying. Eventually he will have covered all your expenses, but it won't stop there. He will continue paying and paying until you die of old age. And then he will continue paying your children. Again - no upper limit. And the loser in this case is the customer. It's basically like a deal - "I make you a house, and then you support me for the rest of my life".
OK, so in real life there will probably be multiple tenants, and the house has some continuous maintenance expenses, but that doesn't change anything. The investor doesn't need to do any work anymore - he can just survive on the continuous income from that little piece work that he did once, 10 years ago.
The renter is not a "loser" in that scenario. You're forgetting that a renter is still getting value out of the deal. A renter isn't giving someone money for nothing. They get to live in a house/property for a set fee that costs less (most of the time) than outright buying a property, without the costs of maintaining and updating said property. They are free to choose a more mobile lifestyle by being a renter - choosing location, amenities, sizing - as appropriate for their needs at any particular time, without the hassles associated with owning. They are paying for mobility and a living space, so how is that coming out as being a loser?
And they are certainly free at any time to move from being a renter to an owner. No one is forcing the renting arrangement on them.
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Otherwise, people making money off of their property did so because they did something to earn that property.
Yes, but afterwards they get infinite returns. If the property would give a fixed amount of returns (even if large), I'd have no quarrel about it. But inifinity?
But it's *not* infinite. It's limited by a) the price that the customer is willing to pay-- if someone considers it an unfair deal, they can opt *not* to purchase/rent/partake, and b) time. Nobody has infinite time-- they have a choice to take their earned resources and turn them to further earnings, or to spend them. Everyone has that same choice-- that others choose to spend their money foolishly and not put the money to work is not the fault of those who do.
It is, in effect, a feedback loop-- you can take modest earnings and make them produce modest earnings. You can take those further earnings and, by investing them rather than spending them, turn them into above average earnings. You can take above average earnings and do the same again, turning them into excellent earnings. Each step along the way is a choice, and one that is available to anyone. It's only unfair if everyone doesn't have the opportunity to make the same choices.
More importantly, look up the "time value of money." Yes a stock can theoretically pay dividends forever. But theoretical future money is worth less than real money today. That's why you can buy a share of all future profits in, say GE, for just $25. If it was truly infinite, why would anyone sell you their shares?
Edit: of course another reason, I think related, is risk
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OK, so in real life there will probably be multiple tenants, and the house has some continuous maintenance expenses, but that doesn't change anything. The investor doesn't need to do any work anymore - he can just survive on the continuous income from that little piece work that he did once, 10 years ago.
I think this is strange where you obviously understand there may be "multiple tenants" -- think turnover time and costs, sometimes ridiculously high ones if they have abused the home -- and "some continuous maintenance expenses" which in reality owning for 30 years or more means new heat systems, new water heaters, new roof, maybe windows, siding, trim, etc.... more than "some." So in the case of a landlord, clearly you do not understand the reality that it is not just "that little piece work he did once 10 years ago." The tenant pays a fixed price for an allotted time whether or not major system repairs are necessary, guaranteeing his fixed expense for housing. The landlord takes the risk of repairs, maintenance, non-payment of tenant, obsolescence, etc. Many landlords cash flow very little until the mortgage is paid off, and then they are still dealing with real estate taxes, maintenance, and turnovers. Many people prefer renting to owning as their costs are known and fixed for that period. I guess my problem is your thinking that passive income is freeloading or parasitic somehow. Freeloading would be living off relatives or friends, expecting them to support you, not coming up with ways to generate income that you can rely on even when you are no longer able to work so you'll never be a burden to others. And I do hope I can pass it on to my children so they can live a better, more secure life as well. We've taught them the value of assets and income and living within your means, and I feel comfortable that they will be good caretakers of any wealth we can pass along to them.
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I'm talking about the case where the investor doesn't sell the house to his customer but rents it. In this case, the customer just keeps on paying and paying. Eventually he will have covered all your expenses, but it won't stop there. He will continue paying and paying until you die of old age. And then he will continue paying your children. Again - no upper limit. And the loser in this case is the customer. It's basically like a deal - "I make you a house, and then you support me for the rest of my life".
OK, so in real life there will probably be multiple tenants, and the house has some continuous maintenance expenses, but that doesn't change anything. The investor doesn't need to do any work anymore - he can just survive on the continuous income from that little piece work that he did once, 10 years ago.
Are you assuming in this scenario that your investor is paying someone to manage? Rental properties will always require additional work and they will even require work on the part of the owner even if a property management company is involved. In fact, I would argue that the longer you hold the rental property, the more expensive it becomes (since older homes tend to require more maintenance, as well as updating to keep them in demand as rentals).
I certainly don't feel like the loser by renting. Although I'd like to own at some point, having no maintenance costs is pretty awesome. Looking out my window right now, I feel very glad that I am not responsible for snow removal or dealing with the tree that just fell down. My dishwasher broke and I paid exactly $0 to have it repaired. While I could have learned to fix it myself and purchased the part, that would have required an investment of time, energy and money on my part. Since we have three full-time maintenance folks who work in my complex, it was fixed within hours with nothing more than a phone call.
I'm sure my landlords make a lot of money on this property. They are a nice couple who own an apartment and townhouse complex with over 180 units. They are also both here at least 40 hours a week, working. They hired three other full-time employees, providing good jobs to people. They also pay a landscaping company to come in once a week, helping to support even more jobs. They provide 180 families with homes, and we don't have to deal with paying property taxes,, water, sewer, and garbage, or handling landscaping and maintenance.
For the cost of my rent, I could pay the PITI on a small house in a lousy neighborhood that is further away from my job and the places I like to spend time. Ultimately, I am willing to pay for the flexibility at this stage of my life. We have talked extensively about moving within the next three years, and it doesn't make sense to us to purchase at this point. If we had an opportunity that felt right, we could pick up and move without the worry of selling a home and what the market looked like. Same thing with downsizing, which is also something we are talking about. We could get into a smaller apartment simply by calling the landlord and asking what is available.
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The fact that some choose to be owners and some choose to be renters, even if they can afford to be owners, is enough evidence for me that it is a fair system.
In the same line, some choose to be employers and some choose to be employees, and some choose to be self-employed. It may seem like not everyone has a choice, but I think in the US most people do. And there are systems in place to help those who don't. I don't know what it is like in Latvia though.
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@Knaak - yes, in this case all is fine. You make something, you sell it. Your "investor's" work is not much different from the contractor's work. He did some finite amount of work (organizing things) and got a finite reward.
I'm talking about the case where the investor doesn't sell the house to his customer but rents it. In this case, the customer just keeps on paying and paying. Eventually he will have covered all your expenses, but it won't stop there. He will continue paying and paying until you die of old age. And then he will continue paying your children. Again - no upper limit. And the loser in this case is the customer. It's basically like a deal - "I make you a house, and then you support me for the rest of my life".
OK, so in real life there will probably be multiple tenants, and the house has some continuous maintenance expenses, but that doesn't change anything. The investor doesn't need to do any work anymore - he can just survive on the continuous income from that little piece work that he did once, 10 years ago.
You still can't seem to get over that win-lose mentality. The customer chooses to trade his dollars to rent a house. The investor wins by getting a return on his investment. The customer wins by getting a place to stay. Still looks like win-win to me. If the customer thinks the amount being charged is unfair, he is free to shop for another place to rent. He can also buy a place if he has the means. The tenant is not being forced to rent from the investor.
"The investor doesn't need to do any work anymore..." To keep making money, he needs to keep providing value to the customer. As soon as that value stops (he lets the place get run down so much that nobody wants to stay there, he own a house in an area like Detroit where nobody wants to live anymore, etc), so do his rent payments.
+1
You seem to continue to think about the economy (I'm referring specifically to the US economy, no experience outside that) as a fixed pie, someone-wins-and-someone-loses zero sum system, when multiple examples have tried to illustrate that that is simply not true. There are no winners in losers, only independent agent making choices about how to allocate their capital. Some choose non-investment consumer goods like iPads and handbags, some choose to risk their money in investments in exchange for some profit.
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(Side note: I apologize if I seem to be stubborn or willfully obstinate. That is not my intention. In fact, this article has given me a lot of food for thought and you have already managed to all but convince me. Thank you all for that! However I continue the debate because I find constructive arguments to be a wonderful way of thoroughly exploring an issue from all it's angles. If you find this offensive, please say so and I will stop).
Ok, I see the point about rental properties. There's quite a bit of service involved there and you don't get money for doing nothing.
Well then... here's the part that I still stumble upon: MMM and others advocate passive income as the only possible path to FIRE and a humane life as such. However it seems to me that this can only work as long as Mustachians are a minority. If everyone would try to base their lives on passive income, the economy would collapse because there wouldn't be anyone left actually making stuff (or, well, they would be a small minority).
What's the counterargument to this?
(P.S. Latvia is pretty much a "western" country. Some details vary, but the principles of economy are the same as in U.S.)
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(Side note: I apologize if I seem to be stubborn or willfully obstinate. That is not my intention. In fact, this article has given me a lot of food for thought and you have already managed to all but convince me. Thank you all for that! However I continue the debate because I find constructive arguments to be a wonderful way of thoroughly exploring an issue from all it's angles. If you find this offensive, please say so and I will stop).
Ok, I see the point about rental properties. There's quite a bit of service involved there and you don't get money for doing nothing.
Well then... here's the part that I still stumble upon: MMM and others advocate passive income as the only possible path to FIRE and a humane life as such. However it seems to me that this can only work as long as Mustachians are a minority. If everyone would try to base their lives on passive income, the economy would collapse because there wouldn't be anyone left actually making stuff (or, well, they would be a small minority).
What's the counterargument to this?
(P.S. Latvia is pretty much a "western" country. Some details vary, but the principles of economy are the same as in U.S.)
Ignoring the fact that MMM does not in any way promote passive income as the only path to FI...
http://www.mrmoneymustache.com/2012/04/09/what-if-everyone-became-frugal/
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@iamlindoro - you say that it's not infinite, but then go on illustrating how to make it infinite. Just re-invest most of your earnings. Your income grows exponentionally, without you needing to do anything. OK, so at some point you will die, but if you've done your part correctly your children will continue where you left off. There is no upper limit.
Logarithmically, not exponentially.
This is really a somewhat silly argument-- so let me ask *you* a question. What is the alternative? Once someone reaches a certain financial level, we confiscate all further earnings? And more importantly, if it's so easy and insidious (One could invest as little as $1000 in Vanguard), why isn't everyone doing it?
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(Side note: I apologize if I seem to be stubborn or willfully obstinate. That is not my intention. In fact, this article has given me a lot of food for thought and you have already managed to all but convince me. Thank you all for that! However I continue the debate because I find constructive arguments to be a wonderful way of thoroughly exploring an issue from all it's angles. If you find this offensive, please say so and I will stop).
Ok, I see the point about rental properties. There's quite a bit of service involved there and you don't get money for doing nothing.
Well then... here's the part that I still stumble upon: MMM and others advocate passive income as the only possible path to FIRE and a humane life as such. However it seems to me that this can only work as long as Mustachians are a minority. If everyone would try to base their lives on passive income, the economy would collapse because there wouldn't be anyone left actually making stuff (or, well, they would be a small minority).
What's the counterargument to this?
(P.S. Latvia is pretty much a "western" country. Some details vary, but the principles of economy are the same as in U.S.)
I agree. I have very much enjoye this thread. This has been a very civil, well reasoned, and interesting debate. This is just about the only place on the internet that seems possible.
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Well then... here's the part that I still stumble upon: MMM and others advocate passive income as the only possible path to FIRE and a humane life as such. However it seems to me that this can only work as long as Mustachians are a minority. If everyone would try to base their lives on passive income, the economy would collapse because there wouldn't be anyone left actually making stuff (or, well, they would be a small minority).
What's the counterargument to this?
Everyone won't. Just like everyone won't choose not to be a thief, or a murderer, or a drug addict.
But let's suppose we suddenly change our society so that the majority of the people in it:
- have adequate math skills to understand the rewards of saving, investing and compound growth,
- can understand and support intelligent policies for their own and society's betterment,
- have sufficient will power to delay instant gratification in order to get better long term results,
- don't require a whole lot of services or products in order to lead a happy life, and
- are willing to work to get those rewards.
Darn, what's the problem? Don't you think a society that's composed of folks like that couldn't figure out how to make it work better than their opposites are now failing to do?
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@iamlindoro - That article talks about investing from the first line to the last. Frugality is nice and fine, and part of the equation - but if you don't have passive income, then you can pretty much forget about FIRE - because once you quit your job your only source of income will be your savings. (Or did I get something wrong again?)
About the alternative - sorry, I haven't come up with one. Believe me, I've tried. :P This is part of the reason I'm asking this here. Because money-through-ownership is the only feasible plan I can see for a financially-stressless life - and yet it somehow seems... wrong. That I'm somehow setting myself above others and denying them the same opportunity that I'm taking. That there's only so much pie and now I'm helping myself to a second serving...
Sorry, I know I'm neither the first nor last person with this sort of mindset and misconceptions. But I couldn't find anything that would satisfactory explain it to me. Once more, thank you very much for taking the time and answering me!
@ksaleh - You're welcome. :)
@SwordGuy - Haha, I think you have a point there! :D
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(Side note: I apologize if I seem to be stubborn or willfully obstinate. That is not my intention. In fact, this article has given me a lot of food for thought and you have already managed to all but convince me. Thank you all for that! However I continue the debate because I find constructive arguments to be a wonderful way of thoroughly exploring an issue from all it's angles. If you find this offensive, please say so and I will stop).
I think you are doing a great job expressing your arguments and thoughts without being offensive. Let the debate continue!
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@iamlindoro - That article talks about investing from the first line to the last. Frugality is nice and fine, and part of the equation - but if you don't have passive income, then you can pretty much forget about FIRE - because once you quit your job your only source of income will be your savings. (Or did I get something wrong again?)
The article I posted is not at all about investment strategies! It directly addresses the outcome if everyone were to become frugal/mustachian. Your exact question was:
Well then... here's the part that I still stumble upon: MMM and others advocate passive income as the only possible path to FIRE and a humane life as such. However it seems to me that this can only work as long as Mustachians are a minority. If everyone would try to base their lives on passive income, the economy would collapse because there wouldn't be anyone left actually making stuff (or, well, they would be a small minority).
Which the article directly addresses:
To understand why that would happen, you just have to look at the actions of individuals again. If you’re working alone on an island, you only need to produce whatever you want to consume. If an entire society gradually decides that it wants to consume less, then it needs to produce less as well.
If there is less stuff that needs to be produced, then people don’t have to work as many hours to create it. That’s perfect, because many people will be dropping out of the workforce much earlier as they finish earning the money they need to get going on their their early retirement. The shortage of available work will be balanced by the reduced number of people willing to do that work.
Wise investments are the most efficient/realistic path for the average person to reach FI-- but accumulating the amount you would need to live off of with no appreciation whatsoever is a perfectly valid path to being FI. For most people, the work (countless long hours at a mid-income profession) or career (average income in an exceptionally well-paid profession) required to reach FI by that path is impractical-- but it's no worse or better to take the path of raw accumulation.
Let's look at this another way. Two people go to work every day. They grew up in similar households and had the same educational opportunities. They each work the same number of hours, shoulder the same amount of stress, and employ the same amount of effort. Because they are in different fields, one makes a wage far above the average, the other a wage far below the average. Is this fair? If the answer is "yes," then passive income is also ethical so long as all people have access to the same systems for producing wealth. If the answer is no, then your problem is not with investments/passive income, but rather with the concept of capitalism in general.
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I've also myself come up with another way of looking at landlording and other types of rentals - it can be seen as providing a service, which is of use to someone else. Hmm... I suppose that investing can be seen the same way - you're renting out your money to the company.
This.
You have no idea how many tenants thank me profusely for providing them clean, safe housing, taking care of maintenance issues right away, etc. They've dealt with terrible landlords all their lives and are grateful to have one that provides them a great service.
Yes, I am making money on it. And they're quite happy about it. Win-win.
Exactly. That's especially the case for my friends who buy ghetto-cheap houses ($30k and under) in a sooooomewhat marginal but not dangerous neighborhood, which happens to be next to some nice neighborhoods. There are so many slumlords in that neighborhood... the kind of landlords who literally won't replace a refrigerator that breaks, won't exterminate if there are rats, won't even fix the goddamn front door lock if it breaks. I have a property there and so many potential tenants told me it was the nicest place they'd ever seen. Sh!t breaks, I fix or replace it. Same situation for my friends. They provide nicely remodeled houses (they can afford to remodel because the houses are so cheap), they fix or replace whatever breaks, they keep the places nicely maintained.
So not only are they (we) providing a service for tenants that is hard to find in that neighborhood, they (we) are also improving the neighborhood because our properties LOOK GOOD, unlike the slumlord properties. The folks who have owned there forever, almost all of whom are decent hardworking people, are seeing their property values stabilize.
Does anyone here really think my friends and I would be providing more value to the world if we got full-time jobs slinging lattes at Starbucks, or helping Acme Corporation more effectively market "Widgets You Don't Need" or "Toothpaste to Make You Sexy"?
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@iamlindoro - That's another good question I've often pondered about. I'm afraid I don't have a good answer here either. :( On an emotional level that doesn't seem fair, but every alternative I've been able to come up with is much worse. :/
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Original Poster: You're from Latvia? That means you either grew up in the USSR or surrounded by people who lived under the Soviet government. No wonder you're so confused. The Soviets told a lot of lies about how a free market economy works. And, of course, where there was some truth to the bad points they exagerated them.
Most capitalists can't really abuse their position because there are enough other capitalists out there to stop them. Read the book I recommended and you'll have a much better grounding in real economics and its effect on humanity.
In the USA, few extremely wealthly families stay that way for more than 3 generations. There is a lot of social mobility upwards and downwards.
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Original Poster: You're from Latvia? That means you either grew up in the USSR or surrounded by people who lived under the Soviet government. No wonder you're so confused. The Soviets told a lot of lies about how a free market economy works. And, of course, where there was some truth to the bad points they exagerated them.
I know quite a few Americans that would agree with the OP. I used to agree with a lot of it too. Seems a lot of these ideas come from college-age people trying to figure out why the world seems so dumb, lol. Not saying that is the case with the OP.
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Well then... here's the part that I still stumble upon: MMM and others advocate passive income as the only possible path to FIRE and a humane life as such. However it seems to me that this can only work as long as Mustachians are a minority. If everyone would try to base their lives on passive income, the economy would collapse because there wouldn't be anyone left actually making stuff (or, well, they would be a small minority).
What's the counterargument to this?
(P.S. Latvia is pretty much a "western" country. Some details vary, but the principles of economy are the same as in U.S.)
Vilx, i like your line of thinking. I believe there is something flawed about the stock market as we know it today. When an economies value is so fluid it creates something too top heavy and volatile. Not only that but we also create a soul less monster of an economy where publicly companies follow the stock tickers. A business no longer has culpable owners for their actions.
I also believe work is good and I don't intend to fully stop--its more about having greater flexibility, balance in life, and a balanced level of commitments for various stages of life. Creating a hord and then living it up is not my goal.
At the end of the day it makes me a little sick to have my 401k in a broad market fund (don't have many options there). Most all other savings/investments I make are privately held or in my home/property. I haven't looked into it much but its more appealing to me to invest in a fund focused on "good" businesses rather than some all out global fund that's sending my money to Brazil and China so Wallmart stuff can be made outside good health systems or outside of good environmental regulation.
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The way i see it, investors are actually stoking the fire that keeps the pot boiling. If they keep a good rolling boil, they get the overflow as a reward. Of no one is there to feed the fire, no new jobs are created, no new companies are funded, no expansion funds are available, no landlords to rent properties. The whole system fails when no one invests....
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Still, I wish i felt that stocks did well because the company they support did something stable and worthwhile... Often it seems like everyone is just chasing their tails and jumping at shadows and that determines whether a stock goes up or down. Not the most encouraging system.
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Yes it's unethical. I'm moving into your house next week for free, hope that's cool.
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OP, in a world were investing is unethical, how can an elderly/disabled person that is no longer able to work ethically survive? That person's options are to leech from their family/society or live off their investments.
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OP, in a world were investing is unethical, how can an elderly/disabled person that is no longer able to work ethically survive? That person's options are to leech from their family/society or live off their investments.
http://www.youtube.com/watch?v=w8JPEq0Qp4Q
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I don't see how it's unethical at all. You have something people want, even if it is passive it's yours and if people want to use it you have the right to be compensated. Everyone is talking about rental homes which also provide a service. What about a more passive income? Say you own land that Verizon wants to put a cell phone tower on and wants to pay you a certain amount if money to lease use of the land each month. Why is it unethical? It's yours, profiting doesn't make you a parasite, if you didn't lease it to them someone else up the road would. People want cell service.
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This is a really dumb question.
I don't think it's a dumb question, and I totally understand where the OP is coming from. In my mind, the question comes down to your feeling about human suffering, exploitation, and inequality. Is it ethical to shower one family in gold plated lottery tickets while the family next door starves to death?
There have been some very predictable arguments made here that the wealthy are wealthy because they work harder, because they are smarter, because they save and invest more wisely. You don't need to disagree with those arguments to see the moral problem with letting a child starve so that you can buy another rental house with your passive income.
I accept that some people are lazy and stupid and will always make poor financial decisions. And by contrast that other people are conscientious and dedicated and frugal and will eventually build wealth. That doesn't mean I want to see either family go hungry, or be homeless or suffer from treatable medical issues, or miss out on a solid education.
From one perspective, each human being should be able to amass wealth based on the output of their own labors. By design, our society has carefully subverted that ideal to allow some people to profit from the labor of others, thereby extracting wealth from people who work and produce and drive our civilization. I don't think it's crazy at all to ask whether or not that system is the best of all possible options.
What's my proposed alternative? Higher marginal tax rates. The United States has historically had marginal tax rates in excess of 90% on the very highest earners, people for whom money no longer has any real value. And still our economy grew, and we used that tax revenue to build great national infrastructure and start anti-poverty programs. And generally try to keep anyone from starving, and I think that's a moral choice.
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The USSR collapsed when I was 6, so I don't have any meaningful memories of it. I don't feel like my ideas were influenced by any communist lies - I came up with them myself (ideas, not lies :D). Also, there's no love lost here for those days. The planned economy back then was simply awful, everything was scarce. (I know some interesting stories, but that's offtopic) So almost everyone today loves capitalism. Whether they understand it though is another question...
So, here's my question then: when I buy some shares on the stock market, how do I help the businesses? After all, my money doesn't go to the business who's shares I just bought - it goes to the previous owner. That owner might spend it for consumption (thus driving the economy a bit), but more likely he'll just use it to buy other shares he thinks more valuable. So how does my money help?
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More demand for shares means higher share prices, so that the company can get more investment money by selling more shares. You also help other people who have shares and would prefer money.
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Seems awfully roundabout. Do companies often emit new shares? Seems like it's against the shareholder's interests, because their shares lose value and they get less in dividends.
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Would you rather live your life supported by passive income or have to continually/frequently work to survive?
Take the example of Chris McCandless. With the right mentality, there are few things more exciting and rewarding than the struggle for survival.
The way I see it, accumulating wealth and passive income allows you the freedom to do whatever you want to do. That choice may include subsistence, producing more than you consume, consuming more than you produce. Choose whatever makes you happy.
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Seems awfully roundabout. Do companies often emit new shares? Seems like it's against the shareholder's interests, because their shares lose value and they get less in dividends.
http://en.m.wikipedia.org/wiki/Corporate_finance
Honestly it's hard to have a conversation about art, when you have to explain what paint is
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*shrug* Well, you have to start somewhere...
Thanks for the link. I'm trying to digest it now, though the terminology is daunting.
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*shrug* Well, you have to start somewhere...
Thanks for the link. I'm trying to digest it now, though the terminology is daunting.
Never tried it, but maybe something like this would be better? https://www.coursera.org/course/finance
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Looks fine, but I'm not interested in committing to a schedule for learning.
Anyways, when I came here I just had these questions and had no idea how much I need to know in order to understand the answers. If I'm going too deep and this is beyond a simple forum conversation, then I'll continue on my own terms. Or not - but that's then my decision.
[Side note: I had a few semesters of economics at high school with a "polarizing" teacher - after studying with her people either fell in love with the subject, or vowed never to touch it again with a 10 foot pole. I was in the latter group. Lately I've regained some fleeting interest in the subject, but not yet enough to dive in headfirst.]
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You can buy stock directly from many well established corporations such as DRIPs and others. Also, if you believe you can just sit back once you have real estate, I hope you never buy any. Any property needs constant maintenance, insurance coverage & tenant management, and study of tax laws.
Real estate can also crash although this hasn't happened since 2008. Stock shares ditto. By saving and investing now, while others are living the good life, allows you to have your good life later. Hardly parasitical; without investors with money, not much would be accomplished. If it really bothers you, as it bothers many who inherit but never worked for a living, give all the profits to your local food bank, soup kitchen, and homeless shelter. There, problem solved.
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No, I do want the good life... not to need to worry about money anymore... to do the work I like when I like it... to live in a nice place... It's a dream alright. :)
It's just that "pie" or "pot" or whatever that has (had?) me hesitating.
Some time ago I googled a bit and found out that the GDP per capita of the world is about $1000 per month per person (or something like that). That's the total output of the world today. If you make more than that, that means that someone else has to make less.
And what I had thought is that the limiting factor, why the world doesn't produce more, is time. After all - one person can only do so much useful work per day. In that case, the only way to increase the world's output would be better technology, that makes those precious hours more productive.
But this discussion has made me think that perhaps there are other limits too. That perhaps people can produce more with today's technology, and it's the inefficient distribution of wealth (and perhaps some other things too) that prevents it. In that case, investing would indeed be commendable.
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It's just that "pie" or "pot" or whatever that has (had?) me hesitating.
Some time ago I googled a bit and found out that the GDP per capita of the world is about $1000 per month per person (or something like that). That's the total output of the world today. If you make more than that, that means that someone else has to make less.
I think this depends on how a person is making money. As already pointed out, many income pursuits make the pot bigger without it being necessary for others to get less from it, and sometimes others actually get more from the bigger pot.
I do think there are situations where a person can take more from the pot without adding to it, so someone else ends up with less. Usually a person has to be tricked in some way for this to happen, or their lack of knowledge about something can be exploited. Credit cards come to mind, not in all cases but many. The only solution I can think of is for people to take the time to learn enough to avoid being duped. There will always be "sharks" and I think making laws to stop them is impractical. Learn to avoid them, and teach your friends!
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If you make more than that, that means that someone else has to make less.
If that was true, and the pot couldn't grow bigger, then everyone would have the same average standard of living that they did 3,000 years ago. Clearly we can raise the standard of living for the average person without making others' lives worse.
That's the total output of the world today.
This is the key part you've apparently skipped over. That's the total output today.
We can raise that total output. We can create wealth, and make things better for ourselves and others.
You're assuming for someone to make two dollars, someone else has to make two less. Instead why can't one person make two dollars and the other make a dollar as well?
The total output, as you put it, rises.
Win-win.
Just because the average is 1000 today, that doesn't mean the people making less than that are making that low because you are making more than that. You can raise yours, and theirs, at the same time.
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We also don't have the only currency in the world, and whatever currency people use holds a different value in different markets. I can buy much more with my dollar than the average person in NY or LA. If $10/month can feed a starving child somewhere, clearly $1,000 USD has much more buying power there.
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@arebelspy - Read carefully. My idea was that the output was limited only by our technology (which is why it's immensely larger today than it was 3000 years ago) and it can be only raised if we invent some new technology. This discussion has made me realize that there are other factors as well, including the distribution of wealth.
@Cheddar Stacker - That was meant to be "converted according to purchasing power, BigMac index and the proper sacrifices to the economic deities". It doesn't matter. The point was that it's a fairly small number by western standards.
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This is a really dumb question.
I don't think it's a dumb question, and I totally understand where the OP is coming from. In my mind, the question comes down to your feeling about human suffering, exploitation, and inequality. Is it ethical to shower one family in gold plated lottery tickets while the family next door starves to death?
There have been some very predictable arguments made here that the wealthy are wealthy because they work harder, because they are smarter, because they save and invest more wisely. You don't need to disagree with those arguments to see the moral problem with letting a child starve so that you can buy another rental house with your passive income.
I accept that some people are lazy and stupid and will always make poor financial decisions. And by contrast that other people are conscientious and dedicated and frugal and will eventually build wealth. That doesn't mean I want to see either family go hungry, or be homeless or suffer from treatable medical issues, or miss out on a solid education.
From one perspective, each human being should be able to amass wealth based on the output of their own labors. By design, our society has carefully subverted that ideal to allow some people to profit from the labor of others, thereby extracting wealth from people who work and produce and drive our civilization. I don't think it's crazy at all to ask whether or not that system is the best of all possible options.
What's my proposed alternative? Higher marginal tax rates. The United States has historically had marginal tax rates in excess of 90% on the very highest earners, people for whom money no longer has any real value. And still our economy grew, and we used that tax revenue to build great national infrastructure and start anti-poverty programs. And generally try to keep anyone from starving, and I think that's a moral choice.
+10. Very well summed up.
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When a lender makes a loan to a business, they're not the only one to profit from the transaction. The business uses the capital to create more wealth for themselves and their employees than they would have been able to without the loan. If that was not the case, the business would never sign up for the loan. So the system is mutually beneficial to both lender and borrower.
That said, there are certainly both ethical and unethical lenders out there. The good ones seek fair returns in a mutually-beneficial transaction, while the bad ones are downright predatory. Which one you choose to be is up to you.
Parting thought: What's more unethical -- lending your money to others so that they can afford the means to create their own wealth, or hoarding your money under the mattress and refusing to share?
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If a majority achieved large savings rates, reality falls between these endpoints
1. Entrepreneurs would find productive uses for that capital, and the economy becomes automated enough that a majority really can fund a lifetime from a few years of paid employment.
2. This doesn't happen. The savings glut pushes the return on capital to low levels, and the majority of savers needs to save even more to reach financial independence. The majority spend decades in paid employment to reach independence based on new 1% returns to capital.
Neither outcome crashes the economy. Neither is unfair.
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The other is ice813's suggestion that you get paid for accepting the risk. It's your neck on the line out there, and that's what you get paid for. Fair enough.
Paying you for the risk of ownership is the only answer to the original question you asked.
We were talking about the real estate and that is a great example if taken to the extreme. Lets say you find $2 million and buy a 200 unit apartment complex and rent it out. You then pay a management company and get an accountant to mange all the dirty little extras and then still have $100,000 per year left over which you have to do absolutely no work for.
The reason you get the $100k/year is because you take the risk that the hotel will lose value. If there were an earthquake, or a flood, or God himself decides to flick your building over, or the area gets taken over by gangs, or people just didn't want to live in that city anymore (think Detroit), then that $2 million loses value (even if you are insured). You are paid because of the risk you are taking that you lose your money.
Same principle works with stocks. You get your share of the profits because if the company goes bankrupt, you lose your money. It could be a Kodak, or it could be Apple in 1990. You don't know and neither does anyone else. By investing, you are saying that "I think this business is unlikely to lose my money but to cover my loses just in case, I want my share of profits now."
All of the other answers here seem way more complicated than they need to be. You are paid for your willingness to take on risks when you rent your assets.
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Having your own business is not always a sure thing. Hence, you are entitled to a profit to reward you for the risk you take in losing it all. You may also be providing jobs to those who need jobs. Frequently, keeping employees productive is like trying to herd cats, so that should be rewarded as well.
Landlords don't always "make" money on their rentals. Many have a negative cash flow offset by other income. Landlords are basically optimists who hope the building is still rebuildable after the tenant moves out.
Many renters rent because they are purchasing a service. They don't want to be bothered by repairs and maintenance, and are happy to pay for the service. They may also want to use their funds in other investments, not be tied down to any one area, or be more sociable than most of us
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@arebelspy - Read carefully. My idea was that the output was limited only by our technology (which is why it's immensely larger today than it was 3000 years ago) and it can be only raised if we invent some new technology. This discussion has made me realize that there are other factors as well, including the distribution of wealth.
Don't just think of technology in a limited sense, like "quantum computing" or "nuclear fusion", the big sexy innovations of science fiction. Technologies can be anything that allow a company to run leaner and more efficiently, producing more value out of the same set of inputs. For financial markets alone, the economist's definition of 'technology' includes low-cost brokerage services, derivatives, credible audited financial statements, securitization of loans like credit cards and mortgages (which has been very productive in general with only one big exception), currency swaps, and a million other things.
Or think of the managerial tools: six sigma, which allows companies to waste less money making stuff that doesn't work; lean manufacturing, which minimizes the production of things customers don't want, empowers employees, and minimizes the amount of inventory a company has to finance at any given point in time; advanced product costing techniques, which allow companies to know what production really costs them and allocate resources accordingly; internal auditing, which minimizes embezzlement and theft; and market resarch, which entails making sure that companies are making things that customers actually want.
There's also infrastructure, like electricity, broadband internet, dredged rivers, and good roads. Asphalt is hardly "technology" - it's crushed up rocks - but as societies invest in their infrastructure production, distribution, and trade become much more efficient. That's a factor that will increase productivity over time, no?
Corporations in the developed world today are much more efficient than they were 150 years ago, and a big part of the productivity increase in coming decades will be the increases that come as the rest of the world becomes capable in these areas. Investors will be confident they can believe the financial statements of the Nigerian brewery, and that they'll be able to trade pesos or rupees for dollars at a reasonable rate when they want to cash out, and more capital will flow to the places that have the least of it. And the world's total output and wealth will increase.
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From one perspective, each human being should be able to amass wealth based on the output of their own labors. By design, our society has carefully subverted that ideal to allow some people to profit from the labor of others, thereby extracting wealth from people who work and produce and drive our civilization. I don't think it's crazy at all to ask whether or not that system is the best of all possible options.
The idea that only labor creates value is the central tenet of Marxism, a failed philosophy that has not only produced totally unworkable societal systems, but also fails to make accurate, actionable predictions about the future of the world. I'm not throwing the term in your face because it's big and scary or because McCarthyism is nifty. But a very clear and fundamental implication of the idea is that real wages should fall as capital intensity increases and we have hundreds of years of evidence that that's exactly the opposite of what happens. It just isn't so! Capital is a fundamental ingredient of production and deserves the income that it receives, just like labor, because nobody has yet managed to describe any other workable economic system.
That doesn't mean inequality is desirable, or that the lower class has too much. But if you start with an assumption that fundamentally does not match the facts of the world, you're not going to get anywhere productive.
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I like to think my passive income is derived from many years of hard, productive work.
The problem is that passive income can be made exponential. You can use it to acquire more assets which generate more passive income and so on into infinity. With a fixed amount of hard work you can get limitless income. Not much better than the lottery, really.
So you think you can just put a few thousand dollars into an investment, do nothing, and watch it grow exponentially?
Really?
Maybe I wasn't doing it right, but I spent a LOT of time managing my investments. And that, my friend, is WORK, just as much as pushing papers at an office is "work." Frankly, it was harder work than my "job." Plus, of course, I'm putting my money, earned by hard work, at risk, in a way that benefits the economy.
If I put $1,000,000 into a savings account/money market/bonds, etc, I'm doing far more to help the economy than I could if I took a job slinging burgers 24-7 for 80 years. The burger flipper may be burning more calories and may look busy, but his job provides minimal benefit to the economy, but my investment dollars are used to create loans that create dozens of new jobs.
I guarantee the average peasant in Bangladesh "works harder" than the average American/German/Japanese.
That's a country full of hard working people, going nowhere because they have next to no investment capital.
Yet those "freeloaders," as you call them, in countries like the USA, allow for even the poorest American to live a life of luxury that most in the world can only dream about.
Clearly, those investors are providing value, even if you don't understand how it works. Take away that investment incentive, and the economy goes into the toilet, and we become hard working, dirt poor "ethical" non-freeloaders like those in Bangladesh or Haiti or whatever.
Is that what you want?
Just as an aside, most investors work, too. If I was a betting man, I'd bet that, on average, they work harder than the average American.
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So you think you can just put a few thousand dollars into an investment, do nothing, and watch it grow exponentially?
Yes. That's the whole investment philosophy of this site.
Maybe I wasn't doing it right, but I spent a LOT of time managing my investments.
Correct. You weren't doing it right.
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That doesn't mean inequality is desirable
Actually, this got me thinking about fairness.
As I said, I don't remember much of the Soviet era, but one thing I do remember is that pretty much everything was of a uniformly crappy quality. And that was because people didn't have much motivation to work better. They were getting paid the same anyway.
In my mind I had this picture, that in the Utopian world everybody would get paid according to their effort. Whether you're a CEO or a janitor, if you put in 8 straight hours of hard work, you get the same reward. What can be fairer that that?
But now I realize that the result would be hardly any better than what they had in the Soviet Union. A system like that wouldn't give people the right motivation. It would encourage them to work harder, not smarter. Innovation would be pointless, because increasing production with the same amount of effort as before wouldn't give any extra rewards to anyone - certainly not to the person who came up with the idea (although the item they were producing would now be cheaper, so I guess that's a gain for everyone - but it still wouldn't motivate the person).
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So you think you can just put a few thousand dollars into an investment, do nothing, and watch it grow exponentially?
Yes. That's the whole investment philosophy of this site.
Maybe I wasn't doing it right, but I spent a LOT of time managing my investments.
Correct. You weren't doing it right.
Well, maybe I wasn't "mustachian" as I made my first million a good decade and a half before I discovered this site, but I gotta tell you, just tossing your money into an investment and forgetting about it probably isn't the fastest way to financial success.
I'm not suggesting flipping in and out of stocks, day trading, or any other scheme, but you have to be paying attention, and that takes time and effort. You don't want to invest in XYZ Corp, then just stop paying attention for 20 years as XYZ Corp drives itself into the ground. If that is "anti-mustachian," then so be it.
As our net worth grew, I did put less and less time into it. Sometime after hitting 2-3 million, I really became a lot more passive, because I knew we had more money than we would likely ever need, but I'm sure my results were less impressive because of it.
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If you are buying stocks directly then you are not investing optimally, full stop. What you do after you buy stocks directly is irrelevant, because you've already made a mistake.
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We have some books we can recommend you libertarian, if you'd like to read more. Also the bogleheads site is pretty good for educating yourself.
Personally, for you, I'd recommend starting with the Bogleheads® investment philosophy (http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy). :)
(This isn't to imply that you can't do whatever you want, just explaining grant's comment on "That's the whole investment philosophy of this site." - this is the investment philosophy of most of us here, based on historical statistical research.)
If you are buying stocks directly then you are not investing optimally, full stop. What you do after you buy stocks directly is irrelevant, because you've already made a mistake.
For the vast majority of people, yes.
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If you are buying stocks directly then you are not investing optimally, full stop. What you do after you buy stocks directly is irrelevant, because you've already made a mistake.
Holy shit! You have hit the nail squarely and succinctly on the head. Amazing how many people believe this is the path to success.
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About the alternative - sorry, I haven't come up with one. Believe me, I've tried. :P This is part of the reason I'm asking this here. Because money-through-ownership is the only feasible plan I can see for a financially-stressless life - and yet it somehow seems... wrong. That I'm somehow setting myself above others and denying them the same opportunity that I'm taking. That there's only so much pie and now I'm helping myself to a second serving...
But there is not "only so much pie." There is far more money in the world today than there was, say, 150 years ago. Just look around--how many more people are living decent, middle-class lives now, compared with 100-150 years ago?
Wealth is not a finite set of objects that exists, which some people find and others don't. It's true that some forms of wealth are finite objects that exist (for instance, a gold mine--there is only so much gold in the world), but many other forms of wealth are CREATED by people.
For instance, I have two friends, a couple, who are becoming wealthy through the following approach: they buy houses in the rather poor neighborhood, where you can buy a house that's in bad shape for $20,000-$30,000, and then they put thousands of dollars (probably $10,000 per house, a low price because they do much of the work themselves) and hundreds of hours into fixing the house up. By doing that they are creating wealth; they found a piece of trash, a house that was literally not far from falling down, and transformed it into an attractive, sturdy house, which they can rent for anywhere from $900-$1400 a month. Out of that rent they must pay property taxes and insurance, so the houses net them anywhere from $600-$1100 a month. If you subtract roughly 10% to account for maintenance and vacancies, it's about $560-$990/month.
So they have turned an abandoned house that was worth $20k into a pleasant house that does all this:
- Provides renters with a nice and inexpensive house to live in
- Makes the neighborhood nicer, since an attractive house with tenants in it is far better than a falling-down abandoned house; this increases the value of all the houses around it, as well as increasing the neighborhood's quality of life
- Provides the city, county and local schools with increased property tax revenue to fund schools and other local government programs (property taxes are a huge source of income for most American municipalities), AND
- Provides my friends with an income of $560-$990/month.
Why should my friends not get an income for providing services to tenants and neighbors, providing money to the city, county and schools, and continually spending money to maintain their houses? If you couldn't get an income for doing this, then the only people who would restore houses, improve neighborhoods and provide low-cost rental housing are... wealthy philanthropists who care about housing. Nobody else could afford to do it. And there simply aren't enough wealthy philanthropists interested in providing cheap housing, so it simply wouldn't happen.
In short, making money off things you own is what CAUSES houses to be restored, neighborhoods to be revitalized, etc. And this involves creating wealth, because you start with a piece of trash (a terrible house worth very little money, which makes the neighborhood around it look terrible) and turn it into something good that generates new wealth.
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Practically everyone who has lots of money has it because of something they own. Some people have real estate, others own shares in some companies, but the basic idea is always the same - you own something that continuously generates income without you needing to lift a single finger.
Of course, such extremes are rare - most early-retired people do something productive simply for the fun of it - but the numbers are still there. If you produce less than you receive, you're a freeloading parasite. Something like that is only possible because someone somewhere receives less than he produces. After all, the sum of all things produced and received is zero (if you produce something but don't give it away, then you can consider that you've received it yourself).
Owning stock - the most common form of "money-generating-ownership" because it's the easiest - has another problem that I can see. It's commonly considered that investing in the stock market is good, because it gives money to the companies who can then use it to grow. But you don't buy shares from a company (not usually, anyway). You buy them from another shareholder. Who then uses your money to buy other shares which he/she considers more valuable. The money never gets to any companies, it just stays in the stock market.
You could, of course, be more mindful and only buy stock from small startups, where the original shareholder is the founder and then you know that he will use this money to actually advance his business... But that's high-risk low-return investment; the complete opposite of what MMM advocates.
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OK, I forgot to add my comments (Blah!)
Should a producer only be paid once? Shall a songwriter only be paid $100 for his song instead of receiving lifetime royalties? Should an author who writes an idiotic tale of a junior wizard and his friends fighting evil be satisfied with the $2000 advance as the sum total of her work? Or, does she deserve royalties?
So, I can't sing, and I can't write. Does this mean I am to be poor forever? Or, can I take that initial payment for toting those barges and invest it so I also can receive a lifetime stream of income? Now, this is not guaranteed. If I had invested in Enron, my original work would have been, to me, worth nothing.
I bought my first DRIP stocks when I was making not much more than minimum wage. This was paid directly to the company. However, you are wondering about stocks in general. If a company can keep its share prices stable, or with a slight rise, as reflected by the stock market, then it will find it easier to receive the financing it needs to make stuff, grow stuff, make things better down at the mattress factory. If it can't get financing most of its employees lose their jobs.
I'm having a slight bit of a problem with your equation: that things produced = things received. As a producer the very last thing I would agree to is that I've received what I made to myself. As a producer I want to move that stuff out the door. It may be in (hopefully) temporary storage - which is just one of the costs of production. If BMW makes 3,000 cars, it did so to sell them. While BMW has title to their creation until they do sell them, it can hardly be said BMW has received them.
Lastly, I get the feeling you believe savings are good, while investments are bad. Let's see. You put your money into the bank. Here in America you are getting less than 1% interest which means your money is becoming worthless as it doesn't pace inflation. Meanwhile, your bank is making money from something it DOES NOT own.
Alternatively, you could put this same money into investments so your children won't ignore you in your old age. This money may grow more than inflation; it may drop to zero.
Whether a savings passbook or a share certificate-- either represents money you've set aside for later.
Can a producer become wealthy from what he produces? That seems to be how most here did it: denial of everyday pleasures to generate a full piggybank, scrimping and saving while others were buying the best & latest, hoping all the while we chose wisely so we don't lose it all. Gee, we must all be gamblers at heart.
When you look at Warren Buffet or Bill Gates, you are seeing them as they are now. View their earlier lives. One started with a newspaper route, and bought his first share of stock at age eleven. The other had to drop out of college to follow his dream.
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Should a producer only be paid once? Shall a songwriter only be paid $100 for his song instead of receiving lifetime royalties? Should an author who writes an idiotic tale of a junior wizard and his friends fighting evil be satisfied with the $2000 advance as the sum total of her work? Or, does she deserve royalties?
Oh, boy, copyright. That's a whole can of worms I'd like to leave out of this discussion. I have some rather... extreme views in that area. (In short: yes, I believe they should be paid only once, according to contract. It's a job like any other. Programmers also get paid only once for their code.)
I'm having a slight bit of a problem with your equation: that things produced = things received. As a producer the very last thing I would agree to is that I've received what I made to myself. As a producer I want to move that stuff out the door. It may be in (hopefully) temporary storage - which is just one of the costs of production. If BMW makes 3,000 cars, it did so to sell them. While BMW has title to their creation until they do sell them, it can hardly be said BMW has received them.
Until BMW has sold them, they belong to BMW. They're not some kind of limbo where nobody owns them.
Lastly, I get the feeling you believe savings are good, while investments are bad.
I haven't thought about that. I don't see saving in a bank with an interest rate as any different than investing. Just that there's less risk and less returns. Saving without an interest (aka "in a sock" or "in a mattress" - whichever is the appropriate metaphor) would be closer to my original idea of "fairness" (though, as I've already said, this topic did manage to change my views about this).
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Oh, boy, copyright. That's a whole can of worms I'd like to leave out of this discussion. I have some rather... extreme views in that area. (In short: yes, I believe they should be paid only once, according to contract. It's a job like any other. Programmers also get paid only once for their code.)
That can only apply to "works for hire", for which the artist generally doesn't keep the copyright. I record music myself, not part of a contract; if I should be paid once for doing that, who should pay me?
Not all programmers only get paid once for their code; those working for hire do, but it's also very common for programmers to write software and make their money by continuing to sell copies.
Not to mention, those contracts only exist because the employer gets the exclusive right to continually sell copies.
I also have some pretty extreme views on copyright, we probably agree about a lot of things, but where do you envisage those one-time payments for programmers coming from, if the company paying for it can't receive income from owning the resulting software?
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Oh, boy, copyright. That's a whole can of worms I'd like to leave out of this discussion. I have some rather... extreme views in that area. (In short: yes, I believe they should be paid only once, according to contract. It's a job like any other. Programmers also get paid only once for their code.)
That can only apply to "works for hire", for which the artist generally doesn't keep the copyright. I record music myself, not part of a contract; if I should be paid once for doing that, who should pay me?
Exactly. The "pay once like any other job" scenario only works when the artist/musician/writer/whatever is employed by someone else to create things.
My view on copyright is that if someone created something I'm going to enjoy over and over, I should pay them for it. *I* only pay them once--when I buy their CD or book, download their song, etc. I pay them once and enjoy the thing for anywhere from a few days to the rest of my life.
And then when someone else wants to enjoy that same CD, book, song, whatever, *they* should pay the artist... just once.
And so on and so forth. Everyone who's going to use the thing should pay for the thing--just once. (That said, if people are living together/married and sharing their stuff, I don't think each member of the couple should pay for it; it's not like each member of a couple bought their own copy of an album back when albums were what you bought. So when I say "everyone who uses it should pay for it" I guess I mean "every household.")
And just to put my money where my mouth is, I have 4000+ songs on my MP3 player and every one of them, either I or my husband paid for. We may have bought them online or we may have bought the CD and then digitized it... but we paid for it.
And that seems to me the only ethical way to go. How else are artists supposed to make a living? It's only "a job like any other" if you can scrape together some kind of living from it, which you can't if a song that took you days or weeks or longer to write and record, or a book that took you years to write, only brings you $10. Unless someone here suggests that, say, the government should pay musicians, writers, etc. a living wage in return for their music being available to everyone for free, there is no remotely feasible alternative.
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"Until BMW has sold them, they belong to BMW. They're not some kind of limbo where nobody owns them."
BMW owns them, but BMW did not receive them. Received implies some outside agency gave, sold or delivered these cars to BMW. That did not happen. BMW created these cars. The factory workers, acting as part of BMW, manufactured them.
It is true that inventory was used up, but your equation has left out 'value added' where the product is worth much more than the sum of the parts even though 'value added' in itself can't be measured or examined much.
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BMW owns them, but BMW did not receive them. Received implies some outside agency gave, sold or delivered these cars to BMW.
Now you're just nitpicking. But, OK, maybe I chose the wrong words (but at least I have an alibi - I'm not a native English speaker :D)
Let me explain. When I said "After all, the sum of all things produced and received is zero" what I meant was - everything that gets produced, also gets received by someone at the instant it comes off the "production line" (metaphorical production line). When BMW makes a car, someone gets to own if afterwards. It could be a customer right away, or it could be BMW itself.
Alternatively you might consider that while the car sits in BMW's backyard, it's still in "production", and only when it's sold, does it gets "produced for real".
The idea that I wanted to tell is this: let's abstract life. Imagine that instead of producing concrete things we all produce one and the same Good. And then we exchange it for someone else's Good. Every person can only produce 1 Good per day (because a human can only do so much work per day). Trading normally would involve trading 1 Good for 1 Good. But if you trick the system and exchange your 1 Good for 2 Goods from other people (or maybe you don't produce 1 Good, but receive 1 Good from someone else anyway), that would mean that at the end of the day someone somewhere would be left without a Good. Because every day only as many Goods get produced as there are people. 1 Person = 1 Good/day.
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Imagine that instead of producing concrete things we all produce one and the same Good. And then we exchange it for someone else's Good. Every person can only produce 1 Good per day (because a human can only do so much work per day). Trading normally would involve trading 1 Good for 1 Good. But if you trick the system and exchange your 1 Good for 2 Goods from other people (or maybe you don't produce 1 Good, but receive 1 Good from someone else anyway), that would mean that at the end of the day someone somewhere would be left without a Good. Because every day only as many Goods get produced as there are people. 1 Person = 1 Good/day.
This simple abstract game you invented is zero sum, sure. But in the real world, you can focus your effort into building machines which produce more Goods per day, increasing your productivity.
The fact that BMW can turn a pile of metal into a car is already a glaring counterexample to the zero sum hypothesis; a car is worth more than a pile of metal. But BMW went one step further: they turned a pile of metal into a car factory, which turns piles of metal into cars more efficiently than any human can.
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Hm, but my idea doesn't change even with technology. OK, let's suppose people produce different amounts of Goods every day. Some people produce 1 Good, some produce 5 Goods, some produce 10. Sometimes people upgrade (or downgrade) and start producing more or less Goods per day.
Anyways, what matters is the exchange at the end of the day. If you produced 5 Goods and exchanged them for 5 different Goods, all is fine. But if you exchange your 5 Goods for 6 other Goods, then somewhere there will be a person who will have produced 5 Goods and traded them for 4 (or, to speak with mathematical precision, produced X goods and traded them for X-1 Goods).
Which seems kinda unfair.
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How does your model account for a Goods machine which costs 25 Goods to build, and thereafter autonomously produces 1 Good per day? I'm a 1-Goods-per-day producer, but if I save up my Goods for 25 days, I can build my machine, and from then on I produce 2 Goods per day. After 26 days I'll be better off than I would be without the machine. I can make more machines and sell them for 30 Goods, and someone else who makes 5 Goods per day can save up for six days, buy my machine and thereafter produce 6 Goods per day; after 31 days he'll be better off than he would have been without buying the machine. Nobody is getting tricked out of their Goods.
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Again - in this case more goods are produced. If you build your machine, you move from producing 1 Good per day (gpd), to 2 gpd. All is nice and dandy.
What I object to is the exchange at the end of the day. When all the goods are produced and all the people come to market to exchange them, then some people trick the system and sell 1 Good and buy 2 Goods instead. Without producing the extra Good themselves.
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But both of us tricked the system. I spent 25 Goods building a machine and sold it for 30 Goods; I'm 5 Goods up. But the other guy spent 30 Goods on a machine which produces 35 Goods over the next 35 days, so he'll also be up 5 Goods. Neither of us deceived the other, and neither of us is out of pocket.
If Goods can only be exchanged for Goods then the exchange rate is obviously 1 Good per Good. But why can't Goods be exchanged for Goods-producing machines, seeing as that exchange benefits both parties?
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What I object to is the exchange at the end of the day. When all the goods are produced and all the people come to market to exchange them, then some people trick the system and sell 1 Good and buy 2 Goods instead. Without producing the extra Good themselves.
I'm not understanding this.
Sure, someone scamming someone else is bad, but if it was a free and open exchange and we are both satisfied, who was tricked? What does it matter if you got two sheep and I got 1 cow?
Are you saying we should regulate the price of everything?
I just don't get why you're saying anyone is "cheating the system" (not even sure what that means) if they trade 1 good for 2, or vice versa.
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OP, do you not have another thread seeking to be hired to work for an American company (at American wages, you quoted a sum of $100K/yar) from your low cost of living locale in Latvia? Personally I don't see any ethical dilemma to this if you could manage it. It confounds me that you have such an issue with investing, yet you are also not troubled by seeking a job that by all rights should be taken by someone who must pay the higher cost of living.
As I said, I don't see any moral issue with investing *or* working from a low cost of living for high wages-- but it seems a double standard to me that one should bother you and the other should be just fine.
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(Side note: this topic already changed my point of view a few pages back. Right now I'm just continuing the argument "in the old mindset", because people still seem to want to argue it. Also, a discussion helps to consider the issue more deeply)
OK, I guess I see the flaw now. In my model, everything has a fixed "intrinsic value", which is inherent to the Good itself, and doesn't depend on anything else. But in real life things don't have any value. A thing is as valuable as someone values it. A pair of shoes might be worthless for one person, while another person could be ready to pay $100 for it. So an exchange of "1 for 2" could still be quite fair, because both people value what they get.
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(Side note: this topic already changed my point of view a few pages back. Right now I'm just continuing the argument "in the old mindset", because people still seem to want to argue it. Also, a discussion helps to consider the issue more deeply)
OK, I guess I see the flaw now. In my model, everything has a fixed "intrinsic value", which is inherent to the Good itself, and doesn't depend on anything else. But in real life things don't have any value. A thing is as valuable as someone values it. A pair of shoes might be worthless for one person, while another person could be ready to pay $100 for it. So an exchange of "1 for 2" could still be quite fair, because both people value what they get.
Bingo!
Scams should be stopped, and obviously there's often an asymmetric information problem, but free and open trade/exchange done should be win-win for both.
You can produce Widget X more efficiently and I can do widget Y, we trade. If I decide I really want X, and end up trading 2 Y for it next time, but willingly do so, that's okay. If I'm happy at the end of the exchange, and felt it was worth the 2 Y, that's fine.
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Your income grows exponentionally, without you needing to do anything. OK, so at some point you will die, but if you've done your part correctly your children will continue where you left off. There is no upper limit.
I'm talking about the case where the investor doesn't sell the house to his customer but rents it. In this case, the customer just keeps on paying and paying. Eventually he will have covered all your expenses, but it won't stop there. He will continue paying and paying until you die of old age. And then he will continue paying your children. Again - no upper limit. And the loser in this case is the customer. It's basically like a deal - "I make you a house, and then you support me for the rest of my life".
OK, so in real life there will probably be multiple tenants, and the house has some continuous maintenance expenses, but that doesn't change anything. The investor doesn't need to do any work anymore - he can just survive on the continuous income from that little piece work that he did once, 10 years ago.
There is an old saying of "shirtsleeves to shirtsleeves in three generations". You may leaves untold wealth to your children, and they will spend it down to nothing while living a life of ease. If your estate is really huge, then depending on where you live, the government also steps in for its cut whether defined as death duties or inheritance taxes. Your unspoken assumption here is that none of these investments will fail and dwindle away to nothingness -- look up Enron.
Real estate is not always a bed of roses. The house may stand empty between tenants even though property tax is still owed. Previous tenants may have done severe damage far beyond the price of normal maintenance. At some time major infrastructure such as roofs or furnaces will need to be replaced. There may be major damage from falling trees or fire. Neighborhoods may decline such that no-one wants to live there. Lastly, even if you've done everything right, another "Russian Revolution" may take all your buildings from you.
Now I will agree that the price of housing - whether owned or rented - is high. In a truly free society anyone should be able to throw up some plywood & cardboard for a hut to live in if that is all they desire. If this hut is right next to your place it should not matter. Outhouses never plug up in the winter, don't use costly water, and are just there when you need them.
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I would like to add that most people suck at saving money or don't want to do it. So a renter could complain that their landlord is making money off of them, but they have no interest in saving their money and buying a place to live. IMO, most people are not willing to do the work necessary to become an investor. That makes it worth more to the people who are willing to do it.
One could argue that we don't all get a fair start. But in the US, the great majority of millionaires are self-made. I do think there are some super-rich who probably don't deserve it though. But I don't know what to do about them, and I think they are a small percentage of all the investors. Some of them may be lucky, but how would we impose a "lucky tax"? Haha, that's a funny idea.
A lot of people think early retirement is taking an easy way out, but when you mention you have to save up at least half your income they say "impossible!" and they wouldn't want to do it even though they could.
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Wow, what a great discussion. I'll add my endorsement for Economics in a Single Lesson. Beyond that, I want to address the "infinite income for finite investment" question. I spent a while typing up a more robust reply (included further down for bored people), but it really came down to this question:
If you limit how long a given sum of money can earn more money, then What is the alternative use for that money?, after the defined time has expired? And further, what is the BEST use of that money?, and further yet, who gets to determine that? The further you go down that rabbit hole, the more it becomes clear that the original question is one of economic systems, i.e. how the distribution of goods and services is determined.
(In a capitalist system, the answers to those above questions, in reverse order, are "the people who own the money decide what the best use is", "the best use is whatever the owners of that money decide", and "moot, because there is no defined expiration date")
Here is the much longer reply I had typed out before I came up with the above response:
Here's one way to look at it: Let's create a simple hypothetical situation. I buy a house for $100,000 and rent it out for one year. For simplicity's sake, let's assume my profit (after maintenance, etc) is $1000/mo. At the end of one year, I sell the house for the same price I bought it for. I now have $110,000 on hand. Have I done anything immoral? I think most of us would agree that I have not.
Now, I go out and buy a different house, again for $100,000, and rent it at a $1000/mo profit. At the end of year 2, I sell the house for $100k, and now I have $120k in cash. Have I done anything immoral? Again, probably not. Let's say I do the same thing in years 3 and 4. And then for another five years. And then another 10. And so forth. At no point have I done anything unethical or immoral, right? Things don't change when, instead of selling one property and buying another, you simply hold on to one property.
As I follow the reasoning of the original question, it leads to the following idea: "After a certain number of years, I should lose that initial $100,000. It has earned enough for me, and I should no longer receive benefit from having that $100k."
I have three ways of rebutting that argument:
1) I decided to live frugally in order to accumulate that $100k. That means I chose not to buy things earlier in life. A tradeoff. Compare it to, say, going to school and getting a degree. You can't go to someone 20 years out of college and say "you've earned enough money from your degree. Now you can't work in your field any more--you have to go back to unskilled labor." An education is a big investment of your time and money, and it can pay off (in increased salary) for the rest of your working career. Similarly, buying a rental property can pay off (in rental income) for the remainder of the property's life.
2) Let's assume that after 20 years, you're no longer allowed to get returns from that $100k. What do you do with it now? Are you forced to spend it? If so, that means you're forced to buy things that weren't worth $100k to you before. Give it away, to charity, or to the government? They have no claim to it (in my opinion), although you can certainly choose to give it to them if you wish. Burn it? Gee, what a waste of all those hours you worked and scrimped and saved. Stuff it in a matress never to be seen again? Might as well burn it.
3) As others have very eloquently explained, your investment (whether in stocks, bonds, or real estate) provides the capital necessary for economic expansion. Your purchase of stocks/bonds provides capital for a company to expand, or to research a new wonder drug, or develop a robot that will make widgets easier for everyone to afford. (or, in a more likely scenario, your stock/bond purchase frees *other* people's capital to invest in expansion/development/etc).
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12k annually, not 10k. But great point. Essentially if you don't want money making more money, what economic system DO you want?
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1) I decided to live frugally in order to accumulate that $100k. That means I chose not to buy things earlier in life. A tradeoff. Compare it to, say, going to school and getting a degree. You can't go to someone 20 years out of college and say "you've earned enough money from your degree. Now you can't work in your field any more--you have to go back to unskilled labor." An education is a big investment of your time and money, and it can pay off (in increased salary) for the rest of your working career. Similarly, buying a rental property can pay off (in rental income) for the remainder of the property's life.
Nice comparison; I like it!
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My confusion originally came from the observation that by doing this investment/rental thing, it seems at first glance that you're not creating anything of value, while are still getting paid for it. As in, you don't do physical work for your income. You just sit there while your property gives you money, for as long as you like. So that kinda looks like you're freeloading.
However this topic made me realize that your property does create value to other people, even though you might not need to physically work for it (or, in the case of rentals, you actually do need to work for it).
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Essentially if you don't want money making more money, what economic system DO you want?
I think it's possible to constructively criticise an economic system without proposing that a particular alternative is better. We can debate whether it's a good idea to reward people for owning things more than we reward them for doing things; concluding that a system has problems isn't the same as concluding that there is a better system. I think it's useful to discuss what the problems are, even if we aren't offering solutions.
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However this topic made me realize that your property does create value to other people, even though you might not need to physically work for it (or, in the case of rentals, you actually do need to work for it).
That's a subtle point, honestly. You can't really see what landlording or VTSAX makes, and if it's a black box to you then the gains can seem suspicious.
I think it's possible to constructively criticise an economic system without proposing that a particular alternative is better. We can debate whether it's a good idea to reward people for owning things more than we reward them for doing things; concluding that a system has problems isn't the same as concluding that there is a better system. I think it's useful to discuss what the problems are, even if we aren't offering solutions.
But it's not useful in any way. If I say "allergies suck" without proposing an improvement to or replacement of the immune system, what have I really accomplished? It's kinda like that Churchill quote: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time." Yes, Capitalism has its ugly spots, but nobody really has viable alternatives and there aren't even many feasible solutions to any one problem.
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But it's not useful in any way.
Imagine saying to your boss, "our customers have a few problems with our service" and getting the response "well, why don't you go work somewhere else where the customers are happier, then?".
Imagine saying to your wife, "we don't do enough things together" and her saying "well, why don't you find someone else to do things with, then?".
Hopefully you can see how the debate could have been constructive but was shut down by the reply.
Yes, Capitalism has its ugly spots,
But people often don't agree about what they are. For some people, inequality is an ugly spot, and for others it's a feature. It's no use suggesting solutions without first having a discussion about what the problems are.
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In my mind I had this picture, that in the Utopian world everybody would get paid according to their effort. Whether you're a CEO or a janitor, if you put in 8 straight hours of hard work, you get the same reward. What can be fairer that that?
You are a talented baker. You take simple raw ingredients (Flour, sugar, apples, butter) and make incredibly delicious apple tarts. These are the best tarts in the city.
Your neighbor is the worst baker in the city. He takes identical raw ingredients and makes half-raw, half-burnt inedible messes.
You are creating value. He is destroying value. You both put in equal effort. Do you really think that he should be paid the same amount as you?
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Read the rest of that post where I arrive at a very similar conclusion. Yes, basing reward on effort spent alone is a bad idea.
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But it's not useful in any way.
Imagine saying to your boss, "our customers have a few problems with our service" and getting the response "well, why don't you go work somewhere else where the customers are happier, then?".
Imagine saying to your wife, "we don't do enough things together" and her saying "well, why don't you find someone else to do things with, then?".
Hopefully you can see how the debate could have been constructive but was shut down by the reply.
No. To have the correct comparison, in your first example, the boss would ask for alternate suggestions on how to improve customer support and hopefully you have some ideas (just as we ask for alternate economic suggestions, and hope the poster has some ideas). The second example is similar (wife may ask how to improve that).
We didn't shut down the conversation with "Well why don't you go live somewhere else, COMRADE," we asked for alternate suggestions. That opens up the conversation, it doesn't shuts it down.
Further we did that after answering all the other questions. I don't know how you can claim on a thread this long with the good discussion that occurred the conversation was "shut down" - we discussed the main topic, and now are asking:
if you don't want money making more money, what economic system DO you want?
I think that's a fair question at this point in the conversation, and isn't designed to shut down conversation but open it up and allow it to continue.
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Vilx thank you for the ethical question on interest. This philosophical debate dates back centuries. It shows concern for those less fortunate than us. Sounds like you found the the answers you were looking for.
I feel compassion is one of the greatest achievements/abilities of humanity. Personally I think we are seeing a change in the consciousness of humanity as we become more aware of our impact on each other. Thank you again for getting me/us to review our habits.
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Read the rest of that post where I arrive at a very similar conclusion. Yes, basing reward on effort spent alone is a bad idea.
Absolutely, yes it is. You might as well give A's to every student who shows up for class and spends x time on homework. I used to teach and it amazed me when students would complain that I "only" gave them a B+ because, after all, they "tried really hard!" Trying hard is good, and it will get you the best grade you can get, but if there are students whose work is better than yours it's going to get a better grade--whether it took them more time or less time than you to do it. If you want to be measured solely on how long it took you to do something, sign up for a 5k run.
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Nobody's disagreeing about that.
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I think that's a fair question at this point in the conversation, and isn't designed to shut down conversation but open it up and allow it to continue.
Yes, it's a fair question, and I didn't read it as trying to shut the conversation down. My second response was against grantmeaname's assertion that it's "not useful in any way", not against arebelspy's question.
My point is it's still useful to identify problems without proposing solutions to them. Still, how about a kid who points out your rear light is defective, and you ask her, "OK, how do you suggest I fix it?".
At least in mathematics, there are many interesting problems that a child could discover, yet a world expert couldn't solve. In economics too, I don't see any benefit from requiring that nobody pose a problem without also offering a solution.
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...concluding that a system has problems isn't the same as concluding that there is a better system. I think it's useful to discuss what the problems are, even if we aren't offering solutions.
That's the root of our mutual incomprehension right there: I, and I think most here, simply do not agree that your 'problem' IS a problem - far from it! In the parlance of software development, "it's not a bug, it's a feature" :-)
My point is it's still useful to identify problems without proposing solutions to them. Still, how about a kid who points out your rear light is defective, and you ask her, "OK, how do you suggest I fix it?".
Except that this discussion is like arguing with a kid who insists that your brake lights must be defective because they aren't lit up all the time.
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OP:
You're confusing ethics with choice, laws, and structure. What is unethical about selling something to someone who is willing to buy? You're not understanding that these transactions aren't forced. You're just seeing face value.
America has thrived on capitalism, which is partly why America is one of the richest countries on earth. We have innovators, efficient (ok, debatable) financial systems, fairly good business regulations, fairly good tax laws, etc...
Your logic is flawed and it's due to a lack of understanding how things work and what constitutes ethical behavior...
Sure there are some things you can get by with in America and make money that is of questionable ethics due to our complex laws. IE: suing someone because you tripped over their dog and broke your hand.
However, investing is nothing like that... In the case of the lawsuit example, the defendant didn't ask to be used, but In the case of buying, the buyer either initiated or accepted the transaction on their own free will.
You really need to read more on the subject of economics and capitalism and even financial law before you go any further...
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I, and I think most here, simply do not agree that your 'problem' IS a problem - far from it! In the parlance of software development, "it's not a bug, it's a feature" :-)
And other people think it's a bug. And I think it's more productive to resolve that disagreement, than to start proposing bugfixes.
For reference, I'm not really on either side of this debate. I do think it's unfortunate that people can be paid much more for owning than they can be for doing, but I don't see it as an ethical conundrum. In my mind it's a market inefficiency; such owners are paid a lot more to continue owning than their marginal cost of continuing to own.
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For reference, I'm not really on either side of this debate. I do think it's unfortunate that people can be paid much more for owning than they can be for doing, but I don't see it as an ethical conundrum. In my mind it's a market inefficiency; such owners are paid a lot more to continue owning than their marginal cost of continuing to own.
Temporarily, but the fix is built right into the system.
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For reference, I'm not really on either side of this debate. I do think it's unfortunate that people can be paid much more for owning than they can be for doing, but I don't see it as an ethical conundrum. In my mind it's a market inefficiency; such owners are paid a lot more to continue owning than their marginal cost of continuing to own.
Why shouldn't capital be rewarded proportionally to the amount of productivity it enables? If you can own capital that contributes as much to society as the labor of fifty thousand workers, why shouldn't you be paid accordingly? If we create some arbitrary rule like "stock market returns are limited to the amount it hurts your feelings that you can't buy NFL tickets with the money you've invested", we're accomplishing nothing productive other than making marxists feel good about themselves. It would hugely distort market incentives, make the system less fair, and make literally nobody better off at the end of the day.
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It's way more ethical to make money off of something you own than off something you don't own. Now if you'll excuse me, I need to go fence my neighbor's television.
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Why shouldn't capital be rewarded proportionally to the amount of productivity it enables?
You are using words like "should" when I've already explicitly said I don't see it as an ethical conundrum.
Productive ownership can be rewarded the same way any other production is rewarded; in an efficient market, that means close to the marginal cost of production.
If you sell bikes, the price I pay for a bike (and by extension, your profit from selling it) isn't determined by how much productivity it enables; try selling me a bike at that price, and I'll buy from someone else. Competition among bike manufacturers means whoever sells me the bike cheapest gets paid, and the cheapest they can sell a bike is a little more than what it costs to make a bike. My employer sells educations; the price of those educations reflects not on their value to the students, but on the cost of providing them.
If owning a house for another year costs $10,000 in taxes/maintenance/&c., then in an efficient, competitive market, the owner would be rewarded a little more than $10,000 for continuing to own the house - since that's her marginal cost of "producing" another year's ownership of the house. As arebelspy points out, the fix is to some extent built into the system: increased competition, which should already be incentivised by the returns available.
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Why shouldn't capital be rewarded proportionally to the amount of productivity it enables?
You are using words like "should" when I've already explicitly said I don't see it as an ethical conundrum.
Right, but you also said: "I do think it's unfortunate"
I think his point was "Why do you think it's unfortunate? [Insert grant's post here.]"
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I, and I think most here, simply do not agree that your 'problem' IS a problem - far from it! In the parlance of software development, "it's not a bug, it's a feature" :-)
And other people think it's a bug. And I think it's more productive to resolve that disagreement, than to start proposing bugfixes.
Yeah, and some people think the Earth is flat - and would continue to insist that it was even if you gave them an all-expenses paid trip to the ISS (see e.g. http://www.answersingenesis.org ). How do you suggest we resolve that disagreement?
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I think it's unfortunate that owners are typically paid in proportion to the productivity of the things they own, while workers typically aren't paid in proportion to the productivity of the work they do. I think it would be good for workers to be paid in proportion to their productivity, for the same reason you think it's good for owners to be paid in proportion to theirs. I don't, however, propose an alternate economic system which would make this so, and I'm not sure there is a palatable one.
I think it's unfortunate that the wealthy have access to investments that the poor don't, because this means that inequality tends to increase, so that the poor tend to get relatively poorer, despite producing more.
"The Earth is flat" is a factual matter to be resolved by evidence, not by philosophy. I think it's pretty condescending to compare people who disagree with your subjective opinion to flat-Earthers.
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"The Earth is flat" is a factual matter to be resolved by evidence, not by philosophy. I think it's pretty condescending to compare people who disagree with your subjective opinion to flat-Earthers.
Thank you. I think it's quite nice of me to condescend to the less... Well, I'll be nice :-)
The question you should be asking, though, is whether what I wrote is really a subjective opinion, or whether it is nothing more or less than an objective observation on how economies work. The world is as it is: you may not like the fact that if you jump off a cliff, you will shortly be splattered on the ground below, but gravity doesn't care about your feelings.
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Erm... TL;DR. What are we talking about right now? :)
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Gravity isn't the law because we discussed it democratically and that seemed to be the best way to go about our business. Obviously.
Capitalism is a choice that society has made; it appears to be the best choice available, but it's a choice nonetheless and it's worth debating the upsides and downsides of that choice. Circumstances change, and if there should ever be a better choice, of course we'd want to adopt it - but that means we should continually assess the choices we've made, just as a mustachians continually assess the financial decisions they've made.
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Neat. So let's discuss other choices. I still haven't heard any alternatives proposed.
(I do agree with you we can critique a system without providing alternatives - we could in fact improve that system, though I suppose that would be an alternative.)
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Neat. So let's discuss other choices. I still haven't heard any alternatives proposed.
(I do agree with you we can critique a system without providing alternatives - we could in fact improve that system, though I suppose that would be an alternative.)
To rephrase the original question. If 5% a year interest is considered a fair rate of return on a mortgage and 50% is illegal at what point do you feel the maximum yearly percentage you'd consider ethical to charge?
For the purpose of the question assume you have 500,000 to make mortgage loans with in a legal manor like a loan website. Also only consider this as a home mortgage loan, leave capital investments and other loan type/options out.
I feel 10% is the max I'd consider charging in our current economy. If I felt someone was a greater risk then they really are not ready to buy. I would be concerned I would cause greater financial problems versus help.
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Neat. So let's discuss other choices. I still haven't heard any alternatives proposed.
(I do agree with you we can critique a system without providing alternatives - we could in fact improve that system, though I suppose that would be an alternative.)
To rephrase the original question. If 5% a year interest is considered a fair rate of return on a mortgage and 50% is illegal at what point do you feel the maximum yearly percentage you'd consider ethical to charge?
For the purpose of the question assume you have 500,000 to make mortgage loans with in a legal manor like a loan website. Also only consider this as a home mortgage loan, leave capital investments and other loan type/options out.
I feel 10% is the max I'd consider charging in our current economy. If I felt someone was a greater risk then they really are not ready to buy. I would be concerned I would cause greater financial problems versus help.
Is it a cop-out to say we don't need to limit interest rates, because if they are too high people will not borrow money?
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As for alternatives, I once read an idea that inheritance should only be allowed to pass down one generation. The reasoning goes the person who originally makes the money can ethically choose to leave it to their kids when they die. The kids can do whatever they want with it, except they can't leave it to their kids because it is not their money to give away; it must go back into the economy. I can't remember where I found this but I'll post a link if I can find it again.
As others have pointed out, kids often squander the family fortune anyway, so maybe it doesn't matter.
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Is it a cop-out to say we don't need to limit interest rates, because if they are too high people will not borrow money?
I would call it a cop-out. In feudal times interest rates keep the peasants perpetually in debt and enslaved to the lords/barons, etc who owned all the lands. You could not opt out of the system cause all the lands belonged to someone. You may be free today to not choose a transactions but still must find a place to sleep. Someone must pay that rent. There is a point were the interested enslaves people.
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Gravity isn't the law because we discussed it democratically and that seemed to be the best way to go about our business. Obviously.
Nor is the economy something that exists because we discussed it democratically. It may not be obvious - you might actually have to think about it - but at base it's a law of nature: if not quite in the same class as gravity, but in the same class as evolution.
In feudal times interest rates keep the peasants perpetually in debt and enslaved to the lords/barons, etc who owned all the lands.
Not at all an accurate description of European feudalism. The medieval Church held that charging interest was a sin, which is why most moneylending was done by Jews. Nor were the serfs 'in debt' by any reasonable definition. It's rather that they had certain ongoing obligations to the lord. A modern equivalent would be much closer to to taxation than to debt.
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Is it a cop-out to say we don't need to limit interest rates, because if they are too high people will not borrow money?
I would call it a cop-out. In feudal times interest rates keep the peasants perpetually in debt and enslaved to the lords/barons, etc who owned all the lands. You could not opt out of the system cause all the lands belonged to someone. You may be free today to not choose a transactions but still must find a place to sleep. Someone must pay that rent. There is a point were the interested enslaves people.
I see your point, even if Jamesqf is right about it being an inaccurate description. But in modern economies I think the cost of necessities is very reasonable. I don't see a reason to limit interest rates or rent. All of the high interest rates I know of are for stupid shit like credit cards and fancy cars, things people could choose to do without. I'm assuming we're talking about an economy similar to the US economy.
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Gravity isn't the law because we discussed it democratically and that seemed to be the best way to go about our business. Obviously.
Nor is the economy something that exists because we discussed it democratically. It may not be obvious - you might actually have to think about it - but at base it's a law of nature: if not quite in the same class as gravity, but in the same class as evolution.
Don't you find it a bit weird that Capitalism is only a "law of nature" in Capitalist societies? Feudalist, Socialist, Communist and even anarchist societies have economies. We weren't discussing the pros and cons of having an economy. We were discussing Capitalism. Disingenuous, my friend; disingenuous. If Capitalism isn't a choice, how did the USSR manage to choose not having it? That must be as amazing to you as anti-gravity boots.
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wf2, I've appreciated many of your posts, but in this thread over the last page or two you seem to be arguing just for the sake of arguing. Not to make any point, but to be "right."
My apologies if I'm misreading that, but I keep coming into this thread hoping for good discussion/debate, and am getting nitpicky arguments.
/shrug
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In feudal times interest rates keep the peasants perpetually in debt and enslaved to the lords/barons, etc who owned all the lands.
Not at all an accurate description of European feudalism. The medieval Church held that charging interest was a sin, which is why most moneylending was done by Jews. Nor were the serfs 'in debt' by any reasonable definition. It's rather that they had certain ongoing obligations to the lord. A modern equivalent would be much closer to to taxation than to debt.
OK, I agree poor comparison, but as you suggest a taxation system that kept the serfs economically poor. The interest as a sin goes back to the original question asked on this thread.
To me it is ethically wrong to loan money at such a high interest rate it will financially destroy the borrower. Which is the point of my question on mortgage interest rates. Where do others see that an interest rate is legal but not ethical?
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wf2
Nudge is appropriate and appreciated. :-/
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wf2
Nudge is appropriate and appreciated. :-/
Thanks for taking it the way I intended. :)