Cory Doctorow: Thomas Piketty’s Capital in the 21st Century
Piketty challenges the idea that modernity somehow led to “merit” asserting itself as the new determinant of wealth. Instead, he makes a very convincing case that the increasing size of the capital class — which expanded comfortably during the period of colonial expansion — created a hunger for wealth that turned the aristocracy on itself in a squabble over who got to loot the colonies, which was World War I. This war was incredibly destructive of capital, and left many of the aristocracy holding onto potentially worthless government bonds issued by states that had nearly bankrupted themselves during the Great War. These states were so beholden to the rich that they couldn’t contemplate inflating or taxing or defaulting their way out of debt, and so they took heroic and improbable measures to keep bondholders whole, which led to the economic chaos of of which WWII was born.
.. (government bonds, especially US Treasuries, which do not pay well, account for less than 10 percent of all these portfolios and are almost totally absent from the largest endowments). The higher we go in the endowment hierarchy, the more often we find “alternative investment strategies,” that is, very high yield investments such as shares in private equity funds and unlisted foreign stocks (which require great expertise), hedge funds, derivatives, real estate, and raw materials, including energy, natural resources, and related products (these, too, require specialized expertise and offer very high potential yields). If we consider the importance in these various portfolios of “alternative investments,” whose only common feature is that they abandon the usual strategies of investing in stocks and bonds accessible to all, we find that they represent only 10 percent of the portfolios of institutions with endowments of less than 50 million euros, 25 percent of those with endowments between 50 and 100 million euros, 35 percent of those between 100 and 500 million euros, 45 percent of those between 500 million and 1 billion euros, and ultimately more than 60 percent of those above 1 billion euros. The available data, which are both public and extremely detailed, show unambiguously that it is these alternative investment strategies that enable the very largest endowments to obtain real returns of close to 10 percent a year, while smaller endowments must make do with 5 percent.
.. Absent some kind of extraordinary intervention, hereditary wealth will reassert itself as the primary political mover in our world. The people at the top have always convinced themselves that they live in a meritocracy, because hey, they’re the best people they know, and they’re at the top of the pyramid.
.. By comparing various sources of data, moreover, it is possible to estimate that the average income of the parents of Harvard students is currently about $450,000, which corresponds to the average income of the top 2 percent of the US income hierarchy. Such a finding does not seem entirely compatible with the idea of selection based solely on merit. The contrast between the official meritocratic discourse and the reality seems particularly extreme in this case. The total absence of transparency regarding selection procedures should also be noted.