How Was the Fortune Made?

As we read yet again of the huge gains by property speculators, are we not obliged to ask a serious question?  Are they – or even more pertinently, are we – happy to live in a society where fortunes are made in the course of a single day from dealing in property while hundreds of thousands of Kiwi children do not have a safe, dry, or even any, roof over their heads?

We live at a time and in a place where to be rich and famous is regarded as the pinnacle of achievement.  The rich – (the fame usually comes along as a corollary) – are admired and envied, not just for the lifestyle their wealth makes possible but also because it is seen as a mark of particular moral worth and social value.

These attitudes are sedulously fostered by the media, who enjoy a complex symbiotic relationship with the rich – largely because the media find it prudent to serve the interests of their owners and because the activities of the rich provide an endless source of copy.  Even more significantly, the same attitudes are translated into political analysis; we have for some decades now been persuaded that the success of those who have made their fortunes is the key to a successful economy.

Even economic analysis has at times succumbed to the worship of the wealthy.  The infamous “trickle down” theory – now largely discredited – postulated that if the rich did well, their wealth would, by stimulating economic activity, “trickle down” to lesser mortals.  Our own government has stopped short of specifically endorsing this “crumbs from the rich man’s table” approach, but has been very clear that the rich are the prime movers in the economy and that their interests must come first.

None of this – which has been so important in shaping changed social attitudes over recent decades – takes much account of distinctions in the way that the rich make their money.  They are usually all lumped together as economic and social leaders, all meriting the same thanks and congratulations from the less successful.

Yet there is now ample evidence that there are major distinctions to be made – at least in terms of the debt of gratitude that the rest of us should feel to our supposed benefactors.  Joseph Stiglitz, the Nobel prize-winning economist, in particular, has shown that the best way to become rich is to be born into a wealthy family.  Even more importantly, he establishes that great majority of “the rich” are “rentiers” – that is, they do not create new wealth (as popular wisdom encourages us to believe) but simply manipulate their existing wealth in order to derive a return from it.

So much, in other words, for the moral virtue we are told we should attribute to the wealthy and the gratitude we should feel to them for the economic benefits they bestow upon us.  Even more particularly, how should we feel about those who quite clearly do not contribute in any sense to the creation of new wealth, but who gouge their fortunes from the rest of us by extracting a disproportionate reward for speculative activities?

We (or at least some of us) might still feel admiration for those who are clever enough to spot profitable opportunities and then walk away with the booty – but at least spare the rest of us from any sense that we should award them medals for benefaction and social responsibility.

These thoughts are prompted by the increasingly frequent recent reports of the fortunes being made by those who speculate in the Auckland property market.  We have ample precedents for the social and economic damage that such activities can produce.  The Global Financial Crisis, for example, was the direct consequence of institutional involvement in highly speculative sub-prime mortgages, which created a dangerously unstable pyramid of debt and grossly over-valued assets.

And who could doubt that speculative activities of this kind now constitute the major risk faced by our economy, to say nothing of the housing crisis that has now placed a family home beyond the reach of many families and reduced others to sleeping in cars, tents and garages?

Should we not say that if the time has now come when excessive speculation fuelled by foreign investors must be restrained, the same is true of speculative investment from domestic sources as well?  Not only are those who grow rich by such means – home-grown or otherwise – not entitled to plaudits as economic leaders and benefactors; they should be identified as those whose gains are literally ill-gotten and which come at the expense of the rest of us.

Every speculative dollar transferred into the pockets of speculators as the consequence of the million-dollar price of the average Auckland property has to come from somewhere – and the answer is that it comes from the rest of us.  It is a transfer of wealth from the poor to the rich and a major driver of inequality.

It may be difficult to convince our Prime Minister of this – as someone who made his fortune by trading on the foreign exchange market, he is unlikely to criticise those who make money by manipulating existing assets – but the rest of us might feel entitled to ask, are those who prosper by creating misery for others really scaling the moral heights and entitled to our respect and admiration or are they plumbing the moral depths?

Bryan Gould

12 September 2016