Prompted by Thomas Piketty’s book Capital in the Twenty-First Century, I ask the question in this post’s title in a recent Freeman article. A slice:
Let’s begin with the source of the income of the idle rich in a free economy. (We need this proviso, “in a free economy,” because in an unfree, crony capitalist economy, the idle rich can receive income taken from others through the political process.)
Whence come the “rents” these rentiers collect? Of what do they consist?
Well, they consist of interest on the rentier’s bank deposits and bonds (let us think here of corporate bonds only, because government bonds must be paid off with taxes taken from the general population), dividends on the rentier’s stocks, rental payments on the rentier’s land and buildings, and capital gains on any bonds or stocks or land he sells which are now more valuable than when he bought them.
How are these companies able to pay interest, dividends, or rents? They are able, if at all, because they have used the rentier’s wealth productively: building facilities with it, buying or leasing equipment with it, doing research with it, and hiring employees with it. When and if all these together produce new value for the companies’ customers in excess of the amount the rentier has invested with them, they are able to pay interest, dividends and rents, and their capital value increases.
But think what that all means: Who has the rentier’s wealth in this process? In the legal sense, the rentier has it: he has legal title to it. But in the practical sense, the employees of the different businesses have the rentier’s capital wealth: they work in the buildings, operate the equipment, use the research facilities. They use the rentier’s capital to earn their own incomes, and the better the capital equipment, the higher their productivity and hence the higher their incomes.