My brother thinks of himself as a farmer, which he is. But I think of him as an asset manager. He has chosen to hold his assets in land, tractors, ploughs; and that's him, driving his tractor, pulling his plough over his land, fixing the tractor, fixing the plough, managing his assets. He earns his income doing the 1001 things he needs to do to get the best return from his assets.
I'm the opposite. I left the farm and got a job. I spend some time managing my assets, but much less than my brother. If I spent more time managing my assets I could get a much better return from my assets. But there's only so many hours in the day, so I face a trade-off between the wages I get from my job and the return I get from my assets. Yet someday I will find it makes more sense to quit my job and become a full-time asset manager, like my brother. People will say I have retired.
Assets don't just manage themselves. It would be nice, for people like me, if my income were simply Y = WL + rK. Then I could simply work at my job for a salary WL, and the value of my assets K would grow at some exogenous (to me) rate r, plus whatever I saved from my salary. But r is not exogenous. Just as my labour income WL depends on my effort and skill in managing my human capital, so my non-labour income rK depends on my effort and skill in managing my non-human capital.
And once you start looking at it like that, the distinction between labour and non-labour income becomes highly suspect. Y = WL + rK makes no sense as a description of my brother's income. Y = F(S,K,L) works much better, where S is his skill, K is his assets, and L is the effort he puts into managing those assets.
Assets don't just manage themselves. We either manage our own assets ourselves, or pay someone else to manage them for us. Actually, it's more of a continuum. At one extreme you have my brother, who spends all his time managing his assets. At the other extreme you have someone who puts all his assets into a savings account at the nearest bank because it requires the least skill and effort. And in between you have people like me. I own shares, which means I delegate the management of my assets to the managers of that company. I own mutual funds, which means a double layer of delegation. And my broker advises me on who to delegate to. My sister rents my land and farms it. And one potentially valuable barn sits empty because I don't have the time and skill to manage it properly right now. It's an option, not a barn. One day I will exercise it, when the strike price of my time falls.
Very few people are like my brother, who works at managing his own assets. Most people work at managing other people's assets, and get other people to work at managing their own assets. It's not just people who work in finance, who think of themselves as managing other people's assets. If you work for a company you don't own, you are working at managing someone else's assets. Even my brother is not a pure case. He borrows money from the bank, which means he is managing someone else's assets. And he hires contractors and mechanics, which means he is delegating the management of his own assets to others.
Most of us delegate the management of most of our assets to other people. But that creates a Principal-Agent problem. We won't manage other people's assets as well as we would manage our own. And much of the effort we expend in managing our assets is monitoring our agents, or choosing the right agents.
If all of us have an income function Y = F(S,K,L), what does that function look like?
If you have no assets, so K=0, it probably looks like this: F(S,0,L) = W(S)L. The wage you earn depends on your skill, and your income is then roughly proportional to your effort or hours worked.
If you do no work, and simply find the easiest possible way of investing your assets, so L=0, it probably looks like this: F(S,K,0) = rK where r is the rate of return on something like a savings account or GIC.
There are probably increasing returns to scale in managing assets. If you double your assets, you need to spend more time but don't need to spend double the time managing them to get the same rate of return. Doubling K holding L constant, or doubling L holding K constant, will mean Y increases but less than double. But doubling both K and L will more than double your income.
Rich people probably face offsetting income and substitution effects on effort. The richer you are the more leisure you want to consume. Leisure is a normal good. But at the same time the greater your assets the greater your marginal return from effort in managing them.
What does all this imply about the distribution of income and wealth over time? I'm not sure. Those born with higher skill will earn higher income. That's standard. But they will also have a higher rate of return on their assets, and so will have a greater incentive to save part of that income. So they will tend to get richer still over time. The distribution of wealth and income will be more skewed than the underlying distribution of skill that creates it. Eventually though, people get old and tired, and so can't devote the effort to managing their assets. Or their skills decay. Or the next generation of heirs regresses towards the population mean level of skills, so their rate of return and rate of accumulation slows. Plus, if your assets keep on doubling you won't and can't keep on forever increasing the effort needed to manage them and get the same rate of return. So the long run distribution of wealth and income may remain stationary.
Just some random thoughts on returning from my fortnight holiday/asset management trip to England. I will get back to macro/money now.