Only a Few Can Live Off Rent-Seeking

Danielle Kurtzleben interviewed a guy named Mr. Money Mustache (or Pete) about a variety of personal finance questions. Pete's claim to fame is that he is retired at 30, which really means that he positioned himself such that he can live off of capital rents for the rest of his life. Like many other personal finance advisors, Pete sells his particular path as one everyone could follow, but, also like a lot of other personal finance advice, this clearly isn't so.

Ryan Cooper had a worthwhile breakdown of the problems with this sort of personal finance nonsense at The Week a few days ago. The main problem, as I see it, has to do with scale. And this scale problem is the one that plagues basically all personal finance people who start selling their cures as being capable of solving broader economic problems. Just because some people can save a bunch of money and live off of capital rents for the rest of their life, that doesn't mean everyone can do so simultaneously.

If you can pull your head out of the world of money and financial accounting for a brief second, this should be perfectly obvious. The things we all consume each year (food, energy, clothing, and so on) must be produced every year. That is, people have to actually go out and make these things. Crops don't plant and harvest themselves. Goods don't manufacture themselves either. It is workers who do this. And no amount of financial wizardy can escape this basic fact.

Accordingly, we can't all be non-workers living off of capital income because there is no capital income without labor. As one great 19th Century British publication once put it:

It is perfectly certain that no amount of thrift, sobriety, or industry by itself can raise the whole class of wage-earners into the class of those who own the means of production. For what is the advantage of being a capitalist or a landlord? Clearly this: that you can employ other men who are in want of a living to work for you. But if all became capitalists or landlords under the existing system of society who would be the workers?

Of course, the purpose of personal financial advice is to simpy help individuals navigate the world, and I can appreciate that so long as it is kept within those narrow boundaries. It's not strictly necessary, for instance, to understand precisely where the money that keeps getting deposited into your Vanguard S&P 500 index fund comes from. It's only necessary that you understand that this will happen if you put your money in that fund and that therefore you should really consider doing so.

But the problem is when these personal financial advisors themselves don't seem to understand how these financial products relate to the overall economy. For the most part, these financial streams are merely means of organizing ownership of income streams that come from a broader macroeconomy that is actually producing goods and services. The real economy is not money in accounts; it's people actually doing things with resources.

A small minority of people can be like Pete and get by living off of rents they extract from real production, but if everyone were to do so, there'd be no production to extract anything from.