A book is causing a sensation. ‘Capital in the 21st Century’ by Thomas Piketty, a French economist specializing in the study of inequality, has been celebrated for its ‘remarkable achievements’ by the Financial Times, for the ‘richness of its data’ by the Wall Street Journal, and for inducing something similar to ‘Beatlemania’ in middle-aged thinkers by Forbes.
Piketty himself is a socialist and therefore unlikely to be the natural friend of anyone working in banking. However, his book draws important conclusions about the nature of financial success in the 21st century, and about what it means to work in the financial services industry in 2014.
Here is Piketty, digested.
1. If you’re at vice president level or above and work in a front office banking job, you might be a ‘super-manager’
Since the late 1980s, there’s been an eruption of ‘super-managers’ in ‘hyper-meritocratic’ Anglo Saxon economies according to Piketty. These are people at the very top of the income hierarchy. If you work in finance, you’re in luck: Piketty’s research suggests that financial services professionals account for one fifth of the top 0.1% of earners, even though financial services professionals only form 10% of the working population as a whole.
2. But being a ‘super-manager’ is not likely to be enough if you want to be a top earner in the 21st century
The central tenet of Piketty’s book is that we seem to be moving away from hyper-meritocracies and back towards an 18th century-style distribution of income in which the richest people increasingly derive the bulk of their income from rents paid on private capital rather than income earned from hard work. The richest are ‘rentiers’, they are not bankers who work 80 hours+ per week.
Piketty suggests that this ‘rentier income’ from capital could become increasingly important as the 21st century progresses, rising from 500% of total global income to around 700% of the total by 2100. “In other words, by 2100, the entire planet could look like Europe at the turn of the twentieth century, at least in terms of capital intensity,” he claims.
To a degree, Piketty says the supremacy of rentier income is already the case. Within the top 10% of people with the highest incomes today, the bottom 9% derive the the bulk of their incomes from ‘super-manager’ jobs; the top 1% derive the bulk of their incomes from rents. The closer you get to the top 1%, Piketty says the more of your income comes from rents and the less comes from slogging yourself to death in front of a screen/screens.
3. Historically, hard work and hard study alone have not been enough to propel you into the top category of earners
Working in investment banking – and especially working in M&A – is synonymous with a willingness to work extremely hard, both in order to get the job in the first place and in order to perform in the job once you’ve got it.
For much of history, however, the relationship between hard work, hard study and high earning has been uncertain. Piketty uses an incident from Balzac’s Père Goriot, written in 1835, to illustrate this. An impoverished man in a boarding house asks a fellow resident for advice about his career prospects. He’s told that even if he chooses a career in law, ranks top of his class and makes the compromises necessary to excel in his profession, he will still likely only earn a moderate income – there are very few positions at the top of the legal profession and competition for them is fierce.
‘The standard of living the wealthiest French people could attain greatly exceeded that to which one could aspire on the basis of income from labor alone,’ says Piketty.
Arguably, this realization is hitting some people in banking, which is a less well paid profession than it once was. Equity researchers for one have been deciding that it’s not worth working 12 hour days for £150k a year.
4. Invest (don’t spend) your compensation
Piketty’s implication is clear: if you have the good fortune to be a super-manager today, don’t blow your earned income on disposable items like a Ferrari and school fees. Invest it. Invest it wisely in order that you too can become a rentier in future.
This is all the more important given that Piketty asserts that paying super-managers makes no economic sense. The gain in marginal productivity that comes from paying someone $10m instead of $1m is negligible, he claims. There’s no need to pay people 100 or 200 times the average wage in order to get them to work – most people would do so for 10 or 20 times the average.
This is something that banks may slowly be coming to appreciate. As we reported on Friday, Goldman Sachs cut pay per head to its lowest level for five years in the first quarter of 2014. And Morgan Stanley cut pay for its investment bankers, even though profits in the investment bank soared in Q1.
If you work in banking and you spend a high proportion of your pay on disposable goods, you’re therefore a fool. According to this infamous French socialist, you will also fail to make it top of the income hierarchy in the decades to come. Bankers are on the way down; Rentiers are moving in the opposite direction.