No IMF, Market Income Is Not 'Captured', It's Earned

Includes: DIA, QQQ, SPY
by: Mark J. Perry

In a January 2014 International Monetary Fund (IMF) Policy Paper on "Fiscal Policy and Income Inequality" the IMF staff make the following statement:

Over the last three decades the market income shares of the richest one-percent of the population have increased substantially in English-speaking advanced economies, as well as in China and India. For example, in the United States, the share of market income captured by the richest 10 percent surged from around 30 percent in 1980 to 48 percent by 2012, while the share of the richest one-percent increased from 8 percent to 19 percent. Even more striking is the fourfold increase in the income share of the richest 0.1 percent, from 2.6 percent to 10.4 percent.

Note the IMF's use of the word "captured" when describing the share of market income that more accurately was "earned" or "produced" by the richest 10 percent of Americans. After all, the dictionary definition of capture is "to take into one's possession or control by force," which doesn't accurately describe how the ever-changing top X percent of Americans ended up earning a given share of income in a given year. It should also be pointed out that the top 10% of "income pirates" who captured 30% of market income in 1980 were a completely different group than the "income pirates" who captured 48% of market income in 2012. And in fact it's likely, given significant income mobility in America, that some of the bottom 90% of Americans, and maybe even some of the bottom 10%, whose income in 1980 had been "captured" by the top 10% had actually moved up and became part of the richest 10% of "income pirates" in 2012.

As a thoughtful CD reader Scott Drum writes in an email:

According to the International Monetary Fund income is "captured." Not produced, earned or generated, but "captured." Apparently income is like rain. It just happens. And if you have a really big bucket or tarp you can capture more of it as it falls than others can who have smaller buckets and tarps.

I have a question for the IMF. Steve Jobs and Bill Gates were two of the wealthiest people in the world. How exactly did they "capture" all of their billions of dollars of wealth? Did they hold a gun to the heads of the public and force them to buy iPhones and XBoxes? I recall reading news reports that eager customers slept on sidewalks overnight to be able to purchase these highly desired products as early as possible. Would these people ever think in a million years that Jobs or Gates had somehow "captured," "pirated" or taken their money from them by force? I don't think so.

It might be a subtle point, and maybe it was even sloppy, imprecise writing at the IMF, but I think the term "capture" when describing income shares earned by the top 1/5/10/20/25% does accurately describe the American public's generally cloudy thinking, especially those on the left, about how income is generated in a market economy. As Walter Williams has pointed out, we can think of dollars as "certificates of performance." In a free society, those "certificates of performance" are earned primarily by pleasing and serving customers through voluntary exchanges of goods and services. Entrepreneurs like Jobs and Gates who were incredibly effective at serving and pleasing consumers end up earning large numbers of "certificates of performance," which is another way of saying they earn high incomes. Jobs and Gates didn't "capture" the billions of dollars of income and wealth they have accumulated, they earned them one dollar at a time by creating value for millions of consumers all over the planet. And in fact, the billions of dollars in value that Jobs and Gates have created for the world dwarfs their personal wealth, so if anything, we consumers have "captured" and "pirated" billions of dollars of wealth away from these billionaires!