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First things first: Why is somebody rich?

There are only three ways to become rich:

  1. By sheer luck, i.e. winning the lottery
  2. Through inheritance
  3. Through a competitive advantage.

The first we can ignore. Just about nobody who got rich through luck remains rich.

People who get rich by luck do not have a competitive advantage and thus their richness will leak away. Also, they were not educated in the ways of staying rich by their elders, thus hastening the loss.

The second one is prevalent among the rich, but it too is a temporary state of affairs. In most cases they have not been properly trained how to stay rich, and thus their richness als tends to leak away.

It is the third one that is important. Competitive advantage.

Competitive advantage can take a multitude of forms. I think that even hard working and a strong saving ethic can be called competitive advantage. Though that is not where I’d like to focus. Besides while hard work en saving can make you comparatively rich, it cannot make you ‘really’ rich.

To become really rich you need an advantage, an angle.

The advantages I am thinking of can be things like knowledge: if you know how to make bread 5% cheaper than anybody else, you can become rich. Simply because every baker must make at least x% to break even. But you are already earning (at least) a 5% return at that price. Now, 5% is not much. And we seldom see rich bakers…

Another advantage can be legal. For example IP right or copy rights. At best, IP rights and copy rights can give you a monopoly. A monopoly allows you to set the price for your products at the optimum earnings potential. And as long as that is above the break-even price, you will get rich.

Yet another advantage can be force. For example if you can force other people to leave the market to you (for example drug/gang/maffia wars) then you gain a monopoly and you can again sell at the optimum earnings potential.

Of course force can also be used directly by robbing other people. Even when it is called “tax”.

Now this sidestep into the reasons of being rich was necessary. We need it to understand why taxing the rich does not work.

Originally posted at: 2017-02-02
Last modified on: 2017-02-302