In light of April 23rd being World Books Day, I’ve decided to post a break away from the investment series I’ve been writing to share some ramblings and thoughts about something I feel strongly about and feel we need more in the public discourse. This article could be long and possibly initially boring but please do read and get to the end because the insights could be life changing to your attitude with money and wealth.

I am currently reading a book called “After Picketty: The Agenda for Economics and Inequality”. The book is a series of papers which critique a book called “Capital in the 21st Century” authored by a French economist called Thomas Piketty. The book by Piketty is regarded as the most important book in economics in probably the last 50 years.

“C21” as I will abbreviate it tries to tackle the huge issue about inequality in our world and what causes it. It primarily focuses on Europe and the US but the lessons seem so strong and relevant even in a country like Botswana which is said to be one of, if not the most unequal country in the world. Through studies of over 200 years of data Piketty tries to find the single biggest factor that causes inequality.

Let me attempt to take you through his main finding and implications.

People “make money” in one of 2 ways: by income earned from our jobs and by income earned from our “investments” ie property, shares, cows, side businesses etc. Piketty found that since the 1980s the income gap between the very rich (say top 1-5%) and everyone else has grown exponentially. We’ve all known this and acknowledge it’s a problem. He found that the reason for this is primarily found in how we earn our money. He found that salaries and wages have grown at a much slower rate than the rate of growth in Investments. This fact has lead to vast inequality because 95% of people make their money mostly as salaries with the 5% earning most of their money from investments.

Let’s think about this in Botswana. In the past 10 years, you’re likely to find that salaries in the country grew 3-5% every year (if we’re lucky). This means that 95% of Batswana enjoyed this rate but you will find that the BSE, property prices and even your uncles farm probably grew 10% to 30% in that same period.

What’s the implication of that?

It means (assuming growth rate of 5%) if you were earning P100,000 (roughly P8-9k 10 years ago) you’re probably earning about P162,000 (P14k a month) today. Someone though who had P100,000 invested in property, shares, business etc, (assuming growth rate of 20%) would now be worth P620,000 (P50k+ a month). So you would have been the same in 2008 but in 2009 one would have been on P105k and the other on P120k a year then in 2010 this would be P110k and P144k eventually growing to P162k and P620k in 10 years. This gap gets even worse as you go further out. In 2038 the salary earned would be on P432,000 a year (P36k a month) whereas the investment holder would be on over P23 million a year (P2 million a month).

This is what happens to the gap between people who earn salaries and people who have investments in one generation.

This revelation by Piketty, that the growth rate between how we earn money, is very important when considering how to tackle inequality in our societies and also for our own individual families.

The first thing you need to consider is how most of the people with Investments end up with Investments. The study also found that the top 5% tend to have inherited their wealth. So as much as a good high paying executive job with bonuses can get you there, most people who get there tend to have been given their investments by their parents however small. The above example shows that a child handed a farm worth P100,000 (20 cattle and some land) or a low cost in Phase 2 has a crazy advantage in 10-30 years over a counterpart starting with nothing (most of the middle class and below fall here).

It also shows you the power of family dynasties. Imagine what the differences in wealth gaps will be between people with Investments and power and us in 20-30 years. Think about this in the context of politics. The Kennedy’s, Bushes, Clinton’s in the US and the political dynasties in Botswana. Examine the families of our 4 presidents. Save for Rre Mogae, the others belong to dynasties. Now examine not just the individuals but their families. Look at our economy and look at how people with connections to Khamas, Masires, Masisis, Gaolathes, Saleshandos etc have been positioned in business, civil service etc. How has this happened? Because political power breeds business opportunity and this in turn builds wealth and in turn inheritance. The kids of the people with opportunity in the 70s are now the rich of today and their grandkids will be the rich of 20 years from now.

This means that while most of us have an attitude of spending our money and giving our kids the inheritance of education, the rich know that the best inheritance will always be actual Investments. This therefore begs the question of how you should be behaving with your money now, in order to give your child a good shot in 20 years.

A big expense in most of our lives with our kids is school fees and the debate rages every year on what should we really be spending when it comes to our kids. The Piketty revelation therefore ask, is it better to be sending your kids to the most expensive school you can afford or should you be taking them to a slightly less expensive school and rather investing an extra P2-3k a month on their behalf? Assuming your child is 5 years today, if you put that amount into an investment for 20 years, you could potentially hand them more than a P2,500,000 investment on top of the education gave them by moving the child from Northside to Baobab and from MAP to Legae.

Now whilst the results of Piketty’s book will not apply equally and similarly across the board to everyone, there is a universal truth that comes out. Investments and generational wealth on average will trump salaries and this is why the rich get richer because they know this and actively grow their investments and opportunities while the middle class rarely consider what they intend to hand their kids in 20-30 years because we are concentrated on the next pay cheque. It is therefore important to realize that all the time that is lost now, and all opportunities we miss now have a widening income gap effect on our kids in 20 years time.

Even if it’s just one property or shares or a cattle farm, we need to actively work towards handing our children SOMETHING. We do also need to actively consider working in jobs which get us access to opportunities similar to what politicians seem to get. Our revulsion at being active in politics may actually be making our kids and grandkids poorer and feeding the inequality gap in our society as we are run by the same families ensuring they stay wealthy and we remain working.

Oh and maybe this makes for a good conversation on how we should be choosing marriage partners

Food for thought. Please share and let’s include as many people on this debate as possible.