We're Spent

• THERE is no shortage of explanations for the economy's maddening inability to leave behind the Great Recession and start adding large numbers of jobs: The deficit is too big. The stimulus was flawed. China is overtaking us. Businesses are overregulated. Wall Street is underregulated.
  
  But the real culprit - or at least the main one - has been hiding in plain sight. We are living through a tremendous bust. It isn't simply a housing bust. It's a fizzling of the great consumer bubble that was decades in the making.
  
  The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago - and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
  
  The Federal Reserve Bank of New York recently published a jarring report on what it calls discretionary service spending, a category that excludes housing, food and health care and includes restaurant meals, entertainment, education and even insurance. Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.
  
  The past week brought more bad news. Retail sales in June were weaker than expected, and consumer confidence fell, causing economists to downgrade their estimates for economic growth yet again. It's a familiar routine by now. Forecasters in Washington and on Wall Street keep saying the recovery's problems are temporary - and then they redefine temporary.
  
  If you're looking for one overarching explanation for the still-terrible job market, it is this great consumer bust. Business executives are only rational to hold back on hiring if they do not know when their customers will fully return. Consumers, for their part, are coping with a sharp loss of wealth and an uncertain future (and many have discovered that they don't need to buy a new car or stove every few years). Both consumers and executives are easily frightened by the latest economic problem, be it rising gas prices or the debt-ceiling impasse.
  
  Earlier this year, Charles M. Holley Jr., the chief financial officer of Wal-Mart, said that his company had noticed consumers were often buying smaller packages toward the end of the month, just before many households receive their next paychecks. You see customers that are running out of money at the end of the month, Mr. Holley said.
  
  In past years, many of those customers could have relied on debt, often a home-equity line of credit or a credit card, to tide them over. Debt soared in the late 1980s, 1990s and the last decade, which allowed spending to grow faster than incomes and helped cushion every recession in that period.
  
  Now, the economic version of the law of gravity is reasserting itself. We are feeling the deferred pain from 25 years of excess, as people try to rebuild their depleted savings. This pattern is a classic one. The definitive book about financial crises has become This Time Is Different: Eight Centuries of Financial Folly, published in 2009 with exquisite timing, by Carmen M. Reinhart, now of the Peterson Institute for International Economics, and Kenneth S. Rogoff, of Harvard.
  
  Surveying hundreds of years of crises around the world, Ms. Reinhart and Mr. Rogoff conclude that debt is the primary cause and that the aftermath is deep and prolonged, with profound declines in output and employment. On average, a modern financial crisis has caused the unemployment rate to rise for more than four years and by 7 percentage points. (We're now at almost four years and 5 percentage points.) The recovery takes many years more.
  
  THE notion that the United States needs to begin moving away from its consumer economy - toward more of an investment and production economy, with rising exports, expanding factories and more good-paying service jobs - has become so commonplace that it's practically a cliche. It's also true. And the consumer bust shows why. The old consumer economy is gone, and it’s not coming back.
  
  Sure, house and car sales will eventually surpass their old highs, as the economy slowly recovers and the population continues expanding. But consumer spending will not soon return to the growth rates of the 1980s and '90s. They depended on income people didn't have.
  
  The choice, then, is between starting to make the transition to a different economy and enduring years of stop-and-start economic malaise.
  
  The easy thing now might be to proclaim that debt is evil and ask everyone - consumers, the federal government, state governments - to get thrifty. The pithiest version of that strategy comes from Andrew W. Mellon, the Treasury secretary when the Depression began: Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate, Mellon said, according to his boss, President Herbert Hoover. It will purge the rottenness out of the system.
  
  History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover's day.
  
  The prospect of that cycle is one reason an impasse on the debt ceiling, and a government default, could do so much damage. Global investors may be the only major constituency that has been feeling sanguine about the American economy. If Washington unnerves them, and sends interest rates rising, the effect really could be calamitous.
  
  But the debt-ceiling debate doesn't have to be yet another problem for the economy. The right kind of agreement could help soften the consumer bust and also speed the transition to a different kind of economy.
  
  What might that agreement look like? First, it could reduce deficits in future years, to keep investors confident that Washington too could begin living within its means after years of excess.
  
  Second, a deal could avoid the Mellon-like problem of having government cut back at the same time as consumers. The Federal Reserve, the Obama administration and Congress seemed to learn this lesson in 2009, when they aggressively responded to the crisis, only to turn more passive in 2010 and spend much of the year hoping for the best. It didn't work out. Today, the most obvious options for stimulus are extensions of jobless benefits and of a temporary cut in the Social Security tax.
  
  But they probably shouldn't be the only options. The biggest flaw with the past stimulus was that it imagined that the old consumer economy might return. Households received large tax rebates, usually with little incentive to spend the money (the cash-for-clunkers program being the exception that proves the rule). People did spend some of these across-the-board rebates, and kept economic growth and unemployment from being even worse, but also saved a sizable portion.
  
  A more promising approach could instead offer a tax cut to businesses - but only to those expanding their payrolls and, in the process, helping to solve the jobs crisis. Along similar lines, a budget deal could increase funding for medical research and clean energy by even more than President Obama has suggested. These are the kinds of investments that have brought huge returns in the past - think of the Internet, a Defense Department creation - and whose price tags are tiny compared to, say, Medicare or the Bush tax cuts.
  
  Politics, of course, makes many of these ideas unlikely to happen anytime soon. Unfortunately, though, these debt-ceiling talks won't be the final chance for Washington to help the country recover from the great consumer bust. That's the thing about consumer busts. They last for a very long time.
  
  

Meet The Luckiest Woman In The World

The August issue of Harper's magazine contains a fascinating story about a woman named Joan R. Ginther, known in the press as the luckiest woman in the world.

To earn that appellation, Ginther won the lottery four times. That's right, four times. And she didn't win no measly $20 and $30 payouts either - she hit multiple million dollar payouts each time.

First, she won $5.4 million; then a decade later, she won $2 million; then two years later $3 million; and finally, in the spring of 2008, she hit a $10 million jackpot.

The odds of this? One in eighteen septillion.

To put this into perspective, the Harper's story's author, Nathaniel Rich, says there are only one septillion stars in the universe, and one septillion grains of sand on Earth. A person with Ginther's kind of luck, writes Rich, would only happen once every quadrillion years.

Okay, a few months back, I found a $100 bill lying on the ground in a JFK terminal. The odds of that happening is something like one in 100,000. But this is ridiculous.

After Ginther's fourth win, the Associated Press picked up her story, and hundreds of outlets around the world proclaimed her the most fortunate woman alive. But Rich thinks Ginther's luck is a mite suspicious - and he spends seven pages explaining why.

"When something this unlikely happens in a casino, you arrest 'em first and ask questions later," a professor at the Institute for the Study of Gambling & Commercial Gaming at the University of Nevada, Reno, tells the author. (There's an institute for that?!)

Ginther won all four of her lotteries in Texas - the first in a standard pick-six drawing in 1993. A decade later, she had three wins in two-year intervals by scratch-off tickets all bought at the same mini-mart, in the same town of Bishop, Texas, where she grew up. (Pop. 3,126) Not that Ginther has even lived in Bishop for decades. No, she lives in Vegas! (I'm not making this up.)

Before you pack up and move to Bishop to camp outside of Ginther's golden mini-mart, there's more. Lots more. Would anyone be surprised if I now told you that Ginther also happens to be a former math professor with a Ph. D. from Stanford University who just happened to specialize in - arts and crafts? No! Statistics.

You can see where the author is going here. Rich proceeds to detail the myriad ways in which Ginther could have gamed the system - including the fact that she may have figured out the algorithm that determines where a winner is placed in each run of scratch-off tickets. (Winning tickets cannot be randomly placed because of the chance that they might all bunch up in one pack.)

Who says women are bad at math?

After Ginther figured out the algorithm, if she figured it out, it wouldn't be too difficult to then determine where the tickets would be shipped, as the shipping schedule is apparently is fixed, and there were a few sources she could have found it out from. Of course, she'd then have to make sure no one else bought a ticket except for her, and that would require some cooperation with the winning store's owner.

All of this is theorized in the article, though not proven.

Rich does add that Ginther's wins could have been sheer luck after all. Her one in eighteen septillion odds would have increased exponentially the more she played, and perhaps she played, well, all the time. He also mentions other multiple winners, though none have won as often as Ginther.

The residents of Bishop, Texas seem to believe God was behind it all.

Rich writes that he could not reach Ginther for comment. And the Texas Lottery Commission told him that Ginther must have been born under a lucky star, and that they don’t suspect foul play. The IRS, however, might think otherwise. Rich notes that it might be somehow involved now, though that entity wouldn't comment for the story either (no word on whether God weighed in). Oh yeah, Ginther's golden mini-mart has since mysteriously shut down.

That said, I’m off to my local deli to buy a Set For Life. Algorithms be damned!

A more dispassionate article on how another statistician cracked the odds on scratch cards here: Wired Magazine article

Following the Herd

The Nobel committee deciding on the 2002 prize for economics broke with tradition by awarding it to a psychologist: Daniel Kahneman.

The award was primarily for his paper with Amos Tversky in 1974, Judgment Under Uncertainty: Heuristics and Biases. It acknowledged that Kahneman and Tversky had shaken the key assumptions underpinning classical economics.

Their portrayal of human decision-making as being littered with systematic short cuts and biases casts doubt over the key assumption of rationality. It helped to spark new fields of 'behavioural' inquiry in economics, finance and elsewhere.

Unfortunately, such inquiry has been confined largely to the margins, with mainstream economics continuing to assume the world is a rational place.

Consider this 1997 quote from Paul Krugman, another winner of the Nobel prize for economics: "If you want a simple model for predicting the unemployment rate in the US over the next few years, here it is: It will be what [Alan] Greenspan [then chairman of the Federal Reserve] wants it to be."

In the wake of the collapse of Lehman Brothers in September 2008, Greenspan underlined his own (now severely shaken) belief in the assumption of rationality when he admitted: "Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity - myself especially - are in a state of shocked disbelief."

It is a slow process, even for Nobel winners, to convince long-standing believers to question a key assumption underpinning their view of the world. The global financial crisis and the failure of mainstream thinking to provide explanations have, however, intensified the doubts raised by Kahneman and others. A richer understanding of the forces that can cause such a crisis is clearly needed.

In this respect, Kahneman and his work on decision-making and its systematic biases offer much material. Andrew Oswald, an economist at Warwick University, has also provided insights that are of particular relevance to investors.

Taking his lead from the animal kingdom, Oswald argues that herding is the rational response of most individuals in most situations, because human happiness is a function of relative rather than absolute position within a group. He makes a compelling case that humans are frightened of falling behind, and are consequently prompted to adjust their relative position within a group, just as an animal seeking safety will do in a herd. As with the herd, however, individually rational behaviour can lead to collective catastrophe.

Oswald uses a graph of the real price of American housing from 1892 to 2010 to show how such individually rational but herd-like behaviour can lull many into ignoring objective evidence and plunging to collective catastrophe. The equivalent graph for Ireland would look even more dramatic.

Some of the lessons for the investor are clear. Succumbing to the powerful instinct to maintain a relative position in a charging investment herd, however individually rational, is inviting catastrophe.

The striking success of value-investing - only buying assets below a reasonable assessment of their true worth - is more richly understood by reference to Oswald's work on the herding instinct of humans. If you must seek comfort in an investment herd, make sure it is populated by the followers of Warren Buffett, the Sage of Omaha. If you can't resist the herding instinct, at least ensure it works in your favour.

Working For Warren

It is surely unprecedented for a person to spend $5,252,722 to get a job, but in a funny way, that is precisely what Ted Weschler, of Charlottesville, Virginia, did. The details, in all their improbability:

Warren Buffett announced this morning that Weschler, 50, the highly successful managing partner of hedge fund Peninsula Capital Advisors, will soon join Berkshire Hathaway to run a portion of its investments. That move, added to the hiring of Todd Combs last year, is aimed at preparing investment-rich Berkshire for a day when Buffett, who just turned 81, will no longer be running the company's investments.

And how did Buffett get to know Weschler? It's here that fact becomes stranger than fiction. Every year, Glide, a San Francisco church and mission, is the beneficiary of an auction in which the prize for the top bidder is a private lunch with Buffett. In the first year of the lunch, 2000, the winner donated $25,000 to Glide. The auction price then proceeded to skyrocket, and in 2010, an anonymous bidder won with an amazing $2,626,311 bid. Then, this year, a bidder also wishing to be anonymous won by upping that bid by $100, to $2,626,411.So here, in a state of affairs being disclosed publicly for the first time, is the fact: Weschler was the winning bidder in both years.In neither year, since he was trying to stay under the radar, did he wish to have lunch in New York, whose Smith & Wollensky steakhouse has usually hosted the lunch -- and given generously to Glide itself. The lunch (or dinners, as they turned out to be) were instead held in both years, at Weschler's request, in Omaha. Buffett picked the site, one of his favorite restaurants, Piccolo's (whose ambiance is pervasively casual).

Meeting in July, 2010 for the $2,626,311 dinner, the two men liked each other right away. Buffett learned about Weschler's investment success and how he achieved it—the 'how' being as important to Buffett as the gains themselves.At Buffett's invitation, Weschler later came to the 2011 Berkshire Hathaway (BRKA) annual meeting, held last spring. At a large private dinner on the night of the meeting, he introduced himself to this reporter, made an impression as smart and friendly, and described himself as having a great time.

And then, at this year's Glide dinner, held July 26th, Buffett almost apologetically sounded out Weschler about the possibility of his joining Berkshire. "I very much wanted him to do it, but I didn't expect to get very far with the idea," Buffett told Fortune. "Ted will no doubt make a lot of money at Berkshire. But he was already making a lot of money with his fund -- you can get an idea of that from the size of his Glide bids -- so money wasn't a reason for him to come."

Even so, Weschler said right away he'd think it over -- and within weeks came to the conclusion that he wanted to accept Buffett's offer. For the moment, Weschler isn't explaining his reasons to the press. But this reporter can speculate that Weschler's long-time admiration for Buffett made this an offer he just couldn't refuse.

Certainly his saying yes has rocked many a boat. He is closing his fund, and that, for a lot of happy partners in it, cannot be good news.Weschler started his fund 12 years ago after getting an undergraduate degree from Wharton, working for six years at W.R. Grace, and helping to start a Virginia private equity fund, Quad-C. While that fund worked its way toward buyouts, it held the cash of its partners, and Weschler invested it, doing well in the job.Deciding in 1999 to strike out on his own, he started Peninsula. The fund's first 13F filing with the SEC, for yearend 2000 -- Weschler had by then opened the fund twice to investments -- shows it owned about $150 million of stocks.

His latest filing, for the second quarter of 2011, gives his long position in stocks as almost $2 billion. (That amount would no doubt be higher, were it not that Weschler closed the fund to new money in the 2004-2005 period).But that $2 billion in long positions only partly tells the story, because in true hedge-fund style, Weschler shorts stocks (positions that do not have to be reported in 13Fs) and also borrows money to leverage the fund's capital.

At Berkshire, Weschler's shorting is likely to cease and certainly leveraging will. Charlie Munger, Berkshire's vice-chairman, has long said that most of the world's ills are caused by "liquor and leverage."

In any case, Weschler has in Peninsula's history produced a dazzling record, which in his letters to partners he compares to four benchmarks -- not only to the standard comparatives like the Dow Jones Industrial Average and the S&P 500, but also to none other than Berkshire B stock.For partners who invested with Peninsula in early 2000, the fund at the end of 2011's first quarter had delivered a total gain of 1236% (a percentage so large it looks like a typo, but isn't). In contrast, Berkshire B had gained a mere 146%.

Weschler's investment style has been to own only a few stocks and to stay with them -- a modus operandi sure to have endeared him to Buffett, whose style is the same. Peninsula's latest 13F filing, for the quarter ended in June, showed the fund holding 9 stocks. The three biggest positions were W.R. Grace (GRA) ($412 million), DaVita (DVA) ($368 million), and DirectTV (DTV) ($328 million). DaVita runs kidney dialysis centers. W.R. Grace is in bankruptcy, but its stock trades actively in the market.

The parameters of Weschler's about-to-be position at Berkshire were in effect spelled out in Buffett's letter in this year's annual report. Weschler (as is the case with Todd Combs) will have the opportunity to invest $1 billion to $3 billion of Berkshire's money. Buffett, meanwhile, will continue to be Berkshire's major domo investor.

Buffett expects Weschler to begin working at Berkshire in several months, perhaps in February. Weschler has told Buffett he will keep his home (just built) in Charlottesville, but will secure an apartment in Omaha and plan to to be at Berkshire several days a week. So private meetings with Buffett are likely to be the new norm for Weschler. Maybe that means he won't be bidding this year in the Glide auction -- or does it?

The writer of this article, a FORTUNE senior editor-at-large, is a Berkshire Hathaway shareholder, a long-time friend of Warren Buffett's and the pro bono editor of his annual chairman's letter.

How Much Money Makes You Happy

Children love goldfish. So if they are given a handful, they should be happy. And they are. Give them even more goldfish and they should be even happier. Not exactly. What made very young children the happiest, according to researchers Elizabeth Dunn and associate, was when they fed some goldfish to Monkey, a puppet. Dunn concludes that rather than focusing on how much we've got in our bowl, we should think more carefully about what we do with what we've got - which might mean indulging less, and may even mean giving others the opportunity to indulge instead.

The study with very young children is part of Dunn's and Michael Norton's larger work on the science of spending. One conclusion is self-evident: people with a middle-class standard of living are happier than people who live in poverty. But in the US, beyond $75,000 year income, happiness doesn't increase. They say higher household incomes were associated with better moods on a daily basis - but the beneficial effects of money tapered off entirely after the $75,000 mark.

Increased money can lead to greater happiness, but generally not if it is spent on more things for yourself. If you have two TVs, buying two more doesn't make you twice as happy. What would? Buying an experience, for one. A trip or dinner out contributes more to happiness than another gadget.

More significantly, that which brings the greatest happiness is buying less for yourself and buying more for others. Buying for yourself is linked to indulgence, a long recognized vice. And buying for others is linked to generosity, a long recognized virtue.

Those who are generous are happier, these researchers find. In one experiment, they gave $20 people walking down the street. Some were told to spend the windfall on themselves, others to spend it on others. From Canada, to India, to the US and South Africa, the results were the same. Those who spent money on others were happier than those who spent it on themselves.

The lesson is clear. It isn't thinking about yourself that makes you happy. It is giving to others that is connected to long-term happiness. Consumers aren't happy; those with big hearts are.

The Richest Men In History

Acoording to ....

LA Times

(Washington Post)

It's fairly easy to figure out who the wealthiest person in the United States is. Just look at the Forbes 100, and you see it's Bill Gates, worth $67 billion. Carlos Slim, the Mexican titan, is worth $73 billion, a measly nine percent more. And with a bit of Googling, you could find similar answers for people across history. The famous Roman politician Marcus Crassus was thought to be among the republic's wealthiest, with a net worth of 200 million sesterces. Fast forward through time, and John D. Rockefeller is said to have had a peak of $1.4 billion in 1937.

Comparing these fortunes across time and geography poses plentiful problems, though. It's obviously a big challenge to convert sesterces to dollars. But it's also difficult to compare Rockefeller's wealth with Gates' and Gates' with Slim's. The essential question is not how much money you have, but what can you buy with it, where you live and when you live. Slim can buy a lot more in his home of Mexico than Gates can in the United States. Not an easy thing to compare.

Branko Milanovic, a top inequality economist, has come up with a smart idea to make sense of this conundrum in his new book, "The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality." He writes:

We do not have an exchange rate that would convert Roman sesterces or asses or Castellan seventeenth-century pesos into dollars of equal purchasing power today. Even more, what 'equal purchasing power' might mean in that case is far from clear. 'Equal purchasing power' should mean that one is able to buy with X Roman sesterces the same bundle of goods and services as with Y U.S. dollars today. But not only have the bundles changed (no DVDs in Roman times), but were we to constrain the bundle to cover only the goods that existed both then and now, we would soon find that the relative prices have changed substantially. Services then were relatively cheap (because wages were low); nowadays, services in rich countries are expensive. The reverse would be true for bread or olive oil.

Thus, to compare the wealth and income of the richissime in several historical periods, the most reasonable approach is to situate them in their historical context and measure their economic power in terms of their ability to purchase human labor (of average skill) at that time and place.

So for Crassus, Milanovic estimates that given his wealth of 200 million sesterces, his annual income, at a 6 percent interest rate, was 12 million sesterces. The average annual income of a Roman at the time was roughly 380 sesterces, so Crassus' income equaled 32,000 Romans.

In Rockefeller's case, his assets of $1.4 billion, assuming the same rate of return, would yield an income equal to 116,000 Americans in 1937. And in Gates' case, his wealth (in 2005) was $50 billion, or $3 billion annually, which when divided by 2005 gross domestic product per capita of $40,000 yields 75,000 workers.

Milanovic concludes that Slim is, by this definition, the richest of all.

"His wealth, also according to Forbes magazine, prior to the global financial crisis in 2009, was estimated at more than $53 billion. Using the same calculation as before, we find that Slim could command ...some 440,000 Mexicans. So he appears to have been, locally, the richest of all! No stadium in Mexico, not even the famous Azteca, would come close to accommodating all the compatriots Mr. Slim could hire with his annual income."

(celebritynetworth.com)

When we think of the world's all-time richest people, names like Bill Gates, Warren Buffet and John D Rockefeller immediately come to mind.

But few would have thought, or even heard of, Mansa Musa I of Mali - the obscure 14th century African king who was today named the richest person in all history.

With an inflation adjusted fortune of $400 billion, Mansa Musa I would have been considerably richer than the world's current richest man.

The list uses the annual 2199.6 per cent rate of inflation to adjust historic fortunes - a formula that means $100 million in 1913 would be equal to $2.299.63 billion today.

Mansa Musa I ruled West Africa's Malian Empire in the early 1300s, making his fortune by exploiting his country's salt and gold production. Many mosques he built as a young man still stand today. After Mansa Musa I death in 1331, however, his heirs were unable to hang on to the fortune, and it was substantially depleted by civil wars and invading armies.

The One Percent

"We are the 99 per cent" is the slogan of the Occupy protest movement. It highlights the fact that 1 per cent of the US population controls 40 per cent of the wealth. So who are these super-rich?

The world now has more billionaires than ever - 1226 of them, according to Forbes magazine. But you don't need billions to be in the top 1 per cent of earners. As of 2010, annual earnings before tax of around $350,000 sufficed in the US. £149,000 put you in that slim top tier in the UK.

The real concern for everyone from Occupy protesters to US president Barack Obama is not how rich these people are, but how much richer they are than everyone else. In recent decades, surging wages for top earners - and stagnation of pay for low earners - has widened the gulf between the haves and have-nots.

We've been here before. In the early 20th century, wealth was likewise concentrated in the hands of the few - mainly a class of "rentiers" whose income largely derived from inheritance and land ownership. Since that time, at least in the US, UK, Canada and Australia, the share of income accrued by the very richest people has followed a U-shaped trajectory (see graph), dropping after the Great Depression and the second world war and plateauing until the late 1970s, when the "Great Divergence" began.

What's more, the composition of the top 1 per cent has completely changed. Now most of the wealthiest people aren't rentiers, but entrepreneurs or highly paid employees. In the UK, two-thirds work in finance, while in the US a third are company execs, 14 per cent work in finance and 16 per cent in the medical profession. Together, members of the richest percentile take home a fifth of all income in the US, according to data from economist Emmanuel Saez of the University of California, Berkeley.

What caused top-tier wages to soar is debated, although globalisation and the impact of technology on the way we work are key factors. Changing social norms may also play a role, says Saez, pointing to the recent lifting of the "outrage constraint" that once kept exceptionally high pay in check.

Being in the top 1 per cent takes on a new significance when you consider the global picture. The poorer half of the world's population hold just 1 per cent of global wealth. Even those who scrape into the richest 1 per cent in the US, earning $350,000, are easily in the world's richest 0.1 per cent, earning more than 300 times the global average, according to the anti-poverty organisation, Giving What We Can.

These dramatic figures capture the vast distance between the very wealthiest and everyone else. The 1 per cent are not simply at the pinnacle of material wealth, they are also on the outermost edge of a widening chasm.

Why The Chase For More?

IF YOU are a top hedge-fund manager taking home $40 million this year, you can afford a lifestyle with more than a little luxury. So why strive to take home $50 million next year? The question goes to the heart of one of the most-researched paradoxes in social science: why do people dedicate so much energy to trying to make more money, when having more money does not seem to make them that much happier?

First, some caveats. People who make very little money do become significantly happier when they earn more. But a large survey of people in the US showed that the impact of additional income on happiness tends to taper off around an annual salary of $75,000 - well below the threshold for inclusion in the top 1 per cent. There is no data suggesting that making more money makes people less happy - it's just that it stops making them much happier.

Nonetheless, it is abundantly clear that the very rich are forever striving to augment their wealth. Some of the reasons why are surprisingly simple.

Leapfrogging the Joneses

People might be happier with their current level of wealth - and stop trying to accumulate more - if not for the curious and apparently irresistible urge humans have to compare ourselves with others on every dimension imaginable: attractiveness, intelligence, height, weight, and crucially, financial success. As the writer H. L. Mencken said, "A wealthy man is one who earns $100 a year more than his wife's sister's husband." The happiness we derive from income is based not only on how much we have, but on how much we have relative to our peers. And the peers of a top hedge-fund manager earning $40 million a year may include fellow hedge-fund managers bringing in $100 million or more. The pain of seeing someone else make more money is a major motivator when it comes to accumulating wealth. Additionally, recent research suggests that people are concerned not only with keeping up with the Joneses, but also with leapfrogging as many as they possibly can. People are much more likely to engage in conspicuous consumption when they know that those purchases will move them ahead of as many of their peers as possible in the status hierarchy.

Interestingly, this applies at the other end of the income spectrum as well. A recent study I collaborated on shows that the group of people in the US who are most opposed to an increase in the minimum wage are those who make just above the minimum wage. Why? Because if the minimum wage increases, these people will now tie for "last place", along with all the people whom they used to feel superior to.

Money can be counted

More obviously, money has a property that many other things that matter in life do not: it can be counted. When people reflect on whether they are better off this year than last, metrics like "do I have more meaning in my life?" are too fuzzy to put a number on; "my life is 32 per cent more meaningful" is just not a calculation we are accustomed to making. Salary, on the other hand, gives us a measuring stick: "If I make more this year than last, then I am doing better in life". This also may explain why people are always buying larger houses and larger televisions.

We just don't know any better

Lastly, despite studies contradicting this notion, most people still believe that more money equals more happiness. Consider research I conducted with Elizabeth Dunn and Lara Aknin at the University of British Columbia in Vancouver, Canada. We asked people to predict how happy they would be if their annual income was anything from $5000 up to $1 million. We also asked how much money they actually earned, and how happy they were with their lives. We found that people generally overestimated the impact of money on happiness; for example, those who reported earning $25,000 a year predicted that their happiness would double if they made $55,000. More money, much more happiness.

But when we measured the happiness of people at these two levels of income by having them rate their satisfaction with life on a scale from 1 to 10, we found that the wealthier group was only 9 per cent happier. This shouldn't be too surprising: many of us can think back to times when we earned less but were happier. (Remember the good times you had while being broke in college and you all had to chip in just to buy a pizza?)

All of that said, the richest among us are better equipped to turn money into happiness, but perhaps not in the way you would expect. Our research shows that people can gain happiness with money if they do something a bit unusual: give it away. It turns out that spending money on yourself does not make you any happier, but spending on others - from donating to charity to buying coffee for a friend - is an efficient way of turning cash into happiness. The wise hedge-fund manager would do well to take a break from giving investment advice to others, and instead take time to invest in others.

The Rich Have Different Rules

"The 1 per cent" may be a catchy phrase, but when it comes to understanding how wealth is distributed within society, we should focus on the top 5 or 10 per cent. Those who study income distribution have discovered that there is one rule for the rich and one rule for everybody else. For the masses, income follows a broad curve; for the wealthiest 5 to 10 per cent, the pattern is different, forming the so-called Pareto tail.

The statistical pattern seems to be ubiquitous and unchanging - "from ancient Egypt up to today", says Juan Ferrero, a physicist at the University of Cordoba in Argentina. That implies that there may be a universal mechanism at work.

More than 100 years ago, physicists pointed out that the broad income curve for the majority resembles the distribution of energy among molecules in a gas, a pattern called the Maxwell-Boltzmann distribution. This prompted the idea that the distribution arises because people exchange wealth when they meet, much as gas molecules exchange energy when they collide.

That idea has since been tested using mathematical models that liken human beings to molecules bouncing around in a gas. In the simplest model, people risk surrendering all their wealth at each encounter. That produces a wealth curve that has far more ultra-poor people than we find in the real world. So in 2000, Bikas Chakrabarti's team at the Saha Institute of Nuclear Physics in Kolkata, India, allowed people to retain some of their wealth in each exchange. The result was a wealth curve similar to the broad hump of the Maxwell-Boltzmann distribution.

The next refinement was to allow different people to hold back different percentages of their wealth - effectively setting money aside as savings. With this tweak, the model correctly reproduced the whole wealth distribution curve, including the Pareto tail, which was made up largely of people who saved the most. This finding has been backed up by other similar models, including one developed by Ferrero, in which the richest 10 per cent are once again those most inclined to save.

If these simple models do capture something of the essence of real-world economics, then they offer some good news. It turns out that the main part of the wealth distribution gets narrower, more equal, the more people choose to save. In other words, inequality can't be abolished, but it can be reduced if we all put more money aside for a rainy day.

The Health Impact of Inequality

THE richest 1 per cent of society has pulled away from the rest of the population at a quickened pace in the past few decades. This asymmetrical distribution of wealth is nothing new - humans have lived in lopsided societies for millennia. But the new question is whether their wealth affects everyone else's health. There may be economists who argue that inequality isn't bad for the health of the economy, but it is becoming more difficult to make the case that it doesn't harm the health of humanity. Growing evidence shows that greater inequality brings with it more crime, worse public health and social ills that affect every tier of society.

In recent decades, the proportion of wealth controlled by the top percentile has ballooned (see "Inequality: Who are the 1 per cent?"). But a global portrait shows that absolute poverty has actually dropped during that time. According to 2008 World Bank figures, 1.29 billion people live in absolute poverty, defined as getting by on less than $1.25 per day, down from 1.94 billion in 1981. The UN's millennium goal is to cut poverty by half from 1990 levels by 2015.

So increasing wealth at the top doesn't seem to drive more people into absolute poverty. However, once you move beyond destitution, another damaging problem is exposed: how you stack up against those around you in social and economic terms affects your health. Michael Marmot, an epidemiologist at University College London specialising in the health effects of inequality, sees the problem as one of relative poverty. Its ills are well documented and numerous: reduced access to nutritious food, healthcare and education and increased likelihood of exposure to violence have a significant impact on mental and physical health, as well as opportunities for socioeconomic advancement. "We shouldn't be thinking only of absolute destitution," he says.

Thomas McDade, a biological anthropologist at Northwestern University and director of Cells to Society at the Center on Social Disparities and Health at the Institute for Policy Research in Evanston, Illinois, says that additional research has unveiled a more challenging landscape. "Increasingly, we're coming to understand that even if you have a stable job and a middle-class income, then your health is not as good as that of someone who is in the 1 per cent. There is something more fundamental about social stratification that matters to health and the quality of social relationships."

The issues of relative poverty are more nuanced than meeting basic needs for food and shelter. A hundred years ago it might have been whether you could afford to eat meat once a week - or have an indoor toilet. Today it might be whether you can afford to mark your child's birthday with a party, Marmot says. "It matters because of what it means: can I participate in society?"

The great divide

Relative poverty goes hand in hand with inequality. "What we find is that the bigger the inequalities, income, educational, social, in a whole variety of ways, the bigger the health inequalities," Marmot says.

One of the measures used to assess economic disparities within a society is known as the Gini coefficient, which ranges from 0 - everyone earns the same - to 1 - one person takes it all (see graph). Most countries fall between 0.25 (Denmark) and 0.63 (South Africa). Studies have revealed the association between higher Gini scores and worse health outcomes, which include increased risk of premature birth and higher mortality rates.

A meta-analysis conducted by S. V. Subramanian at the Harvard School of Public Health, and colleagues, showed that the US, with a Gini score of 0.36, had nearly 900,000 deaths that could have been avoided compared with nations with scores lower than 0.29. The UK, with a score of 0.33, had nearly 12,000 such avoidable deaths.

This analysis also revealed a threshold effect, in which detrimental effects on public health are only observed after inequality reaches a certain level. In this case, a Gini score of 0.3. "There's always going to be some degree of inequality," Subramanian says, but what matters is how drastic the degree is, or how quickly it shifts.

In the past two decades, more than three-quarters of the countries belonging to the Organisation for Economic Co-operation and Development have seen a growing gap between the rich and poor. "It's not just the idea of a threshold, but also how inequality has grown over time," Subramanian says. He and his colleagues stress that as inequality increases, more research on the link with poor health is urgently needed.

According to a 2011 report compiled by the US Congressional Budget Office, between 1979 and 2007, the average after-tax household income (adjusted for inflation) among the top 1 per cent of the US population grew by 275 per cent. Among the top fifth, it grew by 65 per cent; in the top two-thirds, by nearly 40 per cent; and in the bottom fifth, income grew by just 18 per cent.

The divergence in pay, with the top 1 per cent taking a larger share, amplifies inequality. Ultimately, says Marmot: "We're using the 1 per cent as shorthand for a bigger issue."

How does having less relative to your peers undermine health? Study after study identifies the culprit as stress. Not day-to-day fretting, but persistent psychological and physiological reactions to external threats that cannot necessarily be addressed or avoided. Much of this research focuses on those living in impoverished communities, but these associations only diminish by degree as you ascend the economic ranks of a society. "Socioeconomic status, and social stratification in particular, is a very powerful determinant of health - for populations and for individuals," says McDade.

Toxic stress

Unrelenting stress is toxic because it can turn the body's defence system against itself. Neuroendocrinologist Bruce McEwen at Rockefeller University in New York says the stress response that evolved to protect us from harm can be hijacked and actually cause harm when the stress never abates. In a normal situation, the introduction of stress causes the body to deliver a boost of energy - by sending a surge of glucose to the muscles - and to increase heart rate, blood pressure and breathing to get oxygen to the muscles in a hurry. At the same time, blood vessels constrict and clotting factors increase - ready to slow bleeding in case you are wounded. These responses are part of a fight-or-flight survival kit, and once the stress has passed, these should subside.

But for people under unremitting stress, this response never quite switches off - leaving sugar levels unregulated, high blood pressure, increased risk of blood clots, depressed sex drive and an immune system buckling under the strain. Prolonged exposure to stress hormones can have other effects as well, including affecting the brain by altering the structure of neurons and their connections, which in turn can influence behaviour and change hormonal processes.

In the well-known Whitehall II study, which followed more than 10,000 UK civil servants since 1985, Marmot and his colleagues found that reported stress levels were amplified as you descended the organisational hierarchy - with corresponding declines in health. Workers on the bottom of the heap were far more likely to suffer coronary heart disease than those at the top.

In a 2009 study, Michelle Schamberg and Gary Evans at Cornell University in New York looked at the role stress plays in the educational performance gap between those from richer and poorer backgrounds. The researchers hypothesised that childhood stress might impair working memory. They assessed 195 17-year-olds, about half of whom grew up below the poverty line and half in middle-income families.

To measure the amount of stress the children endured over the years, the researchers drew on a measure called allostatic load, with higher numbers indicating higher levels of exposure to stress. It is the sum of six risk factors: blood pressure (systolic and diastolic); concentrations of three stress-related hormones (cortisol, adrenalin and noradrenalin); and body mass index.

On average, the figures were higher for the poor children than for those from the middle-income families. A discrepancy in working memory broke down along the same lines. The 17-year-olds who lived in poverty could hold an average of 8.5 items in their memory at a time, compared with the better-off children, who could run to 9.4. When Evans and Schamberg ran statistical analyses to control for the effects of allostatic load, the relationship between upbringing and working memory disappeared; the deficits seen in the poorer children seemed to be down to their experience of stress.

The Centers for Disease Control and Prevention in Atlanta, Georgia, have also accumulated several decades' worth of data about stress and childhood. As part of ongoing studies into childhood risk factors, researchers came up with a stress scoring system. The method shows how, as the number of adverse experiences increases, so does the risk of health problems ranging from alcoholism and chronic obstructive pulmonary disease to heart disease and suicide attempts.

And in an intriguing 2007 study, Peter Gianaros at the University of Pittsburgh, Pennsylvania, examined the correlation between the way people classify themselves in terms of socioeconomic status, and the size of the perigenual area of their anterior cingulate cortex, a region of the brain involved in self-control, the experience of emotion and the regulation of reactions to stress. In an experiment with 100 men and women, Gianaros found that the lower the participants ranked themselves in terms of socioeconomic status, the smaller the volume of this area.

It is a preliminary finding, but McEwen speculates that awareness of one's own circumstances is likely to be a factor. "If you're living in a place like New York City with huge gradients of differences between rich and poor, you're going to know where you are. You're going to have the sense that 'I'm not able to do this or that'. It's going to have even more of an effect on how you view yourself and how you behave."

The uberwealthy, then, affect everyone else by extending the measuring stick by which we gauge our own successes and opportunities. But there are also other important ways in which they affect those below them.

"The magnitude of inequality damages social cohesion," says Marmot. "The rich live separate lives from the rest of us, live in different neighbourhoods, send their children to different schools." When the wealthy pay directly for the necessary services in their lives, they become less willing to spend tax money on everyone else, which begins to erode public services and creates a hierarchy of quality. "The whole argument against a service for the poor and a different one for the rich is that a service for the poor is a poor service," Marmot says. "That really says we are not one society."

Then there are health differences that change as you go up through society's ranks. A 2007 survey by the US Federal Reserve found that the wealthiest people were more likely to describe themselves as being in good or excellent health. This group also expected to live longer, while those with the least also had the lowest expectations for their longevity.

Health follows a social gradient, but Marmot argues that at some point, as wealth increases, the additional rise in health becomes very shallow. "The difference between somebody earning $1 million and $2 million is just not detectable in the evidence," he says. "You don't keep getting more and more benefit from more and more income." The extra millions piled on top aren't going to make the 1 per cent live much longer, but even a small amount of extra income could make a huge difference to the health of a swathe of the population below.

The policy implications seem obvious, if politically contentious: a more even distribution of wealth would improve health on national and global scales. But that appears unlikely to happen without a radical shift in western political culture; in recent times governments of all political persuasions have presided over growing inequality.

As the divide between the top percentile and everyone else widens, inequality is an issue that will not go away. And as the body of evidence accumulates, a clearer picture is emerging of inequality and its relation to health, self-worth, the ability to participate in society and to take control of one's life. Knowledge, as they say, is power - especially in the hands of 99 per cent of the population.

Unexpected Consequences of Inequality

It's no surprise that the richest 1 per cent have large ecological footprints. But what may come as a shock is that concentrating wealth in their hands may actually be good for the planet. While those with outsized fortunes also tend to have an outsized environmental impact, their carbon output does not keep pace with their wealth (see diagram). Beyond a certain level, they aren't spending their additional cash in ways that take an environmental toll. But if that money were more evenly distributed, it could mean slightly bigger carbon footprints for many more people, which would soon add up.

Last year, economist Marc Lee at the Canadian Centre for Policy Alternatives, a non-profit organisation in Ottawa, Canada, analysed data from the collection of a carbon tax in British Columbia, and concluded that the top 1 per cent of households have carbon emissions three times the provincial average. That difference is considerable, but also considerably less than the disparity in Canadian incomes. According to 2007 figures, the top 1 per cent had more than 10 times the average income.

The breakdown is similar elsewhere. British analyst Chris Goodall, author of How to Live a Low-Carbon Life, did not get down to the top 1 per cent, but he did find that the top 10 per cent in the UK spend nearly 6 times as much each week as the bottom 10 per cent. Still, their carbon footprint is only 2.4 times higher.

How come? Goodall found that the richest 10 per cent spend a great deal more than their fellow mortals on travel, especially air travel. Compared with the poorest 10 per cent, they spend 10 times more on air travel. But otherwise a bigger income did not translate into a commensurately bigger carbon footprint. Why not? The rich spend a lot more on food, for instance, but they don't eat much more than other folk, so their food footprint isn't much above average. Similarly, they may buy better-made goods that require more labour, but the same amount of material inputs as the cheaper alternatives. Personal services such as cleaners and gardeners are also low-carbon ways of spending money, as is the purchase of property.

A final element in the equation, says Goodall, is that while those on lower socioeconomic rungs spend most of their money soon after receiving it, the richest tend to squirrel away their loot.

None of this excuses planetary profligacy, but it does raise the unexpected and bewildering thought that shovelling money to the rich could be the most environmentally sound way of distributing it.

Barbie Math

Why does Doctor Barbie cost twice as much as Magician Barbie? There are many wonderful aspects of online shopping. As someone who has placed 203 Amazon orders this year, I should know. You can do it in your pajamas in the middle of the night, the store is rarely out of what you want, and the resulting shipping boxes make great toys. But there is one serious downside: You can't see what you are ordering before you buy it. So how can you tell what's a better product? Usually the economist's answer would be price: The more expensive thing is better. The logic, very roughly: If it weren't better, the guys who sell it wouldn't be able to get more for it. If this were all that was going on, figuring out quality online would be a snap.

But then there is the Barbie Paradox, which my fellow economics professor Matt Notowidigdo formulated when he was looking to illustrate a particular pricing phenomenon for his class. Mattel makes a line of 'I Can Be' Barbies, in which Barbie takes on various jobs (nurse, president, Olympian, etc.) Other than the details of their clothes and accessories, the 'I Can Be' Barbies appear to be identical.

Yet on Amazon, at least, they are sold for very different prices. A few examples

I Can Be Magician Barbie: $12.99
I Can Be Chef Barbie: $15.99 (Sweets Chef, only $12.99)
I Can Be Doctor Barbie: $32.91

Based on the descriptions of these items, it's hard to find any obvious differences. But before we discard the 'more expensive is better' rule, we have to consider whether we are overlooking something: Maybe Doctor Barbie actually comes with a whole lot of extra accessories - a doctor bag complete with pill bottles and stethoscope. Maybe she comes with an acceptance to the medical school of your choice?

But alas, she does not. Doctor Barbie comes with a doctor bag; Chef Barbie comes with cooking implements and food. Both offer a code for 'career-themed online content.' In fact, it seems a lot more likely that the answer lies in the concept of price discrimination. People are often willing to pay different prices for the same products, either because they have more money to spare, or because they really like the product more. Companies know this, and would like to take advantage of it. If they can just identify those consumers who will pay more, and charge them more, it's good for their bottom line.

This may seem tricky to implement, but companies actually do it all the time. Think about an airline. They know that, on average, business travelers would be willing to pay more for the same basic service of flying them from New York to Chicago. But it's hard to just charge them more for the flight; for one thing, it's hard to see who is a business traveler from the other side of the computer.

The airline would like to find some way to identify these business people. One way to do that is to find something they value more than the leisure traveler and sell that for a premium. Relative to leisure travelers, those on business are more likely to value space to work on the plane, and the ability to sleep before a big meeting. Business class is born.

Yes, business class gives you more: a bigger seat, warm nuts, a chance to board first and lord it over the rest of us. But this doesn't actually cost the airline that much - it's certainly not enough to justify a price five- or 10-times higher. What's really going on is that offering a fancier seat on the plane is a way to identify those who are willing to pay more. The airline charges the extra cost of the nice seat and nice meal, but they effectively also charge them more for the basic flight.And the business travelers cannot get out of paying a higher price for the basic flight - at least not if they want to eat the warm nuts.

How does this explain the Barbie pricing? Richer people, on average, are going to be willing to spend more for a Barbie. Knowing this, Barbie's distributors would ideally like to base the price of any Barbie on the buyer's income. But they have the same problem the airline does: From the other side of a computer, or even a cash register, it can be hard to see people's income. And you can't simply ask a cashier to charge someone more based on, say, what car key they are holding, or how expensive their coat looks.

But the sellers can use price discriminate just like the airlines do. Imagine that some kinds of professions are more attractive to people with higher incomes - doctors, for example, or teachers. This could be because the richer people themselves have those jobs, or because they care more about their children aspiring to those jobs. Barbies with those professions attract a richer segment of the population. Therefore, stores can effectively charge richer people more by charging more for these particular Barbies.

This works even if everyone values higher paying jobs more for their children. All it requires is that richer people care relatively more about that aspect of the Barbie. And there is no way for the richer people to get out of paying more by pretending they are poor: Since they want the Doctor Barbie, they have to pay the premium.

Of course, there could be other explanations for these price differences - maybe it costs more to manufacture those little doctor bags for some reason. But it's telling that the most expensive Barbies tend to be the ones with the highest income jobs: doctor, computer engineer, paleontologist. To my inexpert eye, Doctor Barbie and Magician Barbie certainly look almost exactly the same. You are just paying an extra $12 to avoid your child aspiring to a career in magic.

Once you are aware of this kind of pricing scheme, you see it everywhere. Purchasing your movie tickets online? That'll be a $1.50 'convenience fee.' Seems odd when you think about it: The person for whom this is really convenient is the owner of the movie theater, who now doesn't have to pay a teenager to sell you a ticket. Really, on cost grounds, you should be getting a discount! But, of course, the owner of the movie theater has figured out that people who are willing to pay more also tend to be less willing to wait in line, partly because they see their time as worth more. You can't just charge them more for the ticket, but you can offer them something that they find especially valuable, and charge them for that.

You do have to be a little careful, however. After pondering whether I should actually buy a paleontologist Barbie for my daughter ($21.35!), I remembered I was supposed to buy a car seat sled to drag our car seat around the airport at the holidays. I Amazon searched 'Car Seat Travel' and looked at the first two things that came up. The pictures looked the same, but one was $14.49 ('Traveling Toddler Car Seat Accessory') and one was $69.99 ('Roll and Go Seat Transporter').

Steeped as I was in thinking about price discrimination, I figured that the more expensive one was really no different, maybe it just came in a nicer color, designed to lure in people for whom money was no object. I clicked Buy on the $14.49 one, congratulating myself at having avoided throwing my money away. That is, until the package arrived and I realized that while $69.99 would have gotten me a car seat sled, $14.49 got me an (actually quite expensive) piece of rope that I could use to tie my car seat to my roller bag.

The Lottery Curse

A drian Bayford and his wife, Gillian, celebrated their £148m win on the Euro Millions lottery last August in a typically low-key fashion. They ordered a Domino's pizza for dinner and booked an easyJet flight to Scotland to stay in a windswept caravan park in Carnoustie. Within two weeks Bayford, a 41-year-old former postman, was back working in his music shop in Haverhill, Suffolk.

Less than six months later the Suffolk Music Centre has closed down after being inundated by letters and visitors seeking a slice of Bayford's new fortune. Neighbours recalled how he received grief and abuse from locals who visited the shop, and he has described his sadness about the 'lotto cloud' that hung over the premises.

Bayford announced last week that he was planning to take his business online to dissociate it from his lottery win, but his experiences have raised a question: how much of a blessing is it to win so much money? Many of us dream of a lottery win that would put our financial troubles to rest, but being a jackpot winner can be a difficult business.

"It would be nice to think you could just keep all your old friends and carry on as before, but I think when people win that much money the unfortunate reality is there are going to be outside influences that come into play," says Mark Myatt, who won £1m in 2009.

"To us £1m was an awful lot of money, but the Bayfords are in a different universe now. They will have to live the rest of their lives in a kind of bubble."

The story of the Bayfords illustrates that it is not just 'lotto louts' such as Michael Carroll who struggle to deal with their lottery win. Carroll won £9.7m in 2002 aged 19 and quickly blew his fortune on fast cars, gold jewellery and crack cocaine. He is now living on benefits and recently admitted stealing some Strongbow and a sandwich from his local supermarket.

Jack Whittaker was already a self-made millionaire several times over when he won a $93m (£58m) jackpot in the Powerball multi-state lottery in 2002. He began with good intentions, donating large amounts of money to local charities and starting a foundation.

Despite his long experience of success and good fortune in the water-pipe business, however, within two years Whittaker's life had fallen apart under the strain. Fortune hunters flocked to West Virginia, harassing Whittaker for handouts while he shopped in the supermarket.

Eventually he had to hire off-duty policemen to guard him and his home. Whittaker has estimated that he has been involved in 460 lawsuits since his lottery win, many of which have been thinly disguised attempts at extortion.

Whittaker has also been robbed several times, has been divorced by his wife and has spent time in rehab after being charged with drink-driving. His granddaughter Brandi, to whom he gave large amounts of money, went off the rails and developed a serious drug problem. She was found dead with a syringe in her bra in 2004, aged 17.

Although Whittaker's disastrous tale is extraordinary, many lottery winners have reported that relations with friends and family have become strained by the burden of new-found wealth and the problem of how to distribute it.

"People did have an assumption that perhaps we would help them out," says Myatt, who has started a property company since his win. "There was some envy from more remote friends. People look at you with different eyes sometimes."

"The biggest negative for me as a businessman is that if I have a meeting with anyone, particularly estate agents, they just think you're an idiot who has landed a great big load of money, which they can rip off."

Winners can also become a magnet for any number of grudges, and some have met untimely ends. Urooj Khan, a Chicago businessman, died the day after his $425,000 lottery cheque was issued. Khan's death was initially attributed to natural causes, but last week it was reported that police had launched a murder investigation after finding lethal levels of cyanide in his blood.

There are a number of factors that can bring on the 'lottery curse', but the biggest cause is the total lack of preparation.

"It hits them very suddenly," says Philip Beresford, who compiles The Sunday Times Rich List. "They haven't trained for it; they haven't fought for it as an entrepreneur has."

"Somebody who gradually builds up their fortune to £100m-plus can disappear into obscurity. But a lottery winner is a magnet because it's ordinary folk suddenly doing well and they encapsulate all our dreams."

Camelot, which runs the national lottery, is well aware of the pitfalls for winners. It offers them a long-term advice service and arranges a meeting with financial and legal advisers.

The best way to avoid the scroungers is to manage people's expectations, says Andy Carter, senior winners adviser at Camelot. "Always gift in small amounts. After all, if you give someone £1m, then they've got the same shock as you, and they'll end up needing the same level of advice and support as well."

According to Beresford, the only way for big winners to keep control of their lives is not to go public at all. He says two recent winners of jackpots in the region of £180m and £100m have kept themselves entirely out of the public eye.

"Never, ever, do publicity. Never," he says. "My advice is not to do anything: just carry on your normal life and gradually, quietly, disengage. Go and live in New Zealand. You can afford it."

The Cost of Wars

The American Civil War claimed the lives of at least 600,000 men and many billions of dollars in treasure - yet there is another cost which endures to this day. Two children of veterans of the conflict are still receiving a pension of $876 a year.

The news that, a few months before the 150th anniversary of the Gettysburg Address, the US Government continues to pay Civil War pensions to a recipient in Tennessee and another in North Carolina has caused unease in a nation that has just marked a decade since the invasion of Iraq.

A review of government payment records shows the recent wars in Iraq and Afghanistan are costing America $12 billion in payments to survivors and relatives of those who were killed. Payments to veterans and relatives of the Vietnam War cost over $22 billion - twice the annual budget of the FBI.

The Korean War costs America $2.8 billion a year, World War II pensions cost $5 billion and 2,289 survivors are still drawing payments related to World War I.

Then, there were ten people receiving pensions from the Spanish-American Civil War of 1898, at a combined cost of around $50,000 a year. All the costs are listed by the Associated Press in a review of government payments - yet it was the Civil War pensions that caused the greatest surprise.

Bitcoins

What's not to like about Bitcoin, every libertarian's favorite crypto-currency?

For starters, Bitcoins are as cyberpunk as William Gibson's wildest dream: a form of monetary exchange invented in 2009 by a mysterious character who called himself Satoshi Nakamoto but then disappeared from view after unleashing his virtual currency upon the world. Bitcoins are undeniably cool: marvelously 'mined' from the ore of computer processing power and electricity; more ready for prime time than any previous experiment in purely digital money. And Bitcoins, increasingly, are a success. At a Thursday afternoon all-time-high valuation of $72 per Bitcoin, there were around $700 million worth of Bitcoins in circulation. People are using Bitcoins to buy real goods and services, to hedge against European financial calamity, and to score drugs. That's money.

Over the years, Bitcoin has experienced ups and downs; the currency has been targeted by hackers and thieves and botnets and been victim to more than one embarrassing software glitch. But it has persevered, and this week, one can fairly say that Bitcoin came of age. On Monday, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) released its first guidance as to how de-centralized virtual currencies should fit into the larger regulatory regime under which currencies of all kinds are required to operate. The word Bitcoin is never mentioned in FinCEN's release, but that's just a technicality. Everyone in the Bitcoin community knew who the guidance was aimed at. Bitcoin is a big boy now. The State is paying attention.

But while some observers have applauded FinCEN's guidance as acknowledgment that Bitcoin isn't illegal or considered a threat by the government, not everyone is cheering the news. Because there's a problem here. Bitcoin isn't just an elegant way to create money using peer-to-peer networks and cryptography. Bitcoin is a currency with an ideology. From the beginning, Bitcoin was envisioned as a form of monetary exchange that didn't need third-party financial institutions or central banks or even governments to validate it or back it up. Bitcoin is the fulfillment of a libertarian dream, a currency created out of the workings of the free market, unaffiliated with any state authority, respectful and protective of user privacy and anonymity, and designed to resist inflationary pressures. By its very nature, Bitcoin is made for people who don't want other people to know what they are doing.

Bitcoin, says financial pundit Max Keiser, is the currency of resistance.

That's all fine and dandy, but then here comes the government with its strong suggestion that any organization that facilitates the exchange of Bitcoins into other non-virtual currencies needs to register with the proper authorities and start keeping a lot of bureaucratic paperwork. How does that fit in with the idea of 'resistance'?

Not very well, as we can learn from one Redditor who chastised his fellow Bitcoin fans for celebrating the legitimacy conferred upon Bitcoin by FinCEN's guidance.

From this situation to total government tracking of money flows and zero possibility to escape their theft, it is but a small step. The tax farmers have co-opted all of you into even more total servitude. But you celebrate that. How servile.

Sigh. Slave-minded idiots, nearly all of you, naively happy because the eye of Sauron has finally locked its sight on you, celebrating defeat as if it was a victory, cheering like mad cows as your farmers line all of you up at the slaughterhouse. May you get the cages you foolishly cheered for.

Mr. Eye of Sauron might be a little overheated, but there's a nugget of sense buried in his rage. There's a contradiction at the heart of Bitcoin. The more popular Bitcoin gets, whether as a symbol of resistance or a perceived safe haven in financially troubled times, the more government attention it will inevitably draw, and the more inexorably it will be sucked into existing regulatory structures. Incomes denominated in Bitcoins will be taxed. Efforts at money laundering will be cracked down upon. It's the price of success. Resistance is futile.

The Bitcoin moment is right now. Two weeks ago, at the very end of a SXSW presentation on 3-D gun printing, Defense Distributed founder Cody Wilson encouraged his audience to take a look at what was happening with Bitcoin. Just in the last two weeks, he said, Bitcoin had 'exploded.'

And it's true, over the last four weeks, Bitcoin has repeatedly broken its all time record in terms of how much a single Bitcoin can be exchanged for another currency. Some observers have attributed this to the growing number of vendors - including WordPress and Reddit - that are willing to take payments in Bitcoins. Others point to the financial distress in Cyprus: Bitcoins are the new gold - a hedge against inflation and government appropriation. Others see what's happening as little more than a classic bubble in the making, and are scrambling to get out before it pops.

Whatever the explanation, Bitcoin's profile has never been higher, and the overheated rhetoric is keeping pace. Cody Wilson, who reportedly raised $17,000 in Bitcoins to help fund his organization's purchase of a high-end 3-D printer, was clearly delighted at Bitcoin's surge when he spoke at SXSW. For him, there's an obvious synergy between the virtual, non-government affiliated currency and his own plans to undermine the power of the state everywhere and enact practical anarchy in the world by distributing the power to 3-D print your own assault weapons. In one of his most recent over-the-top promotional videos, Wilson declares that to realize his organization's goals, "we'll need the Bitcoin. These days holding dollars is a political choice." Elsewhere, he has described his vision as "a future of federal communities and slowly disintegrating and reactionary states. It is imperative to begin using cryptocurrencies and private commerce to starve these beasts."

You won't find a more explicit call to see Bitcoin as a technology for liberation than Wilson's. You would imagine, then, that he would be disappointed to hear about FinCEN's 'guidance' suggesting that all Bitcoin entities that exchange Bitcoins for non-virtual currencies must register with the government. So much for starving the beast - a few more steps down that trail, and Bitcoin will be in the belly of the beast!

But Wilson's faith in the free market and the Internet is so profound that he shrugs off any accommodation that Bitcoin might make with the government by expressing his faith that "when the currency becomes captive to regulatory interests, a competing currency and genesis code will take the lead." Just as the Internet's structure makes it impossible to stop the sharing of code or music or 3-D gun printing designs, so too will it enable the endless upwelling of alternative currencies.

But that view seems to miss something fundamental about what makes a currency work. Enough people have to buy into it, so to speak, that people and entities will accept it in exchange for goods and services, or convert it into other forms of legal tender, or employ it as an investment vehicle. It has to be useful, in other words, and true usefulness requires scale.

But scale inevitably attracts attention. Like it or not, the state will not sit idly by if vast sums of drug money start getting money laundered through Bitcoins, or if a significant enough stream of tax dollars starts getting diverted into the Bitcoin ether. Just try to avoid paying taxes on the proceeds of those 3-D-printed guns you are selling to all and sundry. The Eye of Sauron will come looking. In fact, it already has, as proven by FinCEN's Monday release. Welcome to the real world, Bitcoin.

Hollywood or Silicon Valley

Last year, The Dark Knight Rises was one of the top-grossing films of 2012, racking up $1 billion in worldwide box-office sales. That same year, Instagram, the photo-sharing site based in Silicon Valley, was also one of the top-grossing commercial tech deals of the year; Facebook bought it for $1 billion. So which was a better return on investment, the Hollywood hit or the Silicon Valley wonder?

If you really want a sure bet, the answer is neither, said Ilya A. Strebulaev, a professor of finance at Stanford University's Graduate School of Business, who advised caution before whipping out your checkbook to finance either the next movie or start-up. Both industries, he pointed out, are unpredictable and unstable, and not the ideal way to make money.

'Hollywood and Silicon Valley really exist because of a few big successes,' Mr. Strebulaev said. 'If you take a random movie, it loses money. Hollywood makes money from its big hits. The exact same is true with Silicon Valley; the average investment loses money.' He said both were considered 'alternative investments.'

Still, in some ways, the movie industry - in the midst of the summer blockbuster season - may be a better bet, in that its returns are often more consistent. And when it comes to failure, the Valley seems to have even more spectacular flops. The common refrain I hear from venture capitalists is that nine out of 10 start-ups fail within the first two years. In Hollywood, only seven of 10 movies fail at the box office - meaning they do not make back their original investment, according to producers and executives.

But that one tech company in 10 that does not fail can reap huge returns. Far larger than Hollywood.

'A good tech investment firm returns three times the fund it uses for investments,' said Bijan Sabet, a general partner at Spark Capital, one of the first companies to invest in Tumblr. Mr. Sabet noted that this meant that a $100 million fund should return $300 million to investors. 'In most venture capital firms, one third of the investments in start-ups don't work out, one third are flat and one third are the winners.'

Doing the math, that means the winning start-ups must return nine times the original investment. In a rare few instances, that number can be considerably larger, and often outperforms most other investments.

For example, James W. Breyer, of the venture capital firm Accel Partners, said his investment in Facebook returned 100 times its original cost. And anyone who invested in Twitter in the early days would have a 50-fold return on that bet today at the company's current $10 billion valuation. 'The Twitter and Facebook returns come along once every 10 years,' Mr. Sabet said.

Hollywood has those once-every-10-years wins, too. 'My Big Fat Greek Wedding,' which was released by the Independent Film Channel in 2002, had a production budget of nearly $6 million and made $369 million at the box office. Not including DVD, on-demand and other rights, that's 60 times the return on investment. 'E.T. the Extra-Terrestrial,' which opened in theaters in 1982 with a $10 million budget, made just under $800 million, 80 times its investment.

Although the math might look the same here, the difference is that the return on the Valley can be in billions of dollars, while Hollywood still talks in millions of dollars. Additionally, Hollywood has to split the box office costs with the theaters, though the industry makes still more on residuals from television, on-demand, DVDs and licensing.

While venture capitalists are often looking for the companies with the biggest returns, film executives seem equally enticed by the prospect of a good narrative. 'You can't make a film in a garage, you need a great story and that's where it all starts,' said Michael Burns, a film executive and vice chairman of Lionsgate.

'The real financial opportunity to catch lighting in a bottle in the film industry is with the franchise hits,' Mr. Burns said. 'Harry Potter,' 'The Hunger Games' and 'Twilight' are all examples of this.'

Those movies make consistent huge profits for studios, which could be in the billions. Tech start-ups, in comparison, don't have anything close to a franchise opportunity. Even when there is a seasoned entrepreneur at the helm, investors are always betting on a company for the first time.

Tech investors are by and large richer than movie moguls. According to Forbes, Jerry Bruckheimer, creator of the 'Pirates of the Caribbean' franchise and the television series CSI is considered one of the most successful film and television producers in the world, with a net worth of $850 million. John Doerr, a general partner at Kleiner Perkins Caufield & Byers, who invested in Google and Twitter, has an estimated net worth of $2.8 billion, according to Forbes. That's three times the size of Mr. Bruckheimer's bank account.

Silicon Valley can even claim to be home to those with more fame. Mark Zuckerberg, a co-founder of Facebook, has 18.5 million followers on the site. Leonardo DiCaprio has a comparatively modest 5.5 million followers there.

Though let's not dismiss the power of Hollywood. Mr. Zuckerberg is in part so famous because of the global reach of the film 'The Social Network,' about the founding of his company. It no doubt also helped bring people to Facebook, which had 500 million users when the movie opened and has since blown past a billion.

So which is a better investment - Hollywood or Silicon Valley? Here's Mr. Strebulaev's bottom line: If you want bigger wins, go with Silicon Valley, if you want more consistent, but smaller returns, pick Hollywood. But if you want to reliably make money, go with neither. 'If you look at other markets, if you invest oil or steel, you will have a more consistent return on your investment.'

We Need Money

It seems that St Paul was wrong when he wrote that the love of money is the root of all evil. Money is in fact, economists claim, the root of all social trust.

Levels of voluntary co-operation between strangers dropped sharply as the group got larger, yet paid co-operation remained at the same level, however large a group got, research found.

The researchers argue that money is the only thing that makes co-operation possible among strangers. 'Simply put, strangers did not trust one another but put their trust in a symbolic object that could be circulated,' say economists led by Gabriele Camera, of Chapman University in California.

There is a downside, though: the introduction of money made people much less likely to help if they were not being paid.

In an experiment where 450 students were asked to co-operate with each other, 71 per cent agreed when faced with one other person. This fell to 49 per cent in a group of four, 34 per cent in a group of eight and 28 per cent in a group of 32.

However, when other students were given worthless tokens they could exchange for help, co-operation rates were 50 per cent in all group sizes.

'Inherently worthless tokens acted as a catalyst for co-operation, acquiring value because of a self-sustaining belief that they could be exchanged for future co-operation,' the researchers wrote in the Proceedings of the National Academy of Sciences. 'Our findings suggest that the use of money increases a sense of self-sufficiency, thus changing individuals' motivations and their disposition toward others.'

Professor Camera argues that humans evolved in small bands of hunters and gatherers whose survival depended on their ability to co-operate, reciprocating help over time rather than behaving opportunistically.

While it is easy to monitor and punish cheats in small groups, this becomes harder with strangers, he said. Lack of trust among strangers thus made money behaviorally essential.

The research also found that when paying for help was not possible in the groups using tokens, only about 14 per cent co-operated, much lower than in the purely voluntary groups.

We find that money preserves co-operation as groups get larger, but it displaces norms of voluntary provision of help, Professor Camera and his colleagues write.

Crowd Funding

When Michelle Darmody, owner of the Cake Cafe, had the idea for a cookbook, she followed her own recipe. Instead of looking for a publisher, she decided to publish it herself; then, instead of relying on savings or a bank loan to fund it, she crowdsourced the finance.

'I wanted to retain complete control,' she said. ;I had a very strong sense of how I wanted it to look.;

Her initial aim was a modest print run of 300, mainly for family, friends and Cake Cafe regulars. She set a target of E3,000 on fundit.ie, a crowdfunding website that specialises in creative projects.

For donations of E15, she offered a copy of the book. Spend a little more and you also got an apron or tea towels. For E175, you could take part in a cookery lesson with Darmody.

Thanks to 145 contributions, Darmody reached her target and produced the book. Since its publication last year, interest has grown to the point that publisher Thames and Hudson has taken over its worldwide distribution, racking up sales of more than 7,000.

'With crowdfunding you get buy-in from the beginning,' said Darmody. 'People like the idea of being part of it, of being involved. They have a sense of ownership.'

She is now considering producing a range of homewares, and funding it the same way. 'When you run a small business, you constantly have to be thinking of ways of engaging people and keeping their interest,' added Darmody. 'Whether it's an art project or funding a restaurant, I tell people there are other ways of funding out there now. It's not all banks and business angels.'

Fund It was created by Business to Arts, an organisation that acts as a broker between the business and creative communities, most often in relation to sponsorship. It launched the website in March 2011. Since then it has raised E2.1m for 534 projects, with the average target being just under E4,000.

It's small but it is seed funding, said Andrew Hetherington, project manager for Fund It. More than that, it is cash up front, plus time to deliver.

The typical contribution by individuals is E50. The key to rewards-based funding is to be clever about how you get people engaged, said Hetherington. For example, if you are launching a new festival, it would be through a unique ticket that gets contributors backstage with the bands.

In March this year, Peter O'Mahony launched Linked Finance, a crowd-based lending site. So far, 34 businesses have raised E1.1m on the site - an average of E30,000 each. Every company that has posted on the site has found funding - a success O'Mahony puts down to his initiative's screening process: We currently turn away 60% of applications.

Loan-seeking applicants must have a turnover of more than E100,000 and their tax affairs have to be in order and up to date. Applicants must also have been in business for two years, and supply six months' worth of bank statements.

'With us, you get a quick no - typically within 24 hours,' said O'Mahony. 'With banks you can wait eight to 10 weeks for a no, by which stage your business could be in serious trouble.

'Also, there is nothing to stop people coming straight back to us a second time, once they've made the required change.'

Linked Finance has 3,800 registered lenders, of which roughly half are active. The average amount invested is E146 and most lenders have a diverse portfolio with loans given to a number of companies as a way of spreading risk.

Once the required loan amount has been raised, an auction process starts, which drives down the interest rate for the borrower.

'To date we've lent to a huge range of businesses, from medical device companies with a turnover of E18m to a small bakery,' said O'Mahony. 'It works well for any business that is consumer-facing, with food businesses doing particularly well.'

At the moment, O'Mahony said, Linked Finance has two craft beer producers as clients, 'which perhaps reflects the profile of our lending community, 80% of whom are men aged between 45 and 55'.

Lenders are repaid monthly over three years. He believes peer-to-peer funding, as it is also called, will radically alter the way small businesses raise finance.

'Our biggest competitor in the UK is Funding Circle, which has raised E160m to date,' he added. 'Santander is in now in negotiations to find a way it can get involved with Funding Circle, because it just can't find a more effective way to lend.'

Michael Faulkner is the founder of seedups.com, a crowd-based equity investment platform which for the past three years has been supporting tech start-ups.

Earlier this month he launched cofunder.ie, a crowd-based lending site which aims to raise loans for small businesses in all sectors.

Crowdfunding is a viable alternative to what he believes is a broken banking system - at least as far as small businesses are concerned.

'If you consider the billions that have gone into fixing banking in Europe, less than 5% of that has found its way into small business. The rest went into shoring up the banking system,' said Faulkner. 'Crowdfunding platforms are a much more efficient delivery mechanism in that, if you give E1bn to crowdfunding, 95% of it will find its way into the SME market,' said Faulkner.

Cofunder.ie is at present calling out for businesses in need of loans. 'It is very much aimed at the guy who, for example, wants to go out on his own and needs E20,000 to E30,000 in start-up capital with which to do that,' he said.

'Crowdfunding is a social lending model,' added Faulkner. 'No longer is the bank scoring system making the decisions; individuals in the community are,' he said. 'It is inclusive as opposed to exclusive.'

It also presents small businesses with a new route to finance.

'Banks have changed their focus over the past 30 years and are mostly focused on interbank activity rather than on small businesses, which are the lifeblood of the real economy,' said Faulkner. 'Crowdfunding has the potential to rebalance that. Why put your E1,000 in the bank as savings when you could lend E200 each to five companies, and, though the risk is higher, get a better return, get additional 'do good' value, and help companies get the funding to create jobs?'

It is also a creative response to recession. 'It is hard to raise funds in Ireland right now,' said Faulkner. 'There has been an evaporation of middle-class wealth. Your typical BES or angel investor, the rich uncle who could write a cheque for E30,000 for a nephew's start-up without breaking a sweat, is thin on the ground. This is an alternative.'

Brian Kelly, founder of Rising Sum, a fintech start-up, is considering crowdfunding but is not finding it quite as easy as it sounds.

'We're just starting to explore this option for funding,' said Kelly. 'We're interested in crowdfunding as it lets us raise cash outside of Ireland - we find Dublin has a pretty small investor pool.'

Kelly started with angel.co. 'It seemed like the best fit for us and it appears to be modelled on LinkedIn, but you can only reach out to investors at your location [Dublin] - which kind of limits its use - so we still need to find a way to reach out to the US investors on the site.'

He also tried Crowdfunder.com, but it seemed completely focused on America, asking the company 'to declare which type of US company we are, which we can't'. 'We're also interested in a few others but it's time-consuming to have to apply on each different site,' said Kelly. 'It won't be long until an aggregator appears, hopefully.'

Crowdfunding has proved the right route for Cuilan Loughnane. He secured a E12,500 loan in July, from Linked Finance for White Gypsy, his Tipperary brewery. The funding enabled him to invest in an innovative style of barrel.

The company has a turnover of about E350,000 and four staff, supplying draught beer within a 40-mile radius of Templemore and bottles to the restaurant trade nationwide.

'What I liked about the crowdfunding loan is that it was people putting in E50 and E100, not banks,' said Loughnane. 'It's ordinary people helping local businesses and, as a craft brewery, that slots right into our own ethos.'

The auction process took two weeks, and he ended up beating his target, being 200% over-funded, and securing an interest rate of 9%.

'It's people power,' said Loughnane.

Sweden

America is a land of billionaires, boasting five of the 10 richest people on the planet as of the most recent Forbes 500 list. Then again, we're a large country, and in per capita terms, we lag behind several smaller states. Many of these - like world leader Monaco (No. 1 per capita, with three billionaires in a population of 35,427) - are true micro-nations, or else they're St. Kitts and Nevis (No. 2, one billionaire, population 53,051): more of a vacation destination for the rich and less a place where people actually go to earn a fortune. But one country stands out on the list: Sweden (No. 12, 14 billionaires, population 9.56 million).

No single Swede comes close to the epic wealth of a Bill Gates or a Warren Buffett. But Stefan Persson, the chairman, main shareholder, and former longtime CEO of H&M, leads a roster of Swedish billionaires who outpace the U.S. (No. 14) on a per capita basis. In part this is just a bit of a funny coincidence - it's a fairly small country, after all - but the fact that a famously left-wing country like Sweden can be so rich in billionaires is telling and important.

That's because a billionaire isn't just a guy with a well-paying job. To reach that level of stratospheric riches, you probably either need to start a big, successful company or else inherit one from someone who did. And however much people care about inequality, almost every place on Earth would like to be the kind of place where successful new firms are born and raised. The good news about Sweden is that it's exactly that kind of place. High taxes go to finance cheap health care and education, an excellent system of public transportation, and relatively generous subsidies to low-income households that keep the poverty rate and inequality low. But they haven't stopped Swedish entrepreneurs from building giant firms like H&M, Ikea, and Tetra Pak.

This reality cuts against a recent critique of the Nordic social model from Daron Acemoglu, James Robinson, and Thierry Verdier that was popular in right-of-center circles. The authors contrasted American-style cutthroat capitalism with Nordic-style cuddly capitalism as two social systems that are compatible with high levels of GDP per capita. The cuddly Nordic system might be better for human welfare, they said, but the American system is better for the world. Their reasoning was that high levels of inequality create financial incentives for innovation; cuddlier nations don't have those incentives. The authors test this rather schematic model empirically by showing that the U.S. files more patents per capita than any of the egalitarian Nordic countries.

That's fine, except patents aren't innovation - counting them up tells you more about a country's patent policies than about the number of good ideas its people are coming up with. Lots of things that get patented are completely trivial. Or where they're not trivial, they often aren't very innovative - Amazon's infamous 1999 patent on one-click shopping, for example, only looked innovative to the U.S. Patent and Trademark Office because the whole Web still seemed so new at the time. Nobody owns a patent on brick-and-mortar checkout procedures like 'have the customers wait in line until a register is free,' because patent law didn't use to be as promiscuous as it is today. Conversely, lots of important innovations such as 'affordable Scandinavian modern design' aren't patentable.

At the same time, while Scandinavian success stories show that great companies can be born and innovate amid generous welfare states, they do have some cautionary tales for left-wing thinking. The Swedish tax code was substantially reformed in 1990 to be friendlier toward capital accumulation, with a flat rate on investment income. Sweden has no taxes on inheritance or residential property, and its 22 percent corporate income tax rate is far lower than America's 35 percent. Even after spending cuts by the current center-right government, the Swedish public sector is still about half the total economy (much higher than here), but the taxes that finance it fall more heavily on consumption and less on business investment than in the U.S.

Sweden also has a relatively lightly regulated economy. There are rules about public health and environmental protection, of course. But Sweden is arguably further down the neoliberal path of dismantling purely economic regulations than the U.S. In Stockholm, for example, taxi fares are completely unregulated and for-profit charter schools are common. All things considered, international surveys rank Sweden as a place where it's easy to do business. Within the U.S., surveys show that licensing rules rather than tax rates are the main driver of local business-friendliness.

It's much the same in the international context. Regulations that prevent firms from growing big and putting other companies out of business are widespread in many countries, and harm both economywide living standards and billionaire production. France, for example, is considering a ban on free shipping of books to protect its small bookstores from the depredations of Amazon - protections that numerous American retailers in the book industry and beyond would no doubt appreciate. And here in the U.S., the arcane, three-tier liquor distribution system and baroque car dealership rules similarly prevent the most efficient firms from growing and putting the others out of business.

This kind of protectionist regulation has an obvious appeal to incumbents, and the small-business owners it protects are often more sympathetic to it than the wannabe billionaires who'd like to see these rules dismantled. But letting the best firms thrive and grow is what creates both vast fortunes and at least the possibility of broadly shared prosperity. If those parameters are in place, even high taxes and generous social welfare benefits don't stop great businessmen from building great businesses - or even amassing great sums of money.

How To Get Rich

Teach a love of work. After you get rich you can coast some. Getting rich takes work. They will need to excel at physical work and have stamina. They will especially need to excel at mental work and be both flexible and tough.

Teach a love of people. The only way you get rich is by serving the real needs of others. You must have an affinity for others. My household was famous for all the people who came trooping through. People I met stranded at the airport. Japanese Homestay girls. Aux pairs. Local homeless guys dropping by for a shower and a meal. Chinese physicists and Eritrean guerillas had meals with us. Our sons' friends were welcome at any time without prior arrangement. Make sure they understand that they are not above or below anyone else.

Teach generosity. Those who would receive much must be able to give much. My middle son (11 or so at the time) and I walked across Embarcadero from my office to look at SF Bay. There was one sole figure there, a man in his late 40s with one entire seam of his jeans ripped open. He was playing the spoons and playing them well. We got to chatting. He'd just been let out of San Quentin Prison that morning. I told him time to celebrate. We took him up to my office for a shower, out to buy some clothes and to dinner and gave him money for a room for the night. On the way home, I pointed out to my son that the money I gave the guy was nothing compared with the time we gave him. The only real wealth is the time you have, and whenever you have a chance to use your time well for others, do it and do it fully. Giving money without time can be a way of creating distance.

Teach the mental nexus. Here falls the shadow. Rational people do not become entrepreneurs. Like combat officers, one is constantly making critical decisions on partial information. One has to take steps without being able to see if there is support there. One must taste failure time and again and be inspired by it. One must be armed with a variety of rationalizations for continuing on despite doubt, buffeting, adverse opinion. Every successful new business gores someone's ox, and those people react in nasty ways. The faces you see each day are now depending on you to make payroll. Pediatric oncologists must be mentally tough to deal with the suffering of others; entrepreneurs must be superhuman to deal with the tragedies they themselves can be the authors of. Trick is, you can't teach that mental nexus if you have not lived it yourself. If you haven't, then apprentice them to someone who has.

Lie, cheat and steal. I was shocked at my mother's funeral when a brother flatly stated that he'd had a difficult time in life because he'd just assumed everyone was as wonderful as she was. The world is full of assholes and swindlers and your kids will need a radar for it, and they need to suffer the consequences so that they develop an arsenal of techniques for dealing with it. They need to be superb judges of character. You can't teach good behavior by isolating them from bad behavior. There's no satisfactory example here; let's just say that April Fools was big in our house, and not just once a year.

Make them teen outcasts. Correlating highly with successful entrepreneurs is unfulfilled teen years. Basically, those who are dialed in by 18 stay comfortably dialed in. This is another reason to keep them out of high school. Another high correlation is Fs. Entrepreneurs are highly results-oriented and have little patience with those as process-oriented as teachers. I've talked with VCs who confessed to being a little disappointed if they don't see an F or two on a possible CEO's college transcript. I know I had 'em.

Teach numeracy. Anyone who can't do math in his head on the fly is going to have a difficult time being an entrepreneur and putting deals together. Schools don't teach this; it's a special, long-term effort.

No allowances. No "Joe" jobs. Nobody ever got rich working for a living. Trading your time for money is a loser's game. An allowance just teaches a kid to lack resourcefulness--same for teen jobs. My wife and I played VC to our kids. They could ask for any amount of money they wanted but what's the plan? what's your purpose? what are alternatives? etc. etc. They learned to recognize opportunities and pitch them. [Add: If you are going to help them get job jobs, make it in sales--they won't get far without the power to persuade.]

Get a grubstake. Fortunately, my kids went to school with the children of an immigrant couple who left the kids with relatives two straight summers while they went to live in a tent in Alaska and can salmon. They each cleared $80K each summer, and after two years they had a third of a million with which to get into the start-up world. They found some scientists with a bright idea (one that everyone reading this is impacted by many times daily), started the company, got backing and they are billionaires. No grubstake. No billionaires. You can't be a capitalist without capital and the willingness to put it all at risk.

Worthy. Finally, the most important thing is they must be worthy. No backing comes to those who lack abundant evident character. I have found the best way to fine-tune morality is to put it entirely on them. Each time a moral decision is called for, it's "Search your heart, son. You have to build your life around what is important to you. The only way I can help you is to tell you how I screwed up sometimes. But the sooner you learn to get in touch with your own feelings of what is right and what is wrong, the better." (But be sure to model right over wrong like crazy to them.)

There is only one path to getting wealthy: exploit opportunity. The whole purpose of what I've stated above is to equip your children with the tools to spot and build on an opportunity to add value to the world.

How will you know you're on the right track? The vast majority of people you meet are inert. One in ten or twelve has scalar energy--they liven up the event. One in a thousand or so has vector energy--the ability to channel effort to a purpose and pull others in their wake. The only way a human being begins to become a vector force is to Find and Embrace His or Her Passion, and that can be a bit quirky. For example, our youngest has long been the butt of family jokes for his inability to tell a story. What did his passion turn out to be? Turns out his head was too crammed full of details for each story. Once he learned to animate, his stories were incredible!

You should be getting glimpses of that talent to pursue purpose with passion all along, but it doesn't mature until adult years. It is such a rare thing that schools are not at all equipped to teach it. Even the best MBA programs teach you how to go to work for that guy rather than be that guy. So, if you can pull it off, you will not only have enriched your children, you will have enriched the world.

Warren Buffett and Ben Graham

What set Warren Buffett off to become the world's richest investor, worth something like $65 billion - or maybe it's trillion - was reading a book by Ben Graham called The Intelligent Investor.

''Of all the investments I ever made, buying Ben's book was the best,'' he recently wrote to shareholders in his US-based company Berkshire Hathaway, which has been returning 20 per cent a year since 1965.

These annual letters are pure gold for anybody interested in shares, especially on those bad hair days the market often has when you wonder why you ever got involved, yet are freely available at berkshirehathaway.com.

Better still, Buffett points to just two chapters (eight and 20) that really got him going, so I've re-read them (let's just say it's not a book you'd read in bed, so you'll thank me for the tip-off).

There are lots of wannabe Buffetts around, but I suspect they haven't read Graham's book because on almost every second page he talks about government bonds, which they sure don't.

That's a point. During the past 30 years, shares have produced an average annual return just 2.3 per cent more than risk-free government bonds, according to Vanguard, though when you take franking into account the gap is wider.

Anyway, Graham says you're basically wasting your time trying to buy low in a bear market and sell high in a bull market.

He argues that a stock is a good buy if it's undervalued and to hell with what the rest of the market is doing.

''The average investor cannot deal successfully with price movements by endeavouring to forecast them,'' Graham writes. Buffett goes a step further and says rather than select stocks you might as well just buy the whole market with an index fund and you'll do better than most experts.

Incidentally, Graham says you should resign yourself to ''the probability'' that most shares will rise 50 per cent or more from their low point but decline 33 per cent or more from their high point ''at various periods in the next five years''.

Just think, he wrote that 40 years ago.

His most famous message, endlessly espoused by Buffett, is don't follow the crowd in or out of a stock or the market. All you're doing is making the same mistake as everybody else. It's speculating, not investing.

Thought you'd appreciate some other tips too. Pay no more than one-third above the tangible asset value of a stock is one. This belies the impression that Buffett only buys stocks trading below book value - he gave that up decades ago.

Another tip: ''Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.''

A key theme that Buffett has subsequently refined is that you should only buy a stock by building in a ''margin of safety''. In the Graham original that means the stock's earning power has to be ''considerably above the going rate for bonds''.

And it's why you need more than one stock. The more you hold, the more safety margin you have.

Earning power would today be called the earnings yield. It's easy to calculate - take the inverse of the price/earnings ratio. With a p/e of 14.3 the market is yielding 7 per cent and government bonds a bit over 4 per cent.

That's a safety margin of 75 per cent, which I suspect Graham would be mightily pleased with if he were still around.

And it's why Buffett is still buying even though Dow prices have never been higher.

Superyachts

Eddie Jordan's new superyacht cost £25 million - and was built in Dorset. Giles Whittell on the boom in high-end boatbuilding.

At least a couple of times this summer the former Formula One boss Eddie Jordan will decamp with his extended family to the South of France. There will be 11 of them, including grandkids. They won't be renting a villa or staying in a hotel. That would defeat the object. They won't be camping either, but they will be - how to put it? - self-sufficient.

They'll be on a boat; a boat that would cost €200,000 (£167,000) a week to rent, excluding extras. A boat that Jordan won't be renting, however, because his family trust has just bought it for £25 million. It's called Blush, but there is nothing pink or embarrassed about it. Its hull is powder blue and twice as long as a large municipal swimming pool. Inside, its creators have fashioned a teak-streaked six-star floating hotel designed to make you feel like a god.

When the Jordans arrive they will be met by a uniformed crew that matches them numerically in a ratio of one to one. If there's room in the harbour they will stroll aboard from a pontoon that costs about £2,000 a day to rent. If not, they'll be picked up by their own tender.

The mother ship will have been stocked with everything they need for as long as they want, and much that they don't need in case anyone else wants it. This means food, drink and flowers, but also jet skis and power boats for anyone not seeking serenity after a career beside a grand prix track. 'In terms of wine and flowers, I'm a bit of a cheapskate,' says Jordan, whose net worth has been estimated at anything from £100 million to £400 million, sitting in skinny jeans at the dressing table in his master stateroom. 'I'm a bit classical. I just happen to like roses and rioja.'

So roses and rioja there will be, and champagne and the vodka cocktails that his wife and grown-up children like.

In the evening the captain will ask them what they want for breakfast and steady Eddie will ask for black pudding with spinach and diced onions. He'll eat it on the balcony that leads off his suite, or, better, up on the 'sky deck' in the early, balmy sunshine with the family getting giddy around him. 'Just hijinks,' he muses. 'And the noise level of children being so excited and everyone planning things for the day. Just complete joy.'

Comparable scenes will be unfolding not quite all over the Med, because there aren't that many gazillionaires yet in the world. But in the choicest harbours from Antibes to Capri and Portofino, and in Porto Cervo in Sardinia and the fjords of Montenegro, starting around the time of the Cannes Film Festival in mid-May, building to a decorous frenzy for the Monaco Grand Prix a couple of weeks after that, the plutocrats and their dependents will gather in linen shorts and gauzy Miguelina sundresses to leave the land behind and prove that, after the five-year hammering administered by the financial crash to builders, brokers, charterers and buyers, the superyacht is back.

It has been a nervy half-decade for the ultimate indulgence business, but things are calmer now. About 200 new motor yachts more than 40 metres long were built last year - far more than the number of new berths big enough to handle them, which is why parking a superyacht is so expensive. Most are available for charter, but if €200,000 a week sounds a lot, then look but, please, don't touch.

'If you're operating at this level you don't question the cost,' says Paul Charles,a spokesman for Edmiston, a London-based international yacht brokerage. 'If you question the cost, you can't afford to do it.' It's rare for families to split the cost and not unusual for a single uberbreadwinner to take a very large boat for a month, 'leave the family and friends on board, jet off to do some business and come back when they've done a deal'. Factor in food, drink, fuel and tips, which alone will run into tens of thousands, and you could be looking at a £5 million summer holiday. 'Easily.'

Wall Street and commerce account for the bulk of the global superyachting elite, but sport and showbiz are naturally up there, too. Lewis Hamilton is a charterer. Sir Philip Green, the rag trade titan, is an owner. Tamara Ecclestone, daughter of F1's Bernie, partied on the colossal Silver Angel last year after her wedding. Naomi Campbell has been seen aboard her, too.

Some people splash out on superyachts to show they can. Simon Cowell comes to mind. For his look-at-me extravagance he is rated 'proper pukka B-division' by James Daltrey, a veteran boat 'concierge' (essentially a victualler) on St Barts. Others, like the Jordans, spend to escape and enjoy themselves. Mainly. But just supposing there was an element of keeping up with the rest of the superyacht crowd in their upgrade to a 47-metre, three-and-a-half-deck behemoth, well, they'd hold their own.

Blush is the biggest boat ever built by Sunseeker, the unofficial provider of speed boats to James Bond. It is also the biggest fibreglass boat ever built in Britain. Its two 3,000 horsepower engines have the combined power of six Spitfires. Its deep-sea seals, which keep the water out where its prop shafts enter the hull, are built by a company also making seals for Britain's next aircraft carrier. Its bow thruster alone has the power of a small car.

It's enormous. I know this because I've walked the length and breadth of it in protective overshoes. I've sat in the captain's leather armchair, and on his double bed in the cabin tucked behind the bridge. I've walked down three flights of stairs to the rest of the crew quarters (six more cabins, all en suite). In the guests' staterooms I have stroked the richly textured fabrics and the handstitched leather table tops sewn by the people who upholster Rolls-Royce cars. I've seen the porcelain bas reliefs and crushed recycled glass in the master suite's bathroom. I've admired the sprayed bronze-effect panelling and compared the main saloon and dining areas in my mind's eye with those of a stately home, and found them to be on a similar scale. I've pictured my kids larking around on the beach club, a fold-down relaxation area at the stern, strolled across a foredeck the size of a squash court, and confirmed without a trace of envy that there's space in the tender garage for a high-speed rigid inflatable, several jet skis and all the dive gear you'd need to re-enact the underwater battle at the end of Thunderball.

You could have the time of your life on Blush. Yet having stepped into the parallel universe in which she will operate, we should probably acknowledge that while she's super, she's not mega.

Megayacht comparisons are invidious but irresistible. Years from now they may even be significant. Briefly, then, here goes. The world's biggest for the time being is the frankly cruise liner-ish Azzam, at 180 metres a cricket pitch and a half longer than the newest Royal Navy destroyer and owned by the Emir of Abu Dhabi. Next is Roman Abramovich's Eclipse (163 metres, 36 guests, 92 crew), the world's most expensive charter at north of $2 million (£1.2 million) a week, including the use of its submarine. Other notables include A (for Alexandra), 120 metres, owned by the Russian insurance mogul Andrei Melnichenko, which looks like a great white submarine incapable of diving; The Maltese Falcon, an 88-metre, 3-masted, 21st-century clipper that is 25 per cent longer than the Cutty Sark; and Octopus (126 metres, 2 helipads), owned by Microsoft co-founder Paul Allen and loved by many because he uses it to host the best Christmas parties in the Caribbean. Blush is arguably more sophisticated than any of them, but as long as we're being British about her we shouldn't get too carried away. She's less than half the length of Octopus.

Last Christmas, according to James Daltrey, there were 150 super and megayachts moored in and off Gustavia harbour in St Barts, tenders shuttling between shore and ship with crucial cargos of croissants, flowers, foie gras from France and mahi mahi from the morning catch. And, of course, people - 'The 1 per cent of the 1 per cent' - who in a previous year had included a young hedge-fund manager still partying after losing $9 billion in a single day.

There will be similar swarms off Monaco for the grand prix. As Eddie Jordan notes, 'The boats don't seem to get smaller.' So how much bigger will they get? Will it ever stop? What does it mean?

Lamberto Tacoli, an Italian megayacht builder, has called the vessels he produces today's answer to the castles of the early Renaissance. But castles were defensive and necessary. Even with the missile defence systems installed by a few of the more paranoid owners, superyachts are for fooling around on. They're symbols of status - and of peace, prosperity and the world-altering advance of leisure.

For all that, being luxuries can make them hard to sell. 'It doesn't necessarily make financial sense to own one, and yet you've got to sell it to the people with the most acute financial sense,' says Alex Busher, a broker at Edmiston who is on an extended tour of the Gulf on the 88-metre Nirvana, looking for a buyer. The asking price is €199 million (£166 million), up from around €120 million when the present owner bought it two years ago - the sort of premium that sellers seek at the very top end of the market, on the basis that the alternative is to wait years for a custom-built boat. It has a total of six decks, a silent glass elevator that visits all of them and two vivariums stocked with exotic reptiles, removable upon request.

Nirvana is the most expensive privately owned boat on the market at the moment. It was the star of the Dubai International Boat Show, but Paul Charles, who's involved in the sale, thinks it's more likely to find a buyer in Abu Dhabi or Qatar. In Dubai, he says, 'a lot of people are more talk than action'.

But aren't they all, I venture, a little detached from reality? Not at all, he says. 'These are hugely intelligent people who run hugely successful empires.' Or royals, I think, but one doesn't want to be rude.

We manage to agree that few of these prospective megaclients are immune to the lure of bragging rights, for which, nowadays, you really need 'anything over 60 metres, anything with a Michelin-star chef, anything with an unusual gadget, like a submarine, or anything you can land a helicopter on'.

Blush doesn't quite qualify on any of these grounds, but she still utterly dominates Poole Harbour when we get there to witness the Jordans' first visit to their new boat after its launch. Their helicopter lands half a mile away. A short convoy of Range Rovers brings them to the quayside. Sunseeker's man in charge of superyachts asks us to give them a quiet moment alone with the boat before we pounce. Eddie and his wife, Marie, spend a little while on land staring up at the sheer bigness of what they've bought (as does Chris Evans, oddly - he bought the Jordans' last Sunseeker and is a chum). Then they head aboard via the fold-down beach club.

The crew are all there, immaculate and smiling, and no wonder. Their quarters, at the front of the boat on the lower deck, are more spacious and lavishly equipped than most recreational yachtsmen will ever sleep in. Towards the stern but forward of the beach club, the engine room is a huge, bright shrine to internal combustion. Two golf buggy-sized diesel generators sit in the aft corners to power the boat's water-makers and electrical systems, but they're dwarfed by the two main engines. Each of these gleaming monsters has 12 cylinders, and each cylinder has the same capacity as the whole engine of a top-of-the-line 5-series BMW. At cruising speed they could push the boat across the Atlantic and halfway back again without refuelling. At top speed - 22 knots - they could be burning 17 gallons of diesel per mile in flat conditions, but she wouldn't go quite so far. OK, not nearly so far. But it would all feel very smooth. Where the prop shafts meet the engines each one has an ultra-high-precision steel-disc assembly called a thrust bearing. It's custom-machined in Italy to minimise vibrations. List price: £100,000 each.

Her tanks have room for around 60 tonnes of fuel, twice the amount burnt by a jumbo jet flying from London to New York. They take about five hours to fill with a special high-pressure nozzle, or four days with the kind you'd find at your local Texaco. The engineers who built Blush relay all this without apology or Clarksonian delight. There’s simply no such thing as a green superyacht. There is, however, a greener one than those that came before, and by several measures this is it. Because its superstructure is made of fibreglass and composites, it is 100 tonnes lighter than its nearest steel-hulled equivalent. It's also faster, more fuel-efficient and more spacious, which may be why a Swiss company has already placed an order for another one.

The Jordans' new pleasure palace is something else as well: the flagship for a company that could have folded in the crash, but instead has made a remarkable recovery. Over canapes in the main dining room after the Jordans' inspection, Robert Braithwaite, who founded Sunseeker with his brother 48 years ago, describes what happened. 'When all the banks collapsed they suddenly withdrew our overdraft,' he says, still sounding a bit startled. 'So what I had to do was either get wrapped up and throw the business away, or sell it to somebody to save all the jobs.'

He sought help first from an Irish private equity group and last year from the Chinese Dalian Wanda Group, which bought a 92 per cent stake for £320 million. Some 40-foot boats at the bottom of the Sunseeker range could start to be built in China, but Braithwaite is anxious to stress that the bigger ones will always be made in Britain. It was not ever thus. 'When I started this business I could never tell anybody that the product was British,' he says, 'But I wanted to create a product that Britain could be proud of and I believe we've achieved that.'

The Bond connection has helped. Specifically, images of Pierce Brosnan being pursued down the Thames by Maria Grazia Cucinotta in a 34-foot Sunseeker Superhawk in the opening sequence of The World Is Not Enough seem to have resonated with speedboat buyers ever since. They don’t even mind, or notice, that it’s a generic villainess in the Sunseeker, not 007. That film and other Bonds since have helped to draw in entry-level buyers but also Russian and Asian newcomers to boating, who like to start big, often at 100ft-plus.

Boats of this size can be radically customised - think mah jong rooms and karaoke saloons - and customers this rich can often be persuaded to upgrade as their families and fortunes grow.

That's the business model, anyway, and it seems to have worked well for both Braithwaite and his No 1 client. So will Jordan go bigger even than Blush? 'Ask me again in five years,' he says.

And what of Braithwaite himself, the man who has built his brand into the aquatic equivalent of Aston Martin and transformed Poole Harbour into a thriving boat-building mecca? Does he have a boat? 'Yes,' he says. 'I have a traditional 24ft lug-sail crabber. I love boating. I love creating dreams, but I've always kept my feet on the ground and never moved in the circles we sell boats to.' On which note it feels just about OK to catch the teatime train back to the real world.

Inheriting

When Peter Buffett was in his twenties he went to ask his dad for a loan to help him with his music career. His father Warren was well on his way to becoming one of the richest men in the world, but he is renowned for his parsimony and his son discovered that he wouldn't make exceptions for his own family.

'My sister famously went and asked for a loan to remodel the kitchen and my dad said: 'Go to the bank.' He did it again,' the younger Buffett says of his own meeting. Now, more than a quarter of a century later, he understands his dad’s position. 'It sounds harsh, but it's actually very loving. It's a show of respect, saying: 'You can do it. I believe in you and if I give you a crutch you are never going to learn how to walk.' That's the way I look at it and I think that's right. I did go to the bank and I got loans for equipment and built my business and worked my tail off to pay the loans off and I would not have done that if somebody was just writing me a cheque.'

Warren Buffett, the Oracle of Omaha, is the world's most successful investor, with a personal worth of more than $60 billion. That makes him the fourth richest man in the world after Bill Gates, the Mexican telecoms tycoon Carlos Slim and Amancio Ortega, the founder of the Zara chain (some years ago Buffett briefly occupied the No 1 slot). Buffett has pledged to give away 99 per cent of his wealth to charity and his “tough love” approach is increasingly adopted by other very rich people.

Bill and Melinda Gates, whose foundation is to be the major beneficiary of Buffett's giving, said last month that they had been inspired by the Buffett approach to parenting and that their children would not be made billionaires by inheritance. 'They won't have anything like that,' says Bill Gates. 'They need to have a sense that their own work is meaningful and important.' Wired magazine described this as the 'anti-Paris Hilton approach', a reference to the hard-partying, relentlessly self-promoting great-granddaughter of the founder of the Hilton hotel chain.

John Roberts of Bolton, the 'kitchen king' who has built a £500 million fortune from selling his company AO, which sells cookers and fridges online, said in a recent interview that he didn't want his five children to become 'trust babies' and that he and his wife have 'been really conscious not to change anything. The kids are getting nothing.' He said he was thinking of setting up a charitable trust. Nigella Lawson has said that she wants her children to have 'no financial security' because 'it ruins people not having to earn money'. Lord Lloyd-Webber says he will give his children a start in life, but they won't suddenly find a lot of money falling into their laps 'because then they have no incentive to work.'

Peter Buffett, now 55, believes that his father's approach, which sounds 99 per cent admirable and 1 per cent insane, has worked out well for his family. 'The control that money can have over relationships is a little overwhelming at times for a lot of people. I have been very lucky that my dad and our family have bypassed a lot of the negativity that can come with great wealth.'

The Buffett billions come from the success of Berkshire Hathaway, a company of which Buffett is chairman and which operates according to his philosophy of investing only in companies he understands. So the company owns various subsidiaries, including NetJets - which rents out and sells partial ownership of private business jets - and the insurance giant GEICO. It also has major interests in American money fountains such as Coca-Cola, American Express, IBM, Heinz and Mars.

Peter Buffett insists, however, that for his dad the actual money isn't important, except as a way of recording how successful he has been as a businessman. 'For most people the money is a means to an end. They make a lot of money so they can have a lot of stuff, so they can feel better about themselves. For my dad the money just shows him that's he's as good as he thinks he was or is at what he does.'

Peter Leach, a London-based advisor to ultra high net worth families, agrees. 'The thing about Buffett and Gates is they never set out to be the richest men in the world . When money is the object I think it is harder for the next generation to be brought up in a grounded, money-is-not-important way.'

Growing up in Omaha, Nebraska, Peter Buffett and his older siblings Susie and Howard were unaware of the money their father was making because he did not flaunt it. 'We didn't really know what my dad did and we had no idea he was doing it so well,' Peter says. 'There was an article in the local paper when I was in 5th or 6th grade [aged 11 or 12] and it mentioned how much money he had and that's the first time I had ever heard it talked about. We didn't live like that.'

Warren Buffett still lives in the relatively modest house he bought in the Dundee-Happy Hollow district of Omaha. It is a decent-sized home, but close to others in the suburb and not hidden away behind gates. 'He lives in the house I grew up in, a house he bought for $31,000 dollars in 1958,' Peter says. 'When I go to Omaha I can sleep in my bedroom. We lived in just another house on the block.'

He stops himself for a moment and then clarifies. 'When I was a teenager my dad got extravagant and built a racquetball court in our house, but he did it in a way that you couldn't tell it was there: just behind the garage. That was his most radical behaviour. We didn't have a pool or anything.' The children did not attend private school but took the bus to the local high school.

At the age of 19 Buffett did receive a windfall in the form of $90,000 of Berkshire Hathaway shares bequeathed by his grandfather. 'My grandfather made that decision. I wonder if my dad might have said: 'No, don't do it,' but he sent me this letter saying: 'Here is what you are getting. You can do whatever you want with it but there's not going to be any more.' That makes you want to make it work because I never expected that I would get any more.

'I think it did get him off the hook. It was very convenient to have his father leave us a little bit of money so he could always say: 'Well, you got some.' He would say that because we have all turned out OK that it was fine. His phrase was that he wanted to give us enough to do anything but not enough to do nothing. And I would say that amount of money was pretty much exactly right - $90,000 dollars would be about $250,000 today. That's a lot of money.'

The obvious retort to that would be that, yes, it is a lot of money to most people , but surely to a multibillionaire it's loose change that he wouldn't miss if it slipped down the back of a sofa. Except the billionaire in question would probably be pulling the sofa apart if he dropped a dime behind the cushions. The truth about the $90,000 is that because of the extraordinary growth in the Berkshire Hathaway stock price Peter Buffett would be sitting on a fortune of more than $100 million today if he had kept all the shares. However, he sold shares over the years for various reasons, including a down payment on a house on which he then had a mortgage. He has 'a few' of the shares left. Given that the share price is now approaching $200,000 he is undoubtedly very comfortably off. He also inherited some money from his mother Susan when she died in 2004. But 'we are not living ostentatiously at all'.

He says that inheriting money is fine, but it depends on the size of the inheritance and when it is received. It can be damaging for the young. His early inheritance was not overwhelmingly large and the rest of the money came when he was mature, so he has always felt compelled to work.

'I'd like to think I am self-directed but at the same time [inheriting a large sum] is at least distorting, if not corrupting. It will at best create an illusion where you don't have to do anything if you don't want to. If I hadn't had to earn my own reward I don't know how I'd feel about myself and once you start not knowing how you feel about yourself it's a downward spiral.'

He recalls a friend being worried about his son who was set to inherit $50 million from a grandmother at the age of 25. 'This guy was desperate to get his son locked into something he loved doing before he got this money because he knew once he got it it would just sap his energy.'

'Whenever you get a situation where there's this definite knowledge that someone is going to get a load of money it does stop them doing their own thing because it creates dependency,' Leach says. 'The two things that are evils here are dependency and entitlement and what Gates and Buffett have done is make quite clear that they are wealthy but they managed the expectations of their next generation by ensuring they don't feel a sense of entitlement. They were encouraged to make their own careers.'

Peter Buffett has established himself as an Emmy award-winning musician with 17 albums, including new age and Native American-inspired music and pop music. He contributed to the score for the Kevin Costner movie Dances With Wolves and His book, Life is What You Make It: Find Your Own Path to Fulfillment, was a bestseller.

Eight years ago the three Buffett children were surprised when after their mother's death their father gave them each $1 billion to endow their own charitable foundations. Peter says the sum is now $2 billion and he and his wife Jennifer spend much of their time working with a team to disperse the money. The current focus of his NoVo foundation is on empowering adolescent girls around the world. However, Peter has also been critical of the shortcomings of 'philanthropic colonialism,' where long-term solutions to problems are kicked down the road by 'conscience-laundering' donations.

Sara, the daughter of a self-made man who built an international pharmaceutical group, knows that she will inherit an equal share of the business with her four siblings. She went away and did other jobs and created and sold her own business before she felt comfortable taking a role in the family firm. Tensions have crept in over the different levels of financial assistance given to each of them by their father. There have been disagreements too about the level of involvement each has in the company and over the size of salaries and bonuses. However, a bigger issue is looming: what will the grandchildren get? Should they get chunks of money from the patriarch? Will they expect a cushy job in one of the company's divisions? 'I think the real complication is when you go from the second to the third generation,' Sara says. 'When, say, I have three children and my brother two. Does my part of the family get more? That's the harder bit.'

A grandchild was the source of the one discernible rift in the apparently happy Buffett family set-up. In 2006 Nicole Buffett, Peter's stepdaughter, told a documentary that her grandfather paid for her college education and gave her $10,000 but didn't contribute further. He disowned her and Peter says that they are still not reconciled and 'the whole thing is unexplainable to everyone in the family'.

All the grandchildren will get 'a little something when Warren Buffett dies'. Peter has seen his father's will - 'in his inimitable style he is completely transparent' - and he and his siblings will each receive a fraction of the 1 per cent of the fortune not going to charity. The amount will be 'minuscule. We are not getting tens of millions of dollars. And that's fine. I don't know what I'd do with it.'

Today Peter Buffett lives on a farm in upstate New York. We are talking by Skype and he moves the camera to show me the bucolic scene outside. Is that a swimming pool? I say. 'Now we have a pool!' says the youngest child of the world's fourth richest man. 'That's the big luxury, for sure.'

Billionaires

THE number of billionaires in the UK has exceeded 100 for the first time and London has become home to the highest number of super-rich of any city in the world.

The Sunday Times Super-Rich List, published today, reveals that London has 72 residents whose fortune is more than £1bn, more than Moscow (48) or New York (43). In total the UK boasts 104 billionaires, worth a total of £301bn.

It means the UK has more billionaires per head than any other country. There is one billionaire here for every 607,000 people; America has one for every 1,022,475.

More than half (39) of London's billionaires were born abroad, but nationally the proportion was lower, with 44 of the 104 across the country born outside the UK.

The figures confirm that the slump in the wake of the 2008 banking collapse has come to an end. But while George Osborne, the chancellor, might take comfort, critics will say it appears as if the new wealth is going to the already very rich. Last year the total wealth of the 88 billionaires in the UK came to £245.6bn. This year it has leapt by £55.4bn.

Top of the list are the Hinduja brothers, Srichand and Gopichand, whose joint wealth through their multinational conglomerate is £11.9bn - up by an astonishing £1.3bn in the past year.

Alisher Usmanov, last year's wealthiest, who owns a 30% stake in Arsenal football club, slipped to second with £10.65bn, but the £2.65bn drop was largely due to the fluctuating value of the rouble.

Another Russian oligarch with footballing interests, Roman Abramovich, slipped from fifth to ninth with a value of £8.52bn.

The highest woman on the list is Kirsty Bertarelli, a former songwriter for the band All Saints who releases her own album, Indigo Shores, tomorrow. She and her husband, Ernesto, owe their £9.75bn fortune to his family's former ownership of a pharmaceuticals company.

John Caudwell, whose mobile phone empire took him from the back streets of Stoke-on-Trent to a fortune of £1.5bn and a £300m Mayfair home, explained why London attracts so many billionaires: '[It] is unbelievably accepting of different wealths. You've got opulent wealth right next to very ordinary, working-class people.'

Class War

On the June cover of the conservative magazine American Spectator, a vision arises from the collective unconscious of the rich. Angry citizens look on as a monocled fatcat is led to a blood-soaked guillotine, calling up the memory of the Reign of Terror during the French Revolution, when tens of thousands were executed, many by what came to be known as the 'National Razor.' The caption reads, 'The New Class Warfare: Thomas Piketty's intellectual cover for confiscation.' One member of the mob can be seen holding up a bloody copy of the French economist's recent book, Capital in the 21st Century.

Confiscation, of course, can only mean one thing. Off with their heads! In reality, the most 'revolutionary' thing Professor Piketty calls for in his best-sellling tome is a wealth tax, but our rich are very sensitive.

In his article, however, James Pierson warns that a revolution is afoot, and that the 99 percent is going to try to punish the rich. The ungrateful horde is angry, he says, when they really should be celebrating their marvelous good fortune and thanking their betters:

'From one point of view, the contemporary era has been a 'gilded age' of regression and reaction due to rising inequality and increasing concentrations of wealth. But from another it can be seen as a 'golden age' of capitalism marked by fabulous innovations, globalizing markets, the absence of major wars, rising living standards, low inflation and interest rates, and a thirty-year bull market in stocks, bonds, and real estate.'

Yes, things do indeed look very different to the haves and the have-nots. But some of the haves are willing to say what's actually going down - and it's a war of their own making. Warren Buffett made this very clear in his declaration: 'There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.'

Warren is quite correct: It is the rich who have made war against the 99 percent, not the other way around. They have dumped the tax burden onto the rest of us. They have shredded our social safety net and attacked our retirements. In their insatiable greed, they refuse even to consider raising the minimum wage for people who toil all day and can't earn enough to feed their children. And they do everything in their power to block as many people from the polls as possible who might protest these conditions, while crushing the unions and any other countervailing forces that could fight to improve them.

The goal of this vicious war is to control all of the wealth and the government not just in the U.S., but the rest of the world, too, and to make sure the people are kept in a state of fear.

But the greedy rich are experts in cloaking their aggression. Like steel tycoon Andrew Carnegie, who successfully transitioned from robber baron to philanthropist, David H. Koch and his conservative colleagues put on the mask of philanthropy to hide their war dance. Or they project their aggression onto ordinary people who are simply trying to feed their families, pay the bills, and keep the roof over their heads. Many of the wealthy liberals play a less crass version of the game: they talk about inequality only to alleviate their conscience while secretly - or not so secretly - protecting their turf (witness: NY Governor Andrew Cuomo and his mission to reduce taxes on his wealthy benefactors).

It is rich Americans, in particular, financial capitalists, who have made the war-like values of self interest and ruthlessness their code of ethics through their championing of an unregulated market. When we hear the term, 'It's just business,' we know what it means. Somebody has legally gouged us.

People in America are under attack daily. The greedy rich know it, because they are the ones doing the attacking. They know that they have made collateral damage out of hungry children, hard-working parents, grandmother and grandfathers. And somewhere behind the gates of their private communities and the roped-off areas - their private schools, private hospitals, private modes of transport - they fear that the aggression may one day be turned back. They wonder how far they can erode our quality of life before something might just snap.

The growing concentration of wealth is creating an increasingly antagonistic society, which is why we have seen the buildup of the police state and the rise of unregulated markets appear in tandem. This is why the prisons are bursting at the seams with the poor.

The oligarchs hope that Americans will be so tired, so pumped full of Xanax, so terrified, that they will remain in their places. They hope that we will watch the rich cavorting on reality shows and set ourselves to climbing the economic ladder instead of seeing that the rungs have been kicked away.

Of course, there is a very easy way for the rich to remain rich and alleviate their nightmares of the guillotine. That is simply to allow their unearned wealth to be taxed at a reasonable rate. Voila!No more fear of angry mobs.

Or they can wait for some less pleasant alternative, like a revolution. This theme, which once timidly hid behind the scenes, has lately burst onto cultural center stage. The cover of the current issue of Lapham's Quarterly, dedicated to the topic, 'Revolutions,' features five crossed swords. Its contents outline various periods in history when ordinary folks had had enough, such as 'The People's Patience is Not Endless,' a pamphlet issued by the Command of Umkhonto we Sizwe, the armed wing of the African National Congress, in December 1961.

Very interesting reading for the 1 percent.

Tax Havens

GABRIEL ZUCMAN is a 27-year-old French economist who decided to solve a puzzle: Why do international balance sheets each year show more liabilities than assets, as if the world is in debt to itself?

Over the last couple of decades, the few international economists who have addressed this question have offered a simple explanation: tax evasion. Money that, say, leaves the United States for an offshore tax shelter is recorded as a liability here, but it is listed nowhere as an asset — its mission, after all, is disappearance. But until now the economists lacked hard numbers to confirm their suspicions. By analyzing data released in recent years by central banks in Switzerland and Luxembourg on foreigners’ bank holdings, then extrapolating to other tax havens, Mr. Zucman has put creditable numbers on tax evasion, showing that it’s rampant — and a major driver of wealth inequality.

Mr. Zucman estimates - conservatively, in his view - that $7.6 trillion - 8 percent of the world's personal financial wealth - is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman's calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn't changed.

Mr. Zucman, an assistant economics professor at the London School of Economics, is part of a wave of data-focused economists led by his mentor, Thomas Piketty, of the Paris School of Economics. Mr. Zucman's short book on tax evasion, 'The Missing Wealth of Nations,' was a best seller in France last year.

Mr. Zucman's tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world's 'owner' while Europe and America have become large debtors. The idea of the rich world's indebtedness is 'an illusion caused by tax havens,' Mr. Zucman wrote in a paper published last year. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent.

Only multinational corporations and people with at least $50 million in financial assets usually have the resources to engage in offshore tax evasion. Since the less wealthy continue paying taxes, the practice deepens wealth inequality. Indeed, newly invigorated efforts in the United States to curb personal tax evasion, codified in the 2010 Foreign Account Tax Compliance Act, have armed the Internal Revenue Service with strong sanctions to levy on foreign banks that fail to disclose accounts held by American residents. This has made it 'more difficult for moderately wealthy individuals to dodge taxes,' Mr. Zucman says, while the richest account holders still have more elaborate evasive techniques at their disposal.

'There's a profound shift in attitudes that happened in the 1980s,' Mr. Zucman says. 'In the '50s, '60s and '70s, taxes were much higher, yet it was not considered normal to try to aggressively minimize your tax bill and even to evade taxes.' He finds it 'no coincidence' that the era of widespread tax evasion began in the Reagan era, with the rise of the idea that government is a beast that must be starved.

Because large-scale tax evasion skews key economics statistics, it hampers officials' ability to manage the economy or make policy, Mr. Zucman says. It erodes respect for the law, preventing the government from carrying out one of its essential tasks. And it discourages job creation, since it rewards people and corporations for keeping money overseas, instead of investing it domestically.

Despite the obstacles that the tax compliance act faces, Mr. Zucman believes its passage marked a global turning point, starting an era of 'remarkable progress' in reducing bank secrecy. Even so, only an international approach has a chance of stopping tax evasion, he says. Its most important feature would be a global financial registry, which would track wealth ownership in the same way that Americans routinely record real estate holdings now. 'If you can't measure wealth,' Mr. Zucman says, 'it's almost impossible to tax it.'

A registry would make it impossible for multinationals to falsely attribute profits to tax havens instead of the countries where the profits should be taxed. The United States and Europe could build momentum for a global registry by establishing national registries for their own residents, perhaps incorporating the idea into the free trade agreement that Europe and the United States are now negotiating.

What's beyond question is that there is no economic, political or moral justification for tax evasion - it exists only because of the political influence that wealth buys. A society that fails to fight widespread tax evasion proclaims its own corruption.

Stock Market Corruption

There's no escaping the conclusion that the stock market is not a level playing field where all investors, large and small, have an equal shot at a fair deal.

A recent groundbreaking study found that undetected insider trading occurs in a stunning one-fourth of public-company deals. Experts have long debated the pros and cons of high-frequency trading, another pervasive practice, but there is no doubt that it gives superfast traders the jump on others in trading stocks. And the very idea of trading on a public exchange, where stock prices and trading volumes are visible to all, is being eclipsed by private trading of public stocks in off-exchange venues, called dark pools, usually operated by banks.

These are not the only ways in which big market players make money at the expense of other investors. The Senate Permanent Subcommittee on Investigations recently held a hearing on 'maker-taker' pricing in which stock exchanges pay rebates to brokers for sending them buy-and-sell orders. The practice has been around for years, as a growing number of exchanges - there are now 11 public exchanges in the United States - have battled for business. What is new is the compelling evidence that the rebates are corrupting.

Under federal trading rules, brokers must provide 'best execution,' which usually means finding the best stock prices for clients who pay them to buy and sell shares. But the rules also recognize that for some trades, getting the best price is only one part of best execution; the speed, size and cost of a trade must also be considered.

Research presented at the Senate hearing showed that under the guise of making subjective judgments about best execution, brokers were routinely sending orders to venues that paid the highest rebates.

In the last quarter of 2012, for example, the brokerage TD Ameritrade sent all nonmarketable customer orders - those that can't be completed immediately based on the market price - to the one exchange that paid the highest rebate. In the first quarter of 2014, it sent nonmarketable orders to two venues that paid the highest rebates.

Senator Carl Levin, the subcommittee chairman, rightly called it 'a frankly pretty incredible coincidence' that the firm's judgment on best execution for tens of millions of customers had invariably led it to use the venues that paid the highest rebates. Under questioning, Steven Quirk, an executive of TD Ameritrade, conceded that in the trades cited by Mr. Levin the firm had virtually always used exchanges that paid the most. He also estimated that the firm made $80 million last year from maker-taker rebates.

Meanwhile, many brokerages promote their low trading costs. But the fees to trade stocks do not include the hidden costs that are incurred when investors don't get the best price. A study from 2012 estimated that rebates cost individual investors, mutual funds and pension funds as much as $5 billion a year.

Securities regulators clearly need to better enforce the best execution requirements on brokers, and require better disclosure on brokers' routing decisions and the rebates they earn. If Congress won't provide more resources for enforcement, rebates need to be passed along to the customer or eliminated altogether.

Fund Managers Don't Add Value

'THE harder I practise, the luckier I get,' said Gary Player, one of history's greatest golfers. And it is a widespread belief that experienced professionals are a lot better than neophytes. But is that true of fund managers? A new study suggests that the answer is distinctly mixed.

The paper examined the records of 2,846 American mutual funds between the start of 1996 and the end of 2008, overseen by 1,825 managers (some looked after more than one fund). Turnover was high; fewer than a quarter of the managers lasted more than five years. Just 195 of them lasted a decade.

Unsurprisingly, those managers who were poor performers in their early years were more likely to lose their jobs. In their last year in charge of their funds, these neophytes underperformed the veterans. However, the veterans did not outperform consistently; what they did do was avoid periods where they did particularly badly. The authors concluded that 'even long-term managers show no ability to beat the market on a risk-adjusted basis. The key to a long career in the mutual-fund industry seems to be related more to avoiding underperformance than to achieving superior performance.'

Another conclusion may be that it pays to start well. A few years of outperformance at the beginning of your career will establish a reputation as a star manager, and the money will roll in. At that point, it may not matter what happens next in terms of returns. A previous study by the same academics found that successful performance in the first five years of a manager's career is not predictive of success in the following five years.

A similar conclusion was reached in a study backed by Vanguard, a manager best known for its 'tracker' funds - which aim simply to replicate the market's performance rather than beat it, as 'active' funds attempt to do. It analysed the performance of equity mutual funds that had been in the top quintile (20%) of their sector, and thus might be favoured by investors. In the following five years, their performance deteriorated, with more of such managers ending up in the bottom quintile than in the top.

Why is it so difficult to be a consistent outperformer? In another paper, Charles Ellis, an investment consultant for more than 40 years, explains the reasons. Fifty years ago, institutions did less than 10% of all trading on the New York Stock Exchange; now it is more than 95%. In general, fund managers have access to the same information as their peers and, for liquidity reasons, tend to focus on the largest stocks in the market; this makes it very difficult to perform better than the benchmark, particularly after costs and fees are deducted. A few genuinely brilliant managers may outperform the index but it is all but impossible to identify them in advance.

Academics have been alive to this issue for 40 years; what is surprising, however, is how slow the active funds' clients have been to catch on. Tracker funds still have only around 11% of global fund-management assets, according to a report by PwC, a consulting firm. The simplest explanation seems to be blind optimism. Mr Ellis cites a survey that shows clients expect the average manager to beat the market by a percentage point a year, after fees. Pension funds run by trade unions, bizarrely, are the most optimistic of all.

There are a number of potential explanations. Some are psychological; the 'Lake Wobegon effect', in which everyone thinks they can pick above-average managers; or what might be called the 'don't just sit there, do something' problem, in which trustees have to justify their existence by shuffling managers, rather than just buying a tracker and going to sleep.

Another possibility is that investors have to be blindly optimistic if they are to justify the high returns assumptions they have made. Public pension funds in America routinely assume returns of 7.5-8% a year even though the risk-free rate is less than 3%. If they are not going to earn these returns by tracking the index, they must assume they can beat the benchmark. As Mr Ellis tartly remarks, 'among pension-fund executives, the elusive magic of outperformance is now the most favoured way of closing funding gaps.'

The best, it seems, is the enemy of the good. In the hope of earning outstanding returns, investors are paying active fund-management fees that will only dilute the modest returns they are likely to earn.

(Economist 09.08.14 Practice Makes Imperfect)

Uber and "Surge Pricing"

• Dynamic pricing could be applied in many industries to better manage supply and demand.
  
  In the four years since the car service Uber launched, it has been beset by criticism from myriad groups, including city officials annoyed by its sometimes cavalier attitude toward regulation and taxi companies annoyed by increased competition. Some of the harshest criticism, though, has come from an unlikely place: Uber's own customers. Thanks to its reliance on what it calls 'surge pricing' - meaning that during times of high demand, Uber raises its prices, often sharply - the company has been accused of profiteering and exploiting its customers. When Uber jacked up prices during a snowstorm in New York last December, for instance, there was an eruption of complaints, the general mood being summed up by a tweet calling Uber 'price-gouging assholes.'
  
  What's striking about the Uber backlash is that the company is hardly the first to use dynamic pricing. There have always been crude forms of price differentiation - or, as it is known in economics, price discrimination. If you go to a movie matinee, you pay less than if you go at night, and if you're willing to wait to buy a new dress (and run the risk that it might sell out), you can often get it at a marked-down price. But dynamic pricing in a more rigorous sense was pioneered in the 1980s by Robert Crandall, CEO of American Airlines, as a way to fight off competition from discount airlines like People Express. American began by slashing prices for tickets bought well in advance, while keeping prices for tickets bought closer to takeoff (when ticket inventory was lower, and demand was less price-sensitive) as high as possible. In the decades since, this kind of yield management has become integral to the business models of airlines, hotels, and rental-car companies, and greater computing power and more sophisticated data analysis has turned pricing in these industries into an incredibly complex process. (Dynamic pricing has also allowed sites like Priceline and Hotwire to flourish, since when hotels are stuck with extra rooms, they're often willing to drop prices rather than let a room sit empty.) More recently, as technology has made it easier to segment the market and change prices on the fly, dynamic pricing has become common in other industries, too. Many professional sports teams now use it to set ticket prices - games against high-profile teams cost more than games against cellar dwellers - while concert ticket prices wax and wane with demand.
  
  If dynamic pricing is hardly unusual, why has Uber taken so much flak? Some of it is a matter of history: early on, Uber's pricing was not especially transparent, so customers occasionally found themselves stuck with fares that were much higher than they expected. The fact that some of the most high-profile examples of surge pricing have been the result of big storms also matters, since it taps into people's visceral dislike of price gouging. A 1986 study by Daniel Kahneman, Jack Knetsch, and Richard Thaler found that most people thought 'raising prices in response to a shortage is unfair even when close substitutes are readily available' - a situation that almost perfectly describes Uber. Then, too, the price increases during surges are often magnitudes greater than customers are used to; during that New York snowstorm, Uber charged up to nearly eight times as much as it usually did. Thaler has suggested that people find price increases above three times normal psychologically intolerable.
  
  The reality is that the times when people most want a ride are also the times when it's most annoying and, often, most risky to drive: rush hour, New Year's Eve, 2 a.m. on a Saturday night, snowstorms.
  
  It's also important that Uber's prices only rise above the base rate and never fall below it, since customers seem to accept dynamic pricing more easily when it's characterized as a discount. At the movies, for instance, prime-time tickets aren't presented as a few dollars more than the normal price - rather, matinees are presented as a few dollars less. When American introduced dynamic pricing, it framed the 21-day advance-purchase requirement as a chance to buy 'super-saver' fares. And happy hours at bars are, similarly, framed as a markdown from the regular price. These framing devices don't change the underlying economics or price structure, but they can have a big impact on customer reaction. In 1999, for instance, Douglas Ivester, then the CEO of Coca-Cola, suggested that smart vending machines would allow Cokes to be more expensive on hot days, when demand was presumably higher. There was an immediate, intense backlash, and the company quickly backed down, saying Ivester's comments were purely hypothetical. Had Ivester instead suggested that Coca-Cola could use dynamic pricing to charge less on cold days (even if it had raised the base price of a can), response would probably have been very different. Uber's competitor Lyft seems to have recognized the power of framing: it recently introduced what it calls happy-hour pricing, offering discounts during slow business hours.
  
  Finally, Uber also faces a challenge simply because of the industry it's in: a business in which fares have historically been regulated (for cabs) and fixed (if you take a car service to the airport in New York, for instance, you typically pay the same price whether you leave at 6 a.m. or 5 p.m.). Uber's pricing scheme is more complicated and harder to grasp intuitively, so that even though Uber is transparent about surge pricing, some people inevitably find it vexing. Uber's also combating the sense that transportation is, in some sense, a public utility, and that it's offensive to charge people so much more than they're used to paying. This is a mysterious complaint, since there are many alternatives to using Uber. But it's a surprisingly common one.
  
  It's easy to see, then, why Uber has become a flash point for criticism. But there is a deep irony here: the company arguably offers the most economically sensible, and useful, example of dynamic pricing in today's economy.
  
  In most cases, after all, dynamic pricing is a way for companies to maximize profits by exploiting demand - charging higher prices to people who can and will pay more. As MIT professor Yossi Sheffi has put it, it's the 'science of squeezing every possible dollar from customers.'
  
  That's because most industries that use dynamic pricing have a limited inventory (an airline flight has a set number of seats, a hotel a set number of rooms) and are trying to make as much money from selling that inventory as possible. Uber's case is different. While the company also wants to make as much money as possible, it uses surge pricing not only to exploit demand but to increase supply.
  
  When there are more would-be Uber passengers than available Uber cars, the company's algorithm sets a price that balances supply and demand. Uber's algorithm (which it has been refining since 2011) is the company’s greatest asset and most significant innovation, allowing it to find the price that will attract drivers - whom, as independent contractors, it can't order onto the road - without alienating customers. The strategy works. In a recent blog post, the venture capitalist Bill Gurley, who's an Uber board member, said that when Uber first tested dynamic pricing in Boston in 2012, it was able to 'increase on-the-road supply of drivers by 70 to 80 percent.'
  
  Plenty of us have an intuition that cab drivers would want to be on the road when there's money to be made. But this isn't the case: a number of studies have shown that there's considerable variety in how they decide when to drive. Also, the reality is that the times when people most want a ride are also the times when it's most annoying and, often, most risky to drive. Rush hour, New Year's Eve, 2 a.m. on a Saturday night, snowstorms: generally speaking, these are exactly the times when a driver doesn't want to be on the road. But if driving at those times pays considerably better, then they are more likely to be willing.
  
  What this means is that in the case of Uber, surge pricing doesn't just make rides more expensive (as is the case with airline tickets or hotel rooms at times of high demand). It also expands the number of people who are actually able to get a ride. Customers pay more, but they also get a ride that they otherwise would not have gotten. This is exactly how a market is supposed to work: higher demand induces more supply.
  
  Of course, Uber has been making this argument for a while now, and it hasn't stopped people from complaining. (Though it hasn't stopped people from using the service, either: Uber is now valued at more than $17 billion.) So pundits have proffered a number of suggestions for solving the public relations problem.
  
  The company itself should take no money during surge periods (it now takes 20 percent of every fare), so all the money goes to the drivers. Or it should cap prices to consumers but pay the higher price to drivers, essentially subsidizing people's rides in surge periods. Or when prices rise really sharply, Uber should donate its take to charity.
  
  These are all interesting ideas. But it'd be a mistake for Uber to let public relations trump economics when it comes to dynamic pricing. It makes sense that the company recently reached an agreement with New York's attorney general that caps surge pricing during times of 'emergency,' since these emergencies are rare, and the negative fallout from them can be immense. But tinkering with the basic idea of surge pricing will only reinforce the status quo and bolster people's implicit assumption that prices should be set, in some sense, independently of supply and demand. The basic reality of Uber's business model is that when people want a ride the most, it's likely to be the most expensive. This will always be irritating, just as exorbitant prices for last-minute airline tickets are irritating. But over time, surge pricing will also become more familiar and less surprising.
  
  Utilities are now starting to use dynamic pricing for electric power, which can help prevent blackouts at times of high demand and promote energy conservation more generally. A new startup called Boomerang Commerce, which is led by former Amazon engineers, has been helping online retailers set prices dynamically. Dynamic pricing is the future, even if the road to get there will be bumpy.

High Frequency Trading

The beams are infrared, which means you can't see them, but lasers are now flashing stock-market data through the skies over New Jersey. If they work well there, they might soon be flashing over London too. Lasers are the latest tool for high-frequency trading: the fast, entirely automated trading of large numbers of shares and other financial instruments.

Originally, the data needed for high-frequency trading travelled almost exclusively via fibre-optic cables, in which signals move at about two-thirds of the speed that light travels in a vacuum. It's a tried, trusted technology. Fibre has the bandwidth to transmit the huge volumes of data spewed out by today's financial markets. Although accidents do happen (farmers, for example, sometimes cut the buried cables when ploughing), fibre-optic links are very reliable. But 125,000 miles per second isn't fast enough if other market participants are faster. So there's a race on. The theory of relativity tells us that nothing can travel faster than light in a vacuum. Air, unlike glass fibre, slows light down almost imperceptibly. Sending light or radio signals through the atmosphere is less than a tenth of 1 per cent slower than the speed of light in a vacuum.

Every way of sending market data through the air has its limitations. Wireless microwave transmission, using 'dishes' (antennae) on a series of towers, is an old technology, but improved versions get you the necessary speed. Gales can blow the dishes out of alignment, and make it unsafe for workers to climb up to realign them, but those involved tell me a good microwave link will work well more than 99 per cent of the time. Its bandwidth, however, is limited, meaning 'you have to pare down the data,' as one user put it, removing what isn't necessary. Specialised computer hardware can do the necessary editing, compression and decompression in a couple of microseconds (millionths of a second), but we have now reached the point where delays measured even in nanoseconds (billionths of a second) matter.

Higher-frequency millimetre waves provide greater bandwidth than microwaves, so there's less need for 'editing', but are more easily disrupted by bad weather. Three years ago, millimetre-wave links 'would go down when someone sneezed', says Michael Persico, whose Chicago firm, Anova Technologies, uses these links. Even today, they tend to stop working in heavy rain. So Anova has begun to use lasers to supplement its millimetre waves. Lasers have vulnerabilities too (fog is a big problem), but Anova says its test results show that a combination of lasers and millimetre waves is about as reliable as fibre-optic cable, while getting close to the holy grail of the speed of light in a vacuum.

Not so long ago there was a vogue for asserting that globalisation had 'ended geography' and created a 'flat world'. When financial trading was a matter of human beings looking at screens, that had a certain plausibility, because the intrinsic slowness of humans' eyes and brains easily masked the small disparities in the time taken to transfer data between different geographic locations. But now that computers, not humans, are doing the trading, geography matters exquisitely. With any of these technologies - fibre-optic cable, microwave, millimetre wave, laser transmission through the atmosphere - the exact route taken is crucial.

The shortest and therefore fastest route on the surface of the earth between any two places is called a 'geodesic' or great circle. When you talk to high-frequency traders (something I've done a lot over the past four years), you quickly learn that the world's financially most important geodesic - the spinal cord of US capitalism - runs from Aurora, a town in Illinois that's now essentially an outer suburb of Chicago, to northern New Jersey. It's now close to impossible, I'm told, to put new microwave dishes along that crowded geodesic: all the space on the towers closest to it is already rented. The dishes can interfere with one another, so you need permission from the Federal Communications Commission to build new towers or install new dishes. As a result, no one is easily going to beat McKay Brothers, which owns the fastest, geodesic-hugging Aurora-New Jersey microwave link.

Aurora matters to global finance because in 2012 the Merc, the Chicago Mercantile Exchange, relocated its electronic trading system to a new data centre there. The Merc trades futures: originally, futures on eggs, onions and other agricultural commodities, but since 1972 financial futures as well. Chicago futures trading used to be done face to face (by voice, or eye contact and hand signal) in raucous, crowded trading pits. The Merc's pit traders fiercely resisted the coming of electronic trading: its leading advocate, Leo Melamed, received frequent death threats. By 2004, however, the resistance had crumbled, and now nearly all the Merc's trading is electronic.

The Merc's first fully electronic product was the E-Mini financial future, launched in 1997. It tracks the S&P 500 index, made up of the five hundred leading US stocks. The buyer and the seller of an E-Mini each maintain a 'margin' deposit on account at the Merc's clearing house. Each night, the clearing house adjusts those deposits. If the S&P 500 index has risen by a single point, $50 is transferred from the seller's account to the buyer's; if it has fallen by ten points, say, $500 shifts from the buyer to the seller. If their deal is for a thousand E-Minis, the latter sum becomes $500,000.

Traders tell me that new information relevant to the overall value of US shares almost always shows up first in orders for and in the prices of the E-Mini, and a fraction of a second later in the underlying shares; financial economists have documented the same pattern. The reason for it is probably that the E-Mini gives you greater 'leverage': a modest 'margin' deposit permits gains (and, of course, also losses) corresponding to buying or selling a large and expensive block of shares. So if traders think they or their automated trading systems have an information edge, it is to the E-Mini they will usually turn first. The big crises of modern US stock markets have tended to show up first in the E-Mini (or, before 1997, in its predecessor, the S&P 500 pit-traded future) and a little later in the stock market.

Changes in the electronic order book for the E-Mini are crucial information for automated share trading (this particular game is now too fast for human players, who wouldn't be able to react quickly enough to the changes). Suppose the price of the E-Mini has fallen, or even simply that the number of offers (sell orders) has risen sharply and the number of bids (buy orders) has fallen. Over the next fraction of a second, falls in the prices of the underlying shares are more likely than increases. I'm told that a similar pattern generally holds for US Treasury bonds, with the prices of the bond futures traded in Aurora leading changes in the prices of the underlying bonds (although sometimes it's the other way around). Foreign exchange is different. Although Aurora is the world's main site of currency futures trading, the dominant foreign exchange markets are still the 'spot' markets in which foreign exchange for immediate delivery is traded among banks, hedge funds and so on.

US shares, US government bonds and much of 'spot' foreign exchange are traded in data centres in northern New Jersey. These data centres resemble giant warehouses, and their size is the reason the operation has shifted from its traditional sites in Manhattan to townships in New Jersey no tourist has ever heard of: real estate is much cheaper there. Data centres often have high-security features, including a two-door entrance like a spaceship airlock. They're often windowless, and sometimes freezing cold: fierce air conditioning is needed to extract the heat generated by the tens of thousands of computer servers they contain. (The small number of onsite maintenance workers stay in warm rooms unless something goes wrong or new equipment is being installed.) Data centres are huge consumers of electricity, and the combination of so many computers and all that air conditioning makes for a lot of noise. Andrew Blum, author of a fine book on the physical reality of the internet, describes visiting a data centre as 'like stepping into a machine ... as loud as a rushing highway'.

There are four main share-trading data centres in the US. The New York Stock Exchange owns its own data centre in Mahwah, New Jersey. Nasdaq's is in Carteret. The computer systems of their biggest rival, BATS (Better Alternative Trading System, set up in 2005 by a team from the Kansas City high-frequency trading firm Tradebot), are currently in NJ2 in Weehawken, owned by the data centre managers Savvis. The share-trading systems of the fourth main exchange in the US, Direct Edge (recently bought by BATS), are in NY4, a giant multi-user data centre owned by Equinix, the largest global provider of these structures. Despite its name, NY4 is in Secaucus, New Jersey, and much of the trading of bonds, foreign exchange and options also takes place there.

Each data centre contains the exchange's or other trading venue's matching engines, which are the computer systems that maintain its electronic order books, search for a match (a bid and an offer at the same price for the same share, bond or currency) and, if they find one, consummate the trade and generate electronic 'confirms' to tell the parties to the trade that it has taken place. Surrounding the matching engines are the order gateways, computer systems that receive the electronic messages containing traders' orders and cancellations of orders, then send those messages to the correct matching engine, and dispatch 'confirms'. An exchange will also have at least one 'feed server', which collates information on every change in the exchange's order books and sends it out in a continuous stream of messages referred to as the 'raw' data feed.

Nowadays, the majority of orders for US and European shares and futures (and increasing proportions of the orders for bonds and foreign exchange) are generated by computer systems which are themselves often located in the data centre that processes them. High-frequency trading firms - and also, for example, the big banks that act as brokers for institutional investors - pay the exchanges or other data centre owners for space in which to place their computer servers. I'm told that a 'rack', a cabinet-sized space that can accommodate thirty or forty computers, costs between $1500 and $15,000 a month. A big trading firm will need multiple racks in each data centre, or even a whole 'cage' (to protect against rivals' tampering, trading servers are often kept in locked cages), which can easily cost more than $1 million a year. The owners of data centres can charge these high rents because it's a very concentrated world. Most global financial trading probably takes place in no more than 15 data centres: six in the US (the four big share-trading centres, the Merc's in Aurora, and a big multi-user centre closer to the Chicago Loop); another five in Europe; and a handful in the rest of the world.

An institutional investor will set a goal for the computer programs of a bank executing orders on its behalf, for example to buy a hundred thousand Apple shares. If the programs immediately and visibly placed the whole order in the electronic order books of the exchanges on which Apple shares are traded, it would drive up their price sharply. So the bank's programs (its 'smart order router' and its 'execution algorithms') split the 'parent' order into up to a thousand 'child' orders and execute them as surreptitiously as possible, often trying to make them look like large numbers of independent orders from small investors. The order router will usually at first send child orders to 'dark pools' (which are not exchanges, but trading venues in which participants, whether human or algorithmic, cannot see the electronic order books). If the router then has to send child orders to exchanges such as BATS, Direct Edge, Nasdaq or the New York Stock Exchange - in which order books are visible - it will keep them small and therefore hopefully inconspicuous, buying or selling as few as a hundred Apple shares (or even fewer) at a time. All this splitting and routing of a big order is complicated but easily automated. It is of course far cheaper to have computer systems do all of this than to pay human traders.

The goal of high-frequency trading (HFT) programs, running on computer servers inside data centres, is simply to trade profitably, ideally without accumulating too large - and therefore too risky - an inventory of the futures, shares, bonds or currencies being traded. The designers of HFT programs usually want them to end the trading day 'flat': with no inventory at all. There are, broadly, two ways for an HFT program to make a profit. The first is called 'market-making'. If a market-making program is trading Apple shares, for example, it will continually post competitively priced bids to buy Apple shares and offers to sell them at a marginally higher price. The goal of market-making is to earn 'the spread', in other words the difference between those two prices - in Apple's case, a few cents; in many other cases, a single cent - together with the small payments (around 0.3 cents per share traded) known as 'rebates' that exchanges make to those who post orders that other traders execute against. The purpose of these rebates is to encourage market-making, in the hope that competition among market-makers will encourage lots of keen pricing and thus attract other participants to the exchange.

The other way that an HFT program can seek to trade profitably is to be one of those other participants: it can 'hit' a bid or 'lift' an offer that is already in the order book. That's often called trading 'aggressively'. It's more expensive than market-making: you have to pay the exchange a fee, rather than earning a rebate, and, if prices don't move, your program can end up simply 'paying the spread' to market-making programs, because it will have to sell more cheaply than it buys. However, if an HFT program can identify a trading opportunity larger than the 'spread' (a high probability that, for example, the price of the shares being traded is going to rise or fall by several cents), then it may well need to act immediately and aggressively, before other programs do. There's quite a bit of circulation of staff among HFT firms, and consequently the chief ways of identifying trading opportunities are common knowledge across the firms.

How is it that a computer program can identify a profitable trading opportunity? Both macroeconomic and company-specific news is often issued in machine-readable form, and a well-programmed machine can respond to it at least a quarter of a second faster than a human being can. There's also increasing interest in using automated analysis of social media to gain a trading advantage. However, mainstream high-frequency trading programs rely primarily on two other sources of information.

The first is the content of the order book of the particular exchange in whose data centre the HFT program is running. As I've said, the exchange's feed server continuously broadcasts changes in the order book (new orders, cancellations of orders, consummated trades). In US share trading, it isn't the only way of keeping track of the market - you can also subscribe to the official, multi-exchange 'consolidated tape' - but the raw data feed direct from the feed server is faster, so any HFT program needs access to it and the program's owner has to pay the exchange for that access. I'm told that the Merc charges $10,000 a month for access, and that this is cheap: many exchanges charge more. Monitoring the raw data feed involves keeping track of whether the order book contains more buy orders than sell orders, or vice versa, and whether the numbers of either are changing fast. Sometimes, too, a program may be able to detect a distinctive pattern in the arrival of new orders that might indicate that a big institutional investor is buying or selling a big block of shares.

In the early days of high-frequency trading, when execution algorithms handling institutional investors' orders did dumb things like send in a child order every sixty seconds exactly, detecting such patterns was easy. Now, it's more of a dark art. Who does it, with what success and how are very difficult questions to answer. Even those who do it may not fully know whether or not they're doing it. In a field of complex electronic interactions, it may be hard to distinguish between a program that is successfully identifying and exploiting patterns of orders that result from the splitting of one big order, and a program whose success is based on less specific order-book patterns.

Unquestionably, though, the fundamental techniques of making predictions based on the balance between bids and offers in the order book are well known to all HFT firms. The resulting need for an advantage in speed is a major reason why HFT firms all have to pay for the fast, raw data feed. They have no choice other than to rent space for their computer servers in a data centre, because they need to be able to receive the data feed as quickly as possible and respond with orders - along with cancellations of orders that have been rendered 'stale' (mispriced) by changes in the market - that will arrive at the matching engine with minimum delay. Some data centres, such as the Merc's, don't allow you a spatial advantage within the data centre: if your cage is physically closer to the order gateways, the cable that connects your servers to them is coiled so that it is the same length as everyone else's. In other data centres, I'm told, you can get closer by paying a higher rent. You also pay more if you want a 'ten gig' - ten gigabits, or ten billion binary digits, per second - connection to the order gateways and feed server; the standard connection is just one gig.

The second source of information used by an HFT program is order books other than that of the exchange in whose data centre it is running. Since the trading of shares in the US is spread across multiple venues, a change in one venue's order book often presages changes in the others. That's why HFT firms need the fastest possible communication links between data centres. If, for example, an HFT program is trading Apple shares in Nasdaq’s data centre in Carteret, it will most likely need access to a microwave link from Aurora. It will almost certainly also need access to the order books of the other exchanges on which Apple shares are traded. The firm that owns the HFT program doesn't need to organise that access itself: Nasdaq, for example, will sell it to you. According to the most recent price list I've been able to find, you can expect a transmission time over the millimetre-wave link from BATS in Weehawken to Nasdaq in Carteret of around 105 microseconds, at the cost of $7,500 a month. The link from Direct Edge takes 101 microseconds and also costs $7,500 a month; a new link from the New York Stock Exchange is expected to take 190 microseconds and cost $10,000 a month.

Here, one has to look at maps to follow what's going on. Michael Lewis, in his new book about high-frequency trading, Flash Boys, recounts what he was told by his main informant, Brad Katsuyama, who worked in the Royal Bank of Canada's offices in New York. Katsuyama would, for example, often buy a large block of shares from one of the bank's institutional investor customers, and then need to sell those shares in smaller blocks. He would frequently try more or less simultaneously to hit multiple bids or lift multiple offers for shares in the order books of several different exchanges. This would work for BATS - his orders there were typically executed in full - but by the time his orders reached other venues the bids he was trying to hit or offers he was trying to lift would have vanished from the order book. 'The market as it appeared on his screens,' Lewis says, 'was an illusion.'

This is perhaps the most vehement complaint made against high-frequency trading: it leads to a vanishing market, one that disappears as soon as you attempt a trade. You can begin to understand why this happens if you take a taxi from Manhattan to Newark Airport. Quite likely you'll be driven through the Lincoln Tunnel underneath the Hudson River. When you emerge in New Jersey, the first place you come to is Weehawken. The main fibre-optic cables from Manhattan to New Jersey follow the same route through the Lincoln Tunnel. The office in which Katsuyama worked was in Manhattan, like those of most of the big banks that operate as stockbrokers in the US. So Katsuyama's orders were reaching the BATS matching engines at NJ2 in Weehawken before they reached the data centres of the other exchanges. Somehow, HFT systems trading in those data centres were learning of his other orders before they arrived, and buying, selling or adjusting their price quotes accordingly, causing the market Katsuyama could still see on his screen to have disappeared in reality.

I'd heard such complaints myself, and I'd been sceptical, because they seemed to violate the laws of physics. An HFT system in the Nasdaq data centre in Carteret, for example, can't learn by magic about a child order that has arrived at BATS in Weehawken. There are essentially two ways it can find out: from the BATS raw data feed once it arrives in Carteret, or from a message from one of the same firm's servers in Weehawken, which has learned that one of its bids or offers has been executed against. Even with a millimetre wave or laser link, all of that takes time: more time than it would take for the child order sent to Carteret to get there if it was travelling on the fastest fibre-optic route. I was put right by a physicist I met, who knows a lot about speeding up communications. My mistake was to have assumed that banks would know how to find the fastest cables, and would ensure that their own orders and orders from their institutional investor customers travelled down them.

Flash Boys has been much talked about, but no one seems to have focused on its crucial sentence, in which Lewis reports the difference in time taken between an order sent from the Royal Bank of Canada's office in Manhattan to BATS in Weehawken and one sent to Nasdaq in Carteret: around two milliseconds (two thousandths of a second). That sounds tiny - no human being could perceive a time interval that short - but in the world of high-frequency trading it's an eternity. Two milliseconds is ample time for news of the arrival of the order in Weehawken to reach HFT systems in Carteret: it's about ten times longer than you should need if you're using a fibre-optic cable that is optimised for speed and follows the most direct route.

Behind orders from banks' institutional investor customers are people's savings and pension funds. Flash Boys has been widely read as a morality play, a story of evil-doing high-frequency traders. But it can just as easily be read as an account of banks that either wouldn't, or didn't know how to, take best care of their own or their customers' orders. To their credit, the Royal Bank of Canada team took action once they saw the disadvantage they were labouring under. I am assured by a source that other banks have done things to reduce the problem, for example moving their smart order routers from Manhattan into the data centres in New Jersey. All things considered, I suspect that what drains most money from pension funds and other savings are the high fees charged by those who manage them, and the excessive trading they often engage in, not high-frequency trading or even the incompetent handling of orders.

Is there an equivalent to the Lincoln Tunnel in Europe: a geographical quirk that creates exploitable predictability in the arrival of orders at different data centres? I don't yet know: the geography of Europe's automated trading is an issue I've never seen discussed in public. Two of Europe's five main trading data centres are in London: the London Stock Exchange's own centre and the Reuters foreign exchange trading centre, which is in Docklands. (I'm told that, unusually, trading firms originally couldn't place their servers in the building containing the Reuters matching engines, which made locations close to that building very valuable real estate.) Two other data centres are just outside London. Equinix's LD4, in Slough, hosts BATS Europe and one of the three global sets of matching engines of EBS, Reuters's main rival as a foreign exchange trading venue (EBS's other two sets are in NY4 and Tokyo). A data centre in Basildon, now owned by the US-based IntercontinentalExchange, contains the matching engines for Liffe (the London International Financial Futures Exchange) and for much of the trading of continental European shares. Europe's fifth main financial data centre is Equinix's FR2 in Frankfurt, which hosts the matching engines of Eurex (Europe's leading futures exchange) and of the Deutsche Borse.

Europe's data centres are connected not just by fibre-optic cables but also by microwave links, and those in and around London by millimetre wave links too. London's rain is different from New Jersey's - I'm told the average droplet size is smaller - making life in London somewhat easier for millimetre waves and, in the words of one of my contacts, 'much worse for lasers'. So if you're a Londoner, and are spooked by the idea of lasers flashing stock-market data overhead, be grateful for drizzle.

Go beyond the Chicago-New Jersey and London-Frankfurt clusters and you're soon back in the slower world of fibre-optic cable. Oceans are a major barrier to microwave, millimetre wave and laser transmission through the atmosphere. Because of the curvature of the Earth and attenuation of the signals, all three require a series of 'line of sight' repeater stations. I've been warned not to imagine that this barrier can't be overcome: serious attention is being given to such ideas as suspending microwave repeater stations from a series of balloons.

For now, though, transatlantic and other global financial trading links run through undersea cables. The routes followed by existing cables are often at some distance from the relevant geodesics, in order to minimise the extent to which they had to be laid on continental shelves. In shallow waters, cables have to be buried in the ocean floor, which is expensive, because they would otherwise be vulnerable to trawlers and ships' anchors, and to attack by sharks (attracted by the electromagnetic radiation from fibre-optic cables). So an obvious thing to do is to lay new cables closer to the geodesic. It's brutally expensive: laying a transatlantic cable can cost more than $300 million, and to my knowledge nobody has done it since the dotcom boom ended. A firm called Hibernia Networks planned to, with the intention of shaving around 2.6 milliseconds off the one-way transmission time on the fastest existing cable, Global Crossing's AC1. But among Hibernia's partners was the Chinese equipment maker Huawei, and the project seems to have hit trouble because of US cybersecurity concerns.

But you can do quite a lot without a new cable. You can add microwave links between the landing stations of existing undersea cables and the world's main financial data centres. Doing that has reduced the total one-way transmission time from Aurora, Illinois to LD4 in Slough or FR2 in Frankfurt to 35-38 milliseconds. That gives HFT systems in those data centres usefully up-to-date information, about the order book for the E-Mini, for example (which is helpful not just to those trading US shares, but also to those trading European shares and futures).

As well as needing links of this kind, HFT firms have to speed up their computing as much as possible. Even the fastest conventional computer hardware is now not fast enough. At one HFT conference I attended, a firm was promoting a technology that involved submerging computer systems in liquid nitrogen, which permits 'superclocking': getting a computer system to run faster than would be safe at room temperature.

As far as I can tell, however, that approach hasn't been much adopted by high-frequency traders: if nothing else, installing a liquid nitrogen system in your 'cage' in a data centre is likely greatly to increase the rent you have to pay. Much more widely used are specialised forms of computer hardware known as FPGAs, or Field Programmable Gate Arrays. The basic idea is to shift as much computing as possible off the microprocessor chips that make up the heart of a computer system, and to do that computing not by software but in fast FPGA hardware. I was told in Chicago in April that there was a buzz among the city's high-frequency traders about the FPGA technology of a firm called Solarflare. This enables you to circumvent the kernel - the programs that manage the computer's central processing unit, memory and input/output devices - and send bits (binary digits) directly from the raw data feed to designated locations in a computer's memory. Solarflare 'promise you a 1.2 microsecond one-way trip from the network to your user memory', a programmer told me.

You can't do everything using FPGAs: sometimes high-frequency trading requires use of a computer server's central processing unit. The programmer tried to explain to me the software style that was necessary to ensure speed. 'There are rules you need to follow to write fast code,' he told me: 'Don't touch the kernel. Don't touch main memory. Don't branch.' (That third commandment means don't fill your program with 'if' statements - ones with the generic form 'if A then do B else do C' - because they get in the way of a modern microprocessor's capacity to do several things in parallel.) But he also warned me that 'we don't know ahead of time what those rules are because every piece of code comes with a different rule book ... I call them rules, but they're more guidelines ... That's why it's hard to teach someone: they either get it or they don't. Those that get it, awesome.'

I've heard the requisite style of programming described as 'bit fucking'. I'm uncomfortable with the term, but it conveys the need for an intimate understanding of precisely the best, subtlest way to handle the flow of binary digits from the raw data feed, through the computer system and the additional specialised hardware, and then back (in the form of orders) into the network connection to the relevant order gateway. A more polite term for it is 'close-to-the-metal programming'. Just as talk of globalisation in finance tended to assume that local phenomena such as London rain had become unimportant, so it is all too easy to think that digital financial markets are abstract and virtual. But, like bankers who never look at maps, programmers who think that way will do a poor job in high-frequency trading: they will never 'get it'. If you're going to write really fast code, you have to understand the computer you are programming not as an abstract machine, but as a physical device through which electrical signals pass. Only then can you work out the most efficient way of channelling those signals.

If you're a certain kind of person, there's pleasure to be had in a lot of this. I don't mean simply in bit fucking, although pleasure is of course one of the term's connotations. There's pleasure in skilled engineering, and in working for a firm with at most a few dozen employees that can outwit the big banks – which may be rich, but are also often bureaucratic and sometimes simply stupid. (Nearly all HFT firms started small, and only a few have grown to be more than medium-sized.) I confess that some of the pleasure rubs off on me. It's nice to study a domain of economic life that's so caught up with the physical world: with wind and rain and fog, tunnels and oceans and sharks; and with the geography of such unfashionable places as Aurora, Weehawken and Slough.

It should be said that there is less money to be made from high-frequency trading than you might think. If your program is market-making, for example, you might hope that it would make a couple of cents for every share it buys and sells; even a medium-size HFT firm can be trading a billion shares a month, so the cents would really add up. However, in this domain prediction is almost always probabilistic. For example, an HFT program seldom really knows that a particular little order is a child of a bigger parent: it can only guess. More generally, most programs' predictions will be wrong almost as often as they are right. A market-making program is doing pretty well if it turns a profit of a tenth of a cent per share traded. There are, I'm told, opportunities that are quite a bit more profitable than that (and it's these that 'aggressive' programs live off), but they are less common.

A good high-frequency trading firm can almost always make money, but costs of the kind I've listed weigh heavily, and you can't avoid paying at least some of them at each of the many venues at which you are trading (the US has 12 share-trading exchanges and dozens of dark pools). The fact that a lot of these venues use the same handful of data centres - I'm told NJ2 in Weehawken is a favourite of dark-pool operators - creates some economies of scale, but each additional venue to which you feel compelled to connect adds costs. I get the impression that if an HFT firm fails it is most usually because it slowly drowns, submerged in a sea of costs.

Occasionally, an automated trading firm blows up spectacularly, rather than quietly drowning. The most dramatic case was the US market-making firm and stockbroker Knight Capital, which lost $440 million in 45 ghastly minutes on the morning of 1 August 2012. An old, long-unused trading program mistakenly left on one of its servers suddenly sprang to life, while the piece of program that kept track of the execution of its orders no longer worked. So the trading program kept on pumping more and more orders into the market. Knight's staff wrongly guessed that the fault was in newly installed trading software, so they lost valuable time uninstalling it from their servers. By the time the old code was found and switched off, the firm was on the brink of bankruptcy.

Such events don't always become public. In a New York coffeehouse, a former high-frequency trader told me matter of factly that one of his colleagues had once made the simplest of slip-ups in a program: what mathematicians call a 'sign error', interchanging a plus and a minus. When the program started to run it behaved rather like the Knight program, building bigger and bigger trading positions, in this case at an exponential rate: doubling them, then redoubling them, and so on. 'It took him 52 seconds to realise what was happening, something was terribly wrong, and he pressed the red button,' stopping the program. 'By then we had lost $3 million.' The trader’s manager calculated 'that in another twenty seconds at the rate of the geometric progression,' the trading firm would have been bankrupt, 'and in another fifty or so seconds, our clearing broker' - a major Wall Street investment bank - 'would have been bankrupt, because of course if we're bankrupt our clearing broker is responsible for our debts ... it wouldn't have been too many seconds after that the whole market would have gone.'

What is most telling about that story is that not long previously it couldn't have happened. High-frequency firms are sharply aware of the risks of bugs in programs, and at one time my informant's firm used an automated check that would have stopped the errant program well before its human user spotted that anything was wrong. However, the firm had been losing out in the speed race, so had launched what my informant called 'a war on latency', trying to remove all detectable sources of delay. Unfortunately, the risk check had been one of those sources.

Pleasure and risk are important, but we do need to come back to money. The right question to ask about high-frequency trading is not just whether high-frequency traders are good or bad, or whether they add liquidity to the markets or increase volatility in them, but whether the entire financial system of which they are part is doing what we want it to do. Of course, we want it to do several things, but I'd say that high on the list should be putting people's savings to the socially most productive uses, while preventing too much of those savings being wasted along the way.

Speaking a couple of years ago to Bloomberg Businessweek about the new, faster cables, such as those planned by Hibernia, Manoj Narang, founder of the HFT firm Tradeworx, commented: 'Nobody's making extra money because of them: they're a net expense ... All they've done is impose a gigantic tax on the industry and catalyse a new arms race.' The chief economic characteristic of an arms race is that all the participants have to spend more money, and none of them ends up any better off because of it. The programmer I spoke to in Chicago told me that his firm had to spend 'godawful amounts of cash on IT'.

He had a simple proposal for how to stop the waste. The Securities and Exchange Commission (SEC), which regulates share trading in the US, should rule that matching engines couldn't search for matches all the time, but only every hundred milliseconds. That would turn what is in effect a continuous auction conducted by the matching engines into a series of what economists call 'batch auctions'. Some care would need to be taken over the way batch auctions were introduced. The feed servers would have to fall silent during the period between them, because otherwise the arms race would simply concentrate in its final millisecond. More generally, changes in a fast, interactive, highly complex system of the kind I've described can have unexpected side effects. But a regulator such as the SEC could introduce a change such as this on an experimental basis, for a limited number of stocks, and see whether it had benefits.

Variants of the batch auction proposal are being tried out in foreign exchange, but that's a very different context. The big banks retain market power there that they have largely lost in share trading; the difficulties they have with HFT give them good reason to want to slow it down. The programmer wasn't optimistic about the prospects of batch auctions in share trading. 'It's a dream, but it's never going to happen': too many people benefit from the current set-up.

I don't think my programmer knew it, but his proposal for auctions every hundred milliseconds has an intriguing genealogy. A hundred milliseconds - a tenth of a second - is approximately the threshold of human perception of time, and so has played a significant role across a variety of human and physical sciences, not to mention cinematography. It's a marker of how fast finance has become that being able to trade only every tenth of a second would now count as slow trading.

Zillionaires and Pitchforks

You probably don't know me, but like you I am one of those .01%ers, a proud and unapologetic capitalist. I have founded, co-founded and funded more than 30 companies across a range of industries - from itsy-bitsy ones like the night club I started in my 20s to giant ones like Amazon.com, for which I was the first nonfamily investor. Then I founded aQuantive, an Internet advertising company that was sold to Microsoft in 2007 for $6.4 billion. In cash. My friends and I own a bank. I tell you all this to demonstrate that in many ways I'm no different from you. Like you, I have a broad perspective on business and capitalism. And also like you, I have been rewarded obscenely for my success, with a life that the other 99.99 percent of Americans can't even imagine. Multiple homes, my own plane, etc., etc. You know what I'm talking about.

In 1992, I was selling pillows made by my family's business, Pacific Coast Feather Co., to retail stores across the country, and the Internet was a clunky novelty to which one hooked up with a loud squawk at 300 baud. But I saw pretty quickly, even back then, that many of my customers, the big department store chains, were already doomed. I knew that as soon as the Internet became fast and trustworthy enough - and that time wasn't far off - people were going to shop online like crazy. Goodbye, Caldor. And Filene's. And Borders. And on and on.

Realizing that, seeing over the horizon a little faster than the next guy, was the strategic part of my success. The lucky part was that I had two friends, both immensely talented, who also saw a lot of potential in the web. One was a guy you've probably never heard of named Jeff Tauber, and the other was a fellow named Jeff Bezos. I was so excited by the potential of the web that I told both Jeffs that I wanted to invest in whatever they launched, big time. It just happened that the second Jeff - Bezos - called me back first to take up my investment offer. So I helped underwrite his tiny start-up bookseller. The other Jeff started a web department store called Cybershop, but at a time when trust in Internet sales was still low, it was too early for his high-end online idea; people just weren't yet ready to buy expensive goods without personally checking them out (unlike a basic commodity like books, which don't vary in quality - Bezos' great insight). Cybershop didn't make it, just another dot-com bust. Amazon did somewhat better. Now I own a very large yacht.

But let's speak frankly to each other. I'm not the smartest guy you've ever met, or the hardest-working. I was a mediocre student. I'm not technical at all - I can't write a word of code. What sets me apart, I think, is a tolerance for risk and an intuition about what will happen in the future. Seeing where things are headed is the essence of entrepreneurship. And what do I see in our future now?

I see pitchforks.

At the same time that people like you and me are thriving beyond the dreams of any plutocrats in history, the rest of the country - the 99.99 percent - is lagging far behind. The divide between the haves and have-nots is getting worse really, really fast. In 1980, the top 1 percent controlled about 8 percent of U.S. national income. The bottom 50 percent shared about 18 percent. Today the top 1 percent share about 20 percent; the bottom 50 percent, just 12 percent.

But the problem isn't that we have inequality. Some inequality is intrinsic to any high-functioning capitalist economy. The problem is that inequality is at historically high levels and getting worse every day. Our country is rapidly becoming less a capitalist society and more a feudal society. Unless our policies change dramatically, the middle class will disappear, and we will be back to late 18th-century France. Before the revolution.

And so I have a message for my fellow filthy rich, for all of us who live in our gated bubble worlds: Wake up, people. It won't last.

If we don't do something to fix the glaring inequities in this economy, the pitchforks are going to come for us. No society can sustain this kind of rising inequality. In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn't eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It's not if, it's when.

Many of us think we're special because 'this is America.' We think we're immune to the same forces that started the Arab Spring - or the French and Russian revolutions, for that matter. I know you fellow .01%ers tend to dismiss this kind of argument; I've had many of you tell me to my face I'm completely bonkers. And yes, I know there are many of you who are convinced that because you saw a poor kid with an iPhone that one time, inequality is a fiction.

Here's what I say to you: You're living in a dream world. What everyone wants to believe is that when things reach a tipping point and go from being merely crappy for the masses to dangerous and socially destabilizing, that we're somehow going to know about that shift ahead of time. Any student of history knows that's not the way it happens. Revolutions, like bankruptcies, come gradually, and then suddenly. One day, somebody sets himself on fire, then thousands of people are in the streets, and before you know it, the country is burning. And then there's no time for us to get to the airport and jump on our Gulfstream Vs and fly to New Zealand. That's the way it always happens. If inequality keeps rising as it has been, eventually it will happen. We will not be able to predict when, and it will be terrible - for everybody. But especially for us.

The most ironic thing about rising inequality is how completely unnecessary and self-defeating it is. If we do something about it, if we adjust our policies in the way that, say, Franklin D. Roosevelt did during the Great Depression - so that we help the 99 percent and preempt the revolutionaries and crazies, the ones with the pitchforks - that will be the best thing possible for us rich folks, too. It's not just that we'll escape with our lives; it's that we'll most certainly get even richer.

The model for us rich guys here should be Henry Ford, who realized that all his autoworkers in Michigan weren't only cheap labor to be exploited; they were consumers, too. Ford figured that if he raised their wages, to a then-exorbitant $5 a day, they'd be able to afford his Model Ts.

What a great idea. My suggestion to you is: Let's do it all over again. We've got to try something. These idiotic trickle-down policies are destroying my customer base. And yours too.

It's when I realized this that I decided I had to leave my insulated world of the super-rich and get involved in politics. Not directly, by running for office or becoming one of the big-money billionaires who back candidates in an election. Instead, I wanted to try to change the conversation with ideas - by advancing what my co-author, Eric Liu, and I call 'middle-out' economics. It's the long-overdue rebuttal to the trickle-down economics worldview that has become economic orthodoxy across party lines - and has so screwed the American middle class and our economy generally. Middle-out economics rejects the old misconception that an economy is a perfectly efficient, mechanistic system and embraces the much more accurate idea of an economy as a complex ecosystem made up of real people who are dependent on one another.

Which is why the fundamental law of capitalism must be: If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators. Which means a thriving middle class is the source of American prosperity, not a consequence of it. The middle class creates us rich people, not the other way around.

On June 19, 2013, Bloomberg published an article I wrote called 'The Capitalist's Case for a $15 Minimum Wage.' Forbes labeled it 'Nick Hanauer's near insane' proposal. And yet, just weeks after it was published, my friend David Rolf, a Service Employees International Union organizer, roused fast-food workers to go on strike around the country for a $15 living wage. Nearly a year later, the city of Seattle passed a $15 minimum wage. And just 350 days after my article was published, Seattle Mayor Ed Murray signed that ordinance into law. How could this happen, you ask?

It happened because we reminded the masses that they are the source of growth and prosperity, not us rich guys. We reminded them that when workers have more money, businesses have more customers - and need more employees. We reminded them that if businesses paid workers a living wage rather than poverty wages, taxpayers wouldn't have to make up the difference. And when we got done, 74 percent of likely Seattle voters in a recent poll agreed that a $15 minimum wage was a swell idea.

The standard response in the minimum-wage debate, made by Republicans and their business backers and plenty of Democrats as well, is that raising the minimum wage costs jobs. Businesses will have to lay off workers. This argument reflects the orthodox economics that most people had in college. If you took Econ 101, then you literally were taught that if wages go up, employment must go down. The law of supply and demand and all that. That's why you've got John Boehner and other Republicans in Congress insisting that if you price employment higher, you get less of it. Really?

The thing about us businesspeople is that we love our customers rich and our employees poor. Because here's an odd thing. During the past three decades, compensation for CEOs grew 127 times faster than it did for workers. Since 1950, the CEO-to-worker pay ratio has increased 1,000 percent, and that is not a typo. CEOs used to earn 30 times the median wage; now they rake in 500 times. Yet no company I know of has eliminated its senior managers, or outsourced them to China or automated their jobs. Instead, we now have more CEOs and senior executives than ever before. So, too, for financial services workers and technology workers. These folks earn multiples of the median wage, yet we somehow have more and more of them.

The thing about us businesspeople is that we love our customers rich and our employees poor. So for as long as there has been capitalism, capitalists have said the same thing about any effort to raise wages. We've had 75 years of complaints from big business - when the minimum wage was instituted, when women had to be paid equitable amounts, when child labor laws were created. Every time the capitalists said exactly the same thing in the same way: We're all going to go bankrupt. I'll have to close. I'll have to lay everyone off. It hasn't happened. In fact, the data show that when workers are better treated, business gets better. The naysayers are just wrong.

Most of you probably think that the $15 minimum wage in Seattle is an insane departure from rational policy that puts our economy at great risk. But in Seattle, our current minimum wage of $9.32 is already nearly 30 percent higher than the federal minimum wage. And has it ruined our economy yet? Well, trickle-downers, look at the data here: The two cities in the nation with the highest rate of job growth by small businesses are San Francisco and Seattle. Guess which cities have the highest minimum wage? San Francisco and Seattle. The fastest-growing big city in America? Seattle. Fifteen dollars isn't a risky untried policy for us. It's doubling down on the strategy that's already allowing our city to kick your city's ass.

It makes perfect sense if you think about it: If a worker earns $7.25 an hour, which is now the national minimum wage, what proportion of that person's income do you think ends up in the cash registers of local small businesses? Hardly any. That person is paying rent, ideally going out to get subsistence groceries at Safeway, and, if really lucky, has a bus pass. But she's not going out to eat at restaurants. Not browsing for new clothes. Not buying flowers on Mother's Day.

Is this issue more complicated than I'm making out? Of course. Are there many factors at play determining the dynamics of employment? Yup. But please, please stop insisting that if we pay low-wage workers more, unemployment will skyrocket and it will destroy the economy. It's utter nonsense. The most insidious thing about trickle-down economics isn't believing that if the rich get richer, it's good for the economy. It's believing that if the poor get richer, it's bad for the economy.

I know that virtually all of you feel that compelling our businesses to pay workers more is somehow unfair, or is too much government interference. Most of you think that we should just let good examples like Costco or Gap lead the way. Or let the market set the price. But here's the thing. When those who set bad examples, like the owners of Wal-Mart or McDonald's, pay their workers close to the minimum wage, what they're really saying is that they'd pay even less if it weren't illegal. (Thankfully both companies have recently said they would not oppose a hike in the minimum wage.) In any large group, some people absolutely will not do the right thing. That's why our economy can only be safe and effective if it is governed by the same kinds of rules as, say, the transportation system, with its speed limits and stop signs.

Wal-Mart is our nation's largest employer with some 1.4 million employees in the United States and more than $25 billion in pre-tax profit. So why are Wal-Mart employees the largest group of Medicaid recipients in many states? Wal-Mart could, say, pay each of its 1 million lowest-paid workers an extra $10,000 per year, raise them all out of poverty and enable them to, of all things, afford to shop at Wal-Mart. Not only would this also save us all the expense of the food stamps, Medicaid and rent assistance that they currently require, but Wal-Mart would still earn more than $15 billion pre-tax per year. Wal-Mart won't (and shouldn't) volunteer to pay its workers more than their competitors. In order for us to have an economy that works for everyone, we should compel all retailers to pay living wages - not just ask politely.

We rich people have been falsely persuaded by our schooling and the affirmation of society, and have convinced ourselves, that we are the main job creators. It's simply not true. There can never be enough super-rich Americans to power a great economy. I earn about 1,000 times the median American annually, but I don't buy thousands of times more stuff. My family purchased three cars over the past few years, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. I bought two pairs of the fancy wool pants I am wearing as I write, what my partner Mike calls my 'manager pants.' I guess I could have bought 1,000 pairs. But why would I? Instead, I sock my extra money away in savings, where it doesn't do the country much good.

So forget all that rhetoric about how America is great because of people like you and me and Steve Jobs. You know the truth even if you won't admit it: If any of us had been born in Somalia or the Congo, all we'd be is some guy standing barefoot next to a dirt road selling fruit. It's not that Somalia and Congo don't have good entrepreneurs. It's just that the best ones are selling their wares off crates by the side of the road because that's all their customers can afford.

So why not talk about a different kind of New Deal for the American people, one that could appeal to the right as well as left - to libertarians as well as liberals? First, I'd ask my Republican friends to get real about reducing the size of government. Yes, yes and yes, you guys are all correct: The federal government is too big in some ways. But no way can you cut government substantially, not the way things are now. Ronald Reagan and George W. Bush each had eight years to do it, and they failed miserably.

Republicans and Democrats in Congress can't shrink government with wishful thinking. The only way to slash government for real is to go back to basic economic principles: You have to reduce the demand for government. If people are getting $15 an hour or more, they don't need food stamps. They don't need rent assistance. They don't need you and me to pay for their medical care. If the consumer middle class is back, buying and shopping, then it stands to reason you won't need as large a welfare state. And at the same time, revenues from payroll and sales taxes would rise, reducing the deficit.

This is, in other words, an economic approach that can unite left and right. Perhaps that's one reason the right is beginning, inexorably, to wake up to this reality as well. Even Republicans as diverse as Mitt Romney and Rick Santorum recently came out in favor of raising the minimum wage, in defiance of the Republicans in Congress.

One thing we can agree on - I'm sure of this - is that the change isn't going to start in Washington. Thinking is stale, arguments even more so. On both sides.

But the way I see it, that's all right. Most major social movements have seen their earliest victories at the state and municipal levels. The fight over the eight-hour workday, which ended in Washington, D.C., in 1938, began in places like Illinois and Massachusetts in the late 1800s. The movement for social security began in California in the 1930s. Even the Affordable Health Care Act - Obamacare - would have been hard to imagine without Mitt Romney's model in Massachusetts to lead the way.

Sadly, no Republicans and few Democrats get this. President Obama doesn't seem to either, though his heart is in the right place. In his State of the Union speech this year, he mentioned the need for a higher minimum wage but failed to make the case that less inequality and a renewed middle class would promote faster economic growth. Instead, the arguments we hear from most Democrats are the same old social-justice claims. The only reason to help workers is because we feel sorry for them. These fairness arguments feed right into every stereotype of Obama and the Democrats as bleeding hearts. Republicans say growth. Democrats say fairness—and lose every time.

But just because the two parties in Washington haven't figured it out yet doesn't mean we rich folks can just keep going. The conversation is already changing, even if the billionaires aren't onto it. I know what you think: You think that Occupy Wall Street and all the other capitalism-is-the-problem protesters disappeared without a trace. But that's not true. Of course, it's hard to get people to sleep in a park in the cause of social justice. But the protests we had in the wake of the 2008 financial crisis really did help to change the debate in this country from death panels and debt ceilings to inequality.

It's just that so many of you plutocrats didn't get the message.

Dear 1%ers, many of our fellow citizens are starting to believe that capitalism itself is the problem. I disagree, and I'm sure you do too. Capitalism, when well managed, is the greatest social technology ever invented to create prosperity in human societies. But capitalism left unchecked tends toward concentration and collapse. It can be managed either to benefit the few in the near term or the many in the long term. The work of democracies is to bend it to the latter. That is why investments in the middle class work. And tax breaks for rich people like us don't. Balancing the power of workers and billionaires by raising the minimum wage isn't bad for capitalism. It's an indispensable tool smart capitalists use to make capitalism stable and sustainable. And no one has a bigger stake in that than zillionaires like us.

The oldest and most important conflict in human societies is the battle over the concentration of wealth and power. The folks like us at the top have always told those at the bottom that our respective positions are righteous and good for all. Historically, we called that divine right. Today we have trickle-down economics. What nonsense this is. Am I really such a superior person? Do I belong at the center of the moral as well as economic universe? Do you?

My family, the Hanauers, started in Germany selling feathers and pillows. They got chased out of Germany by Hitler and ended up in Seattle owning another pillow company. Three generations later, I benefited from that. Then I got as lucky as a person could possibly get in the Internet age by having a buddy in Seattle named Bezos. I look at the average Joe on the street, and I say, 'There but for the grace of Jeff go I.' Even the best of us, in the worst of circumstances, are barefoot, standing by a dirt road, selling fruit. We should never forget that, or forget that the United States of America and its middle class made us, rather than the other way around.

Or we could sit back, do nothing, enjoy our yachts. And wait for the pitchforks.

Digital Wallets

THIS week Apple announced two new pieces of hardware, the iPhone 6 and a 'smartwatch.' But as flashy as they are, neither item is as groundbreaking as a piece of software that will accompany them: a digital wallet, allowing users to eschew cash and credit cards for a quick swipe of their device at the register.

Apple’s digital wallet, if widely adopted, could usher in a new era of ease and convenience. But the really exciting part is the fast-emerging future that it points toward, in which virtual assets of all sorts - traditional currencies, but also Bitcoin, airline miles, cellphone minutes - are interchangeable, opening up enormous purchasing power for consumers and creating tough challenges for governments around the world.

Moving toward a digital wallet for dollars (or yen, or euros) is only a marginal step forward; throughout history, money's value has been largely virtual anyway - think of stocks, or personal lines of credit. The real change is how the digital wallet technology facilitates the parallel emergence of virtual purchasing power, like loyalty points.

We don’t typically think of these as currency, because virtual money has traditionally been locked down, in the sense that its use was strictly limited: If you earned points from Amazon, only you could use them, and you could exchange them for dollars only within the Amazon marketplace. Meanwhile, up to now, the only currencies you could use everywhere in an economy were state-issued currencies, like the dollar.

But that distinction is eroding: After all, the value of a currency lies in what you can buy with it, not in the fact that a government says it's worth something. So if I want to buy a widget, and the only thing I can use to buy it is Widgetcash, then I am willing to trade dollars or euros or anything else for Widgetcash. When I buy something with Widgetcash, it doesn't go through any bank.

That's why a digital wallet, loaded with your dollars, credit and loyalty points, is such a revolutionary technology - it makes those transfers and transactions seamless and safe.

Imagine you want to buy a shirt at Target. Your digital wallet can pay for it with dollars, your Target points or any other form of purchasing power that Target accepts. Wave your phone at the cash register, and the shirt is yours.

That's the sort of thing that the current generation of digital wallets already promises; the only obstacle is adoption by retailers. But that won't be an obstacle for long. Frictionless exchange is a killer app. Some companies might lose value in their loyalty programs, but others will find enormous value in issuing their own currencies for advertising or data-tracking purposes, or even just because the creation of a successful virtual currency or digital wallet lets companies make money by making money. That's certainly Apple's bet.

The revolution is what comes next: an exchange that connects and trades these different stores of value to find the most cost-efficient one to use, both within your wallet and between wallet users, worldwide. Let's say you want to buy an audiobook from Best Buy. It costs $16, or 1,000 My Best Buy points, or M.B.B.P.s. Your wallet contains several hundred dollars and 200 Best Buy points. The wallet software automatically determines that, at the current exchange rate between M.B.B.P.s and dollars, it is better to buy using the points.

But then let's say you only have 50 M.B.B.P.s. The wallet system searches its clients and finds someone - call her Hannah - with enough M.B.B.P.s for the transaction. It buys the audiobook with her points and sends it to you, and sends Hannah dollars from your account.

Following Bitcoin's protocol, the wallet software broadcasts these transactions to the network, and every wallet in the world updates the M.B.B.P.-to-dollar exchange rate.

The idea is that you can buy anything, with anything. The wallet will find the best deal and execute it. In so doing, it will ignore the historical and cultural differences between dollars, points, coins and virtual property. It's all bits anyway.

This sort of digital wallet raises difficult problems for regulators, who rely on institutional intermediaries like banks as the point for monitoring transactions. But a digital wallet can be a phone app; just like the cash in your pocket, it doesn't require accounts with any intermediary. A wallet app can be written by anyone, downloaded by anyone and secured and maintained by everyone. In this huge river of money, there is no narrow channel from which the state can divert flow into its own fields.

Consider the tax implications. If you get caught cheating on your taxes and flee the country, the government could compel your bank to freeze your assets and cough up the money. But what if there's no bank?

One concern that doesn't apply is transparency. Digital wallets don't hide trades or encourage criminal transactions. Using Bitcoin is much less secret than using hard cash. The government, and anybody else, can easily see the trades passing through our wallets, just as every trade in Bitcoin is visible at blockchain.info. Even if you try to hide who you are, network or traffic analysis can often de-anonymize you. The critical point is that, with a digital wallet, a government or bank can see the trades, but it will be harder to compel or block them.

As exchange becomes less costly to perform, it becomes more costly to regulate. That means different things depending on your politics. You might celebrate the freedom the technology could bring to the 2.5 billion people in the world without adequate access to financial services, or you might worry about abuse by criminals. One thing that will not work is pretending that these technologies - and their revolutionary implications - don't exist.

Mind Over Money

There are not many fund managers who believe that the answers to successful investing are to be found in Neanderthal man’s reaction to a sabre-toothed tiger. Thomas Howard is not your usual money manager.

An academic for most of his career, he became a fund manager only when he turned 54, an age when most of us are beginning to think of retiring. Yet since its launch 12 years ago, his Athena Pure Valuation fund has performed extraordinarily well.

Interestingly, he has thrown away the foundations of financial theory that were the bible of his early university years. He has jettisoned the gold standards of “modern portfolio theory” and the “efficient markets hypothesis”. He manages money on the basis of what he calls “behavioural portfolio management”. He realises that “the emotions that the stock market engenders are the same as when a sabre-toothed tiger showed up at the cave door tens of thousands of years ago”. By betting against that evolutionary bias, Mr Howard aims to profit.

Over the past few decades, a lot of work has been done by psychologists on how human beings make decisions. They have discovered that we are remarkably clouded by emotion, far from the “rational” beings that financial theory assumes. Daniel Kahneman, the psychologist, won a Nobel prize in economics for his work on how human beings make decisions involving risk (irrationally).

In his book Thinking, Fast and Slow, he points out how differently psychologists and economists view human beings: “To a psychologist, it is self-evident that people are neither fully rational nor completely selfish and that their tastes are anything but stable. Our two disciplines seem to be studying different species.”

It is this difference that Mr Howard seeks to exploit. He is betting that other investors make consistent mistakes because their decisions are clouded by emotion. He aims to become the purely rational investor by “ruthlessly driving emotion” out of his investment choices. In order to do that, he deliberately doesn’t know the names of the shares he owns, doesn’t know what they do and he never looks at news feeds. An extraordinary admission from a “normal” fund manager.

How does he invest? He screens 7,000 United States-listed companies for a few criteria. He is looking for companies that pay high dividends and are heavily indebted. Then he values the companies based on their sales and expected future profits.

The accepted narrative against buying high-dividend stocks is that they have nothing else to do with their cash and so are mature or declining businesses. The usual narrative against buying highly indebted companies is that they are too risky. Mr Howard aims to profit from the fact that these fears overly hurt share prices. Companies that pay generous dividends and are indebted are overlooked by investors and so their share prices are relatively cheap. The majority of investors mis-price the risks.

Mr Kahneman explains why: “The brains of humans and other animals contain a mechanism that is designed to give priority to bad news. By shaving a few hundredths of a second from the time needed to detect a predator, this circuit improves the animal’s odds of living long enough to reproduce.” It is bedded deep into our evolutionary history to fear and it is the mispricing of fear in the stock market that Mr Howard aims to exploit by buying high-dividend-paying indebted companies.

Another problem with investors is an overreliance on narratives. Nassim Taleb states in his book The Black Swan: The Impact of the Highly Improbable: “We like stories, we like to summarise and we like to simplify.” He calls it the “narrative fallacy” that is “our predilection for compact stories over raw truth”. As humans, we invent stories to make sense of and explain the complex and ever changing world we live in. However, although the narratives are compelling, they are not good explainers of events.

Again, this is a hangover from our past, where the ability to communicate and tell stories secured the success of our species. Telling your fellow hunter gatherers around a fire at night how to spear a sabre-toothed tiger and where to find the best berries ensured survival. The human desire to listen to a story is hardwired into our subconscious. It was the key skill that enabled our ancestors to flourish in a hostile world.

Yet, as Mr Howard states: “The stock market is almost incomprehensible and impossible to simplify. It is beyond our evolutionary abilities. Narratives may work in many places, but the stock market is such a complex system, narrative no longer works.”

The financial world has moved faster than our evolutionary ability to understand it, but most investors buy stocks on the basis of a story, a simplified narrative that a broker sells them. It is from that Mr Howard aims to profit; he buys and sells stocks purely based on the company’s financials. He avoids Mr Taleb’s “narrative fallacy”.

There is an old Wall Street adage that the stock market is driven by fear and greed. Now we know why. It’s because of our ancestor’s reaction to a sabre-toothed tiger.

The Alpha Rich of London

I am what you could call a BWAG (a banker’s wife and girlfriend), who is privileged enough to live in a five-storey, white stuccoed, terraced Victorian house in “Alpha Territory”, the land of the rich and super-rich in central London.

Our house has a nanny flat; a fridge called the Morgue (it is so big you could hide three bodies in it); a super-king-size bed, which could accommodate Brangelina’s family; a media/playroom for the kids with enough toys to start a Toys R Us; a mini gym with an elliptical cross-trainer and a stationary bike with a flat-screen attached to it; a garden with olive trees, figs and strawberries.

I have a nanny/housekeeper, who cleans, cooks and looks after my darling daughters, whom I send to a private school, at a cost of £18,000 a year per child.

Our holidays include a yearly jaunt to Barbados, a ski trip to the Swiss Alps and school holidays to our second home in the Med. We have memberships to just about everything you could think of: the Tate for private art views; the zoo, so we can skip the queues; a private club; an exclusive concierge service that can source tickets to anything that begins with the word “private”.

School fees, a full-time nanny/housekeeper, some designer clothes and handbags, a few Michelin-star dinners and one or two five-star holidays add up to at least £100,000 a year – and that’s not counting the mortgage payments, savings or the higher-rate taxes. And yet, BWAGs are quickly disappearing from London and being replaced by the super-BWAGS, the billionaire wives and girlfriends, most famously led by Dasha Zhukova, Roman Abramovich’s girlfriend. I am a dying breed.

Over the past ten years, while many bankers have stopped receiving their inflated salaries and bonuses, or have lost their jobs and moved out of London, the international super-rich have taken over prime areas of the capital, pushing not just the middle class out of central London, but the merely rich, too.

I am lucky. My banker husband has slogged on the trading floor of a gleaming American bank for 20 years, often for 18 hours a day. He has survived the job culls, the credit crunch, banker bashing and the nervous breakdowns around him. He invested in London real estate at the right time, during the property slump of 2009.

He has survived the worst of the recession. But many bankers did not, and banking is not what it used to be – a place to make real money. Even bankers no longer want to be bankers.

Not that you should feel sorry for us – because you shouldn’t – but banker bashing, Britain’s favourite pastime, is now irrelevant. It is the super-rich that are transforming London and creating a supersociety.

London has become the billionaire capital of the world, with 72 billionaires, ahead of Moscow (48), New York (43) and San Francisco (42). Such is the interest in this subset of society and its impact on London that sociologists at Goldsmiths, University of London, are studying what they call the Alpha Territory – elite enclaves in central London that are inhabited by the super-rich.

I live on the fringes of Alpha Territory. My children mingle with super-rich children at school, and we frequent some of the same private clubs. I am, by definition, an HNWI (High Net Worth Individual) with assets of $1 million (£625,000) or more (excluding primary residence). To all intents and purposes, I am rich. But I am a super-rich man’s pauper and they do not regard me as one of them. There is an entire social stratification of the rich, and I am at the bottom of the ladder. Above me are Ultra High Net Worth Individuals (UHNWIs), who have a net worth of at least $30 million. Then come the centimillionaires – those with $100 million – which is considered really rich, even by really rich people’s standards. At the top of the pyramid are the billionaires.

And the centimillionaires and billionaires keep coming to London for political, economic and social safety. They are attracted to the city because it is one of the few places in the world where privacy is valued so highly, and where one can move from private members’ club to private car to private jet without actually having to walk on a public pavement. Even New York does not have these levels of self-segregation. In London, there are private members’ clubs, private schools, private gardens, children’s private members’ clubs, access to private jets.

I belong to a members’ club. Some of my friends belong to more than one. An Italian friend, who left London ten years ago, still has membership at a club, just in case he is passing through. Another, who lives in New York and has never lived in London, has a club membership so that he can make business deals when he stops by (in his private jet).

For about £3,000 (£1,500 joining fee, plus £1,500 annual membership), Mayfair clubs such as the Arts Club and 5 Hertford Street – where I once overhead someone say, “In London, if you have £10 million, you’re poor” – allow the super-rich to dine and socialise with like-minded individuals. The Arts Club, which has welcomed everyone from Gwyneth Paltrow to Prince Harry and hosted Victoria Beckham’s 40th birthday party, now holds private concerts with the likes of will.i.am performing.

Culturally, London offers the super-rich experiences that go beyond the ordinary. Who wouldn’t want to enter this exclusive world, where I have been, on occasion, a spectator? For a few hundred pounds a concierge service can get you tickets for an exclusive Q&A with the director and actors at the premiere of an Oscar-nominated film. Or private views with artists such as Tracey Emin, Damien Hirst or Jeff Koons. Or a private Pharrell Williams concert at the Serpentine Summer Party, dancing under the stars, as I did, with Cara Delevingne and Keira Knightley. A ticket to the Serpentine Summer Party costs £350, so that’s £700 for a couple, not counting what you need to pay a concierge service to get these prized assets.

Exclusive concierge services such as Quintessentially Lifestyle and Sincura can source tickets for the most exclusive events, including those for the Cannes Film Festival for about £3,000 (for a screening of one of the Palme d’Or contenders), or London Fashion Week for anything from £500 to £3,000, depending on the designer and how near the front you sit.

Membership of these concierge services ranges from a few hundred pounds a year for basic services to more than £25,000. It’s like having a personal assistant who has insider knowledge of and access to all the hot tables and parties around town. London also caters for super-rich hobbies, such as collecting fine art and wine, or playing polo, which means owning four polo ponies, each costing £20,000. This is creating a sub-society that only the super-rich inhabit.

I don’t live in one of the prime central London areas of SW1X, SW3, SW7 or W11, but in one of the less desirable postcodes such as SW10 (the “lesser” postcode in Chelsea), SW11 (Battersea, the wannabe Chelsea), W10 (North Kensington, not quite Notting Hill), or the dodgier parts of W2 (Westminster, which has super-rich, rich and pseudo-rich all mixed together), where a house will cost half the price of a comparable one in a posher postcode.

The international super-rich, whose favourite topic of conversation is property, collect houses like a Monopoly game, buying the most expensive houses possible in the most expensive postcodes. In this stratosphere of wealth, the more expensive, the better. The super-rich have flocked to areas such as Belgravia and Knightsbridge, which increases the price of property. But it also pushes up prices in neighbouring areas such as Chelsea and Kensington, and in the neighbourhoods next to them.

It is absurd for me to see my friends, in families with two incomes from big City banks of £500,000, unable to buy a property in central London. These are people who have lived in the Alpha Territory for the past ten years and have moved away to live close to a good state school, because they can no longer afford the fees at private schools.

One friend, a director at a City bank, is making a choice on whether to have a second child, knowing he cannot afford a bigger house or school fees for two children.

The merely rich will buy a three or four-bedroom house for a few million, spend another £500,000 on renovation, including a bespoke £60,000 kitchen with a £10,000 granite worktop, a wireless music system and a media room that doubles as a playroom. For those with a heftier bank balance, something will be created in the house to give it that “wow” factor: a zen garden with a waterfall, a subterranean gym, a climbing wall or a wall-to-wall aquarium.

But the super-rich are different. The properties they are buying are not really what we would consider houses. They are micro cities, with house managers who act like CEOs and run them like mini companies. They are built to cater to their owners’ every whim. Like to exercise and swim lengths in the morning? Let’s build a basement swimming pool with a gym next to it. You’re a film aficionado? Let’s build a 12-seater cinema room. For children, playrooms are built with slides, zip wires and climbing walls.

Doctors, hairdressers, masseuses and reiki masters are on speed-dial. These houses are so big and so well appointed that there is eventually never a need to leave them.

I was once invited to a superhouse, and it was a rather overwhelming affair. I was welcomed by the butler, escorted to one of the antechambers by a housekeeper and told to wait. I saw cleaners and nannies milling around, a chef cooking away in the back.

The staff seemed like a highly organised colony, and included two chauffeurs (his and hers), six cleaners, one house manager (the CEO), one personal assistant (the COO), a chef (trained by Gordon Ramsay), two nannies (one per child), a governess (what does a governess actually do?) – and that’s just those who lived in. The live-out staff extended to builders (they are constantly upgrading and renovating), a gardener, a landscape architect, an interior designer, a stylist, swimming-pool maintenance, a florist, an art consultant and the specialist architect who masterminded the subterranean renovation. Then there were the financial advisers, who managed this wealth. Being this rich takes a lot of effort and manpower. At least this is one positive economic contribution the super-rich are making: the creation of highly specialised service jobs for UHNWIs.

On the other hand, I was recently in the process of hiring a nanny and discovered that the Russians are distorting the nanny-market economy. Experienced nannies are in great demand in these parts of London. You would expect to pay from £350 to £450 a week for a live-in nanny.

The Russians and some other ultra-wealthy families are offering double the going rate – £800 a week. And there are families who decide to buy for their nannies Burberry raincoats, Saint Laurent sunglasses, Tod’s shoes and Hermès bags, which 1) makes me look like a miser; 2) will bankrupt me if I follow their lead and try to retain these supernannies; 3) has made people mistake me for the nanny and vice versa on a number of occasions, since I do not wear Tod’s shoes or Saint Laurent sunglasses or carry an Hermès bag on the school run.

The Russians demand seven-day weeks and 24-hour availability, so if a nanny wants that bag, she’ll have to work for it. Then there’s the issue of parenting. We are fortunate enough to send our children to schools and nurseries that attract celebrities and the super-rich. They are deemed some of the best in the country, and hence the world, because there seems to be a general opinion that a British early education is the best.

This creates a self-segregated group of HNWI and UHNWI parents. There is a selection process to enter these schools and nurseries, which involves who you know and whether you can afford the £18,000-a-year price tag.

After school fees, there are children’s private members’ club to think about. I know children who spend their weekends being chauffeur-driven from their private garden to Purple Dragon in Chelsea, their private children’s members’ club. It has everything a child could dream of: a soft-play area, cooking classes, painting classes, a swimming pool and a recording studio.

An ex-Purple Dragon mother told me that she had spent more than £100,000 there (and finally cancelled her membership). One wonders how this prepares children for real life, or whether they will ever need to encounter reality.

We have also been invited to birthday superparties at the Dorchester, Berkeley and Mandarin Oriental hotel ballrooms, which have been transformed into mini Disneylands complete with merry-go-rounds, rides, magicians, entertainers, popcorn machines, ice-cream machines, face painters, balloon sculptors and bouncy castles. I struggle to explain to my children why they will never have a party like that, and question whether it is morally right for me to expose them to this amount of obscene wealth. To these people it is small beer, but to us and to our kids, who do not have inheritances to fall back on and who will need to work to earn a living, where do we draw the line?

We want our children to attend the best schools, but how can we protect them from a fantasy world they do not really belong to?

Similarly, weddings are occasions when the super-rich try to outdo each other. People I know, the merely rich, will organise “destination weddings” in the south of France in places such as Le Château de la Chèvre d’Or and Villa Rothschild Ephrussi, or at beautiful monasteries in Portofino or Ravello in Italy.

The super-rich will do the same, but fly their guests there by private jet and, instead of hiring the local band, will book George Michael and have a firework display bigger than Sydney’s new year pyrotechnics.

The richer the rich get, the more rich they want to be and, almost like an addiction, the more they want to spend to feel better.

First comes the house, then the cars, then the private jet and finally the superyacht. The super-rich compete with each other for the biggest yacht in the marina and their boats are moored in Monaco, St Tropez or St Barts for ogling bystanders to dream of becoming not only the “haves” but the “have yachts”.

This summer we splurged on renting a yacht for a few thousand pounds a day to go to Formentera and have lunch at Juan y Andrea. We felt a mixture of guilt and excitement to be splashing out on such luxury – until we ran into an acquaintance, who arrived on a 30m yacht that cost 10 times more than ours to rent, having flown down to Ibiza in his private jet.

With private jets being as easy to access as calling an Addison Lee cab, plane travel has enabled the super-rich to be citizens of the world, living a few months a year in one country and a few months in another. One billionaire I met said he spends more hours on his private jet than in his house.

It’s another reason why London is one of the best locations for the super-rich to base themselves. Being no more than 12 hours from most major cities and financial centres – New York, Paris, Frankfurt, Tokyo, Moscow, Hong Kong – it is easy to do business anywhere in the world.

It is also only a few hours away from the favourite super-rich holiday destinations: Monaco and Cannes for the Arabs, the Byblos in St Tropez and Courchevel for the Russians, the Hamptons and the Caribbean for the Americans, and the Maldives for the Asians, Chinese, Russians, British, French and Indians. A £10,000 holiday may sound like a lot to you or me, but for the super-rich, you can multiply that figure by 10.

Before we had children, we once went on what we thought was a very expensive holiday to Reethi Rah, a tiny island in the Maldives and a favourite of the super-rich. We treated ourselves to a private beach villa and business-class flights, thinking that overseas travel with children would soon be out of the question.

Even in the middle of the Indian Ocean, we ran into someone we knew, who was staying in the presidential villa with a private swimming pool while his children were in their own villa like the one we were staying in. By our calculation, including flying five people business class, they had spent £100,000 for two weeks of bliss.

For those who want to know how to snag a millionaire/billionaire, most of the BWAGs I know are intelligent, well-educated women from well-off families. Many BWAGs have their own careers and salaries that match their husbands’ (until they give them up to raise a family). Many met their husbands through work or at university, or from socialising in clubs or bars that cater to the wealthy.

I was educated at an Ivy League university in the States, where I met 18-year-old girls who openly admitted to being there to meet a husband. (My husband jokes that I am the overeducated, clever one, whereas he is the lucky one who is paid more than he really deserves.) There are women who lead the way in banking, private equity or hedge funds and have equally successful husbands, but, generally speaking, it is the men who are making the fortunes.

There are also women who have their own family fortunes looking for an appropriate husband, usually good-looking and charming, intelligent enough to bring home to Mummy and Daddy.

The dating game for the super-rich has its own rules. If you are a woman looking for a super-rich man, it helps to a) have supermodel looks; b) be highly intelligent; c) come from a very rich family yourself; d) all of the above, or, if you have none of the above; e) work for them. These include nannies, personal assistants or any of the service providers mentioned earlier. I have met an overnight billionairess who went from being a billionaire’s personal assistant to being a billionaire’s wife soon after his divorce came through. Call it luck or good planning.

After love comes marriage – and the prenup – and then divorce. Quite a few super-rich I know are on their second marriages. For the merely rich, divorce usually comes in the form of alpha men working too hard (workaholics), ignoring their wives and families (egoholics), or becoming too alpha at home as well (controlaholics), or wives becoming too demanding, needy or “difficult”.

Affairs happen, on both sides, when the men are working and travelling constantly and the women find themselves in the arms of a consoling other. One woman I know, who married into super-rich society thanks to her good looks, knew that affairs when he was away would be part of the contract. “At least I know he will be coming home to me and sleeping in my bed every night when he’s here,” she told me.

To some, marriage has become a cynical transaction. When we bought our second home and I started spending more time abroad, a friend warned me against it. “Don’t stay away from him too long. He’s only a man, after all.” As the French saying goes, loin des yeux, loin du coeur (far from the eyes, far from the heart). Of course, there are very happy, stable and genuinely solid marriages in the mix, mostly those who understand the limitations of wealth and power or those who have an equal marriage. I hope I fall into this latter category.

I arrived in London 12 years ago, wide-eyed and innocent. I was 26 years old and finishing a master’s degree. I lived near the King’s Road in Chelsea, where I watched financiers, who thought they were the kings of the world, driving their Ferraris and Porsches down Sloane Street.

This was a time when private equity and hedge funds were making their millions, when work trips involved reserving entire floors of five-star hotels, private jets, helicopters and £10,000 bar bills. Then Lehman Brothers fell and the credit crunch happened, leaving many bankers broke and in disrepute, funds shutting down and only the super-rich left standing when the dust settled.

I still feel like an onlooker to this new breed of super-rich. There is an inevitability that more and more of them will come to London for its culture, its education, its economic stability.

This concentration of wealth will affect everyone who lives in London, from the man pouring your Starbucks to the butler opening the door in the Kensington Palace Gardens mansion, to the banker who can no longer afford private schools.

There will be an increase in social inequality, but with it will come more jobs in London. Perhaps instead of a £2 million mansion tax (which is a misnomer; the price of an average London home is now £500,000 and £2 million no longer buys you a mansion), the council tax should be revisited and we should introduce a UHNWI supertax on purchases over £10 million (ie, planes, superhouses, art and boats), or a philanthropic tax to encourage the super-rich to donate to worthy causes.

I will leave these reflections to the economists and the sociologists who are researching the Alpha Territory. In the meantime, I have to figure out how to answer my daughter when she asks why we don’t have a pool in our basement and how to keep my nanny from leaving me for an Hermès handbag.

A BWAG’s guide to London’s hierarchy of wealth

Merely rich

A four-bedroom house in SW10; a full-time, live-in nanny; private schools for their children; a few nice holidays to Italy or Ibiza in the summer; possibly a second home in the Mediterranean; an Hermès Birkin bag; a black Range Rover.

Super-rich

A 10-bedroom house in SW1X, SW3 or SW7 (or some areas of Holland Park or Notting Hill); a lift and six live-in staff, including nannies, housekeepers and a chef; private jet and chauffeur-driven Mercedes; 10 Hermès Birkin bags in different colours; a property portfolio in at least two continents.

Billionaire rich

An ostentatious mansion the size of the Dorchester hotel, in Kensington Palace Gardens or around Regent’s Park; a micro city of employees; a private island; a superyacht with its own Wikipedia page; a football team; a £100 million divorce; a super-BWAG, preferably a supermodel.

Bitcoins

Unlike other currencies, Bitcoin is underwritten not by a government, but by a clever cryptographic scheme.

For now, little can be bought with bitcoins, and the new currency is still a long way from competing with the dollar. But this explainer lays out what Bitcoin is, why it matters, and what needs to happen for it to succeed.

Where does Bitcoin come from?

In 2008, a programmer known as Satoshi Nakamoto - a name believed to be an alias - posted a paper outlining Bitcoin’s design to a cryptography e-mail list. Then, in early 2009, he (or she) released software that can be used to exchange bitcoins using the scheme. That software is now maintained by a volunteer open-source community coordinated by four core developers.

“Satoshi’s a bit of a mysterious figure,” says Jeff Garzik, a member of that core team and founder of Bitcoin Watch, which tracks the Bitcoin economy. “I and the other core developers have occasionally corresponded with him by e-mail, but it’s always a crapshoot as to whether he responds,” says Garzik. “That and the forum are the entirety of anyone’s experience with him.”

How does Bitcoin work?

Nakamoto wanted people to be able to exchange money electronically securely without the need for a third party, such as a bank or a company like PayPal. He based Bitcoin on cryptographic techniques that allow you to be sure the money you receive is genuine, even if you don’t trust the sender.

The Basics

Once you download and run the Bitcoin client software, it connects over the Internet to the decentralized network of all Bitcoin users and also generates a pair of unique, mathematically linked keys, which you’ll need to exchange bitcoins with any other client. One key is private and kept hidden on your computer. The other is public and a version of it dubbed a Bitcoin address is given to other people so they can send you bitcoins. Crucially, it is practically impossible - even with the most powerful supercomputer - to work out someone’s private key from their public key. This prevents anyone from impersonating you. Your public and private keys are stored in a file that can be transferred to another computer, for example if you upgrade.

A Bitcoin address looks something like this: 15VjRaDX9zpbA8LVnbrCAFzrVzN7ixHNsC. Stores that accept bitcoins—for example, this one, selling alpaca socks—provide you with their address so you can pay for goods.

Transferring Bitcoins

When you perform a transaction, your Bitcoin software performs a mathematical operation to combine the other party’s public key and your own private key with the amount of bitcoins that you want to transfer. The result of that operation is then sent out across the distributed Bitcoin network so the transaction can be verified by Bitcoin software clients not involved in the transfer.

Those clients make two checks on a transaction. One uses the public key to confirm that the true owner of the pair sent the money, by exploiting the mathematical relationship between a person’s public and private keys; the second refers to a public transaction log stored on the computer of every Bitcoin user to confirm that the person has the bitcoins to spend.

When a client verifies a transaction, it forwards the details to others in the network to check for themselves. In this way a transaction quickly reaches and is verified by every Bitcoin client that is online. Some of those clients - “miners” - also try to add the new transfer to the public transaction log, by racing to solve a cryptographic puzzle. Once one of them wins the updated log is passed throughout the Bitcoin network. When your software receives the updated log it knows your payment was successful.

Security

The nature of the mathematics ensures that it is computationally easy to verify a transaction but practically impossible to generate fake transactions and spend bitcoins you don’t own. The existence of a public log of all transactions also provides a deterrent to money laundering, says Garzik. “You’re looking at a global public transaction register,” he says. “You can trace the history of every single Bitcoin through that log, from its creation through every transaction.”

How can you obtain bitcoins?

Exchanges like Mt. Gox provide a place for people to trade bitcoins for other types of currency. Some enthusiasts have also started doing work, such as designing websites, in exchange for bitcoins. This jobs board advertises contract work paying in bitcoins.

But bitcoins also need to be generated in the first place. Bitcoins are “mined” when you set your Bitcoin client to a mode that has it compete to update the public log of transactions. All the clients set to this mode race to solve a cryptographic puzzle by completing the next “block” of the shared transaction log. Winning the race to complete the next block wins you a 50-Bitcoin prize. This feature exists as a way to distribute bitcoins in the currency’s early years. Eventually, new coins will not be issued this way; instead, mining will be rewarded with a small fee taken from some of the value of a verified transaction.

Mining is very computationally intensive, to the point that any computer without a powerful graphics card is unlikely to mine any bitcoins in less than a few years.

Where to spend your bitcoins

There aren’t a lot of places right now. Some Bitcoin enthusiasts with their own businesses have made it possible to swap bitcoins for tea, books, or Web design (see a comprehensive list here). But no major retailers accept the new currency yet.

If the Federal Reserve controls the dollar, who controls the Bitcoin economy?

No one. The economics of the currency are fixed into the underlying protocol developed by Nakamoto.

Nakamoto’s rules specify that the amount of bitcoins in circulation will grow at an ever-decreasing rate toward a maximum of 21 million. Currently there are just over 6 million; in 2030, there will be over 20 million bitcoins.

Nakamoto’s scheme includes one loophole, however: if more than half of the Bitcoin network’s computing power comes under the control of one entity, then the rules can change. This would prevent, for example, a criminal cartel faking a transaction log in its own favor to dupe the rest of the community.

It is unlikely that anyone will ever obtain this kind of control. “The combined power of the network is currently equal to one of the most powerful supercomputers in the world,” says Garzik. “Satoshi’s rules are probably set in stone.”

Isn’t a fixed supply of money dangerous?

It’s certainly different. “Elaborate controls to make sure that currency is not produced in greater numbers is not something any other currency, like the dollar or the euro, has,” says Russ Roberts, professor of economics at George Mason University. The consequence will likely be slow and steady deflation, as the growth in circulating bitcoins declines and their value rises.

“That is considered very destructive in today’s economies, mostly because when it occurs, it is unexpected,” says Roberts. But he thinks that won’t apply in an economy where deflation is expected. “In a Bitcoin world, everyone would anticipate that, and they know what they got paid would buy more then than it would now.”

Does Bitcoin threaten the dollar or other currencies?

That’s unlikely. “It might have a niche as a way to pay for certain technical services,” says Roberts, adding that even limited success could allow Bitcoin to change the fate of more established currencies. “Competition is good, even between currencies—perhaps the example of Bitcoin could influence the behavior of the Federal Reserve.”

Central banks the world over have freely increased the money supply of their currencies in response to the global downturn. Roberts suggests that Bitcoin could set a successful, if smaller scale, example of how economies that forbid such intervention can also succeed.

Variable Electricity Tariffs

Getting up early just to boil the kettle or switch on the washing machine might seem strange behaviour but such disruptions to daily routines will become the norm under plans to vary the price of electricity by the hour.

Families paid up to 17 times more for each unit of electricity depending on when they switched on, in the first big trial of “time-of-use” pricing. The electricity industry is planning to introduce the new way of charging customers to cope with the peaks and troughs in output from wind farms, which form a rapidly increasing share of Britain’s generating capacity.

Electricity demand tends to peak on cold, windless days when wind turbines contribute very little to the grid. On Monday, between 5pm and 5.30pm, demand was the highest this winter but wind farm output was at its lowest, meeting only 1 per cent of demand.

The new pricing system, also known as “wind-twinning tariffs”, would offer people cheap rates during windy periods to encourage them to use washing machines, tumble dryers and other power-hungry devices.

More than 1,100 homes in London took part in the year-long trial in which they paid three rates for electricity: 4p, 12p and 67p. They were sent text messages a day in advance informing them of changes to the high or low rate, allowing them to plan when to use electricity.

One man told researchers from Imperial College London, who conducted the research for UK Power Networks and Ofgem, that he got out the ironing board on Saturday morning while electricity was at the cheapest rate and raced to finish his shirts because the price rose at 11am. Another man set his alarm early to put the kettle on to beat the 67p rate, which on some days began at 5am.

People were generally willing to change the time they used washing machines and dishwashers. More than a third of people with electric ovens also changed the time they cooked meals.

The average household saved £21 a year, and one “super flexible” family saved £148. However, a quarter of households made no saving and some would have paid up to £40 more — although they had been guaranteed the trial would not cost them money.

Four out of five people who tested the tariffs said they should be “standard for everyone”. A similar proportion said the tariffs motivated them to carry out domestic chores.

Guaranteed Basic Income

It was Thomas More, in his Utopia of 1516, who first suggested the idea of a basic income, paid as a right of citizenship to all. In the five hundred years that have followed, a citizen’s income has been endorsed by Thomas Paine, John Stuart Mill, Martin Luther King, Friedrich Hayek, Milton Friedman and Steven Webb, a minister in the Department for Work and Pensions.

To that distinguished list we can now add Natalie Bennett, leader of the Green party, whose case was dismembered by Andrew Neil last weekend in an interview that was compelling viewing if you could see anything with your head in your hands. The interview has been written up as if Ms Bennett buckled under the weight of a preposterous policy. The verdict, unfortunately, has to be harsher. It was lamentable of her not to make a better fist of a good argument.

The best defence is to list a series of problems that bedevil British politics and show how a citizen’s income solves them all. It would, once and for all, make work pay. Under the citizen’s income, no money is clawed back when a person takes a job, so work always makes financial sense. So does prudent saving. Hence the criticism that a citizen’s income will reduce the incentive to work, on which Mr Neil skewered Ms Bennett, is wrong. A citizen’s income abolishes the benefit trap, which is, always and inevitably, the problem of meanstested benefits.

The next problem it solves is that it makes cheating all but impossible. Welfare fraud is committed by people who exploit the means test by lying about their circumstances. When the means test is replaced by a flat-rate benefit, the opportunity for fraud disappears. So do errors in claims because the system is made so simple. To the extent that immigrants taking benefits is a problem (which is hardly at all), that would also be impossible under a scheme that, as the name suggests, grants an income only to UK citizens. The saving from avoided fraud of all kinds would be, on a conservative estimate, £3.5 billion.

If you are of a left-wing cast of mind, you can devise a citizen’s income to increase the bargaining power of low-paid workers. If you are of a right-wing disposition, you could, if you were so minded, argue that there was no further need for a minimum wage or a working time directive. Income would be protected directly, rather than via the proxy of labour market regulation. Those of any political complexion might argue that a citizen’s income rightly places a value on child care and looking after elderly relatives. It rewards public-spirited voluntary work. It brings security to the poor and enables the less well-off to take entrepreneurial risks or go back to college without forfeiting income.

There is, of course, one major objection to be met. When Mr Neil asked Ms Bennett about the cost, her argument unravelled to its barest threads. Yet the cost of a citizen’s income is the length of a piece of string. It depends on the rate set and the benefits that are offset. You would never have known it from Ms Bennett’s account but the citizen’s income is, in large part, a replacement for a means-tested welfare state, not a supplement to it. The Citizen’s Income Trust has calculated that if we gave £56 a week to people aged under 24, £71 a week to those between 25 and 65 and £142 to the over-65s, the total cost would be £276 billion. Means-tested benefits would be abolished to the value of £272 billion. Add in your saving on fraud and the reduced costs of administration and you’re in the black.

There is then the question of work incentives. Might granting everyone a guaranteed income encourage too many people to stay in bed? The state of Alaska has, since 1982, given every citizen a dividend from its oil reserves with no obvious impact on propensity to work, but it’s a serious objection.

To which the economist Richard Frank, who is rather oddly worried that Californians will spend too long playing nude volleyball, offers one answer. The income should be contingent on people making a contribution either by paid work or some public endeavour.

There is not really any need, though, to give up the pure principle of the citizen’s income. After all, £71 a week is hardly a king’s ransom. Are we so sure that poor people want no more than their basic needs? Rich people work way beyond the point that basic need is met. Why would the same logic not apply to the less well-off? This reminds me of Malthus’s disreputable argument against birth control. If the poor could have sex without the fear of pregnancy, then teenage boys and girls would spend all their working time “rolling in the hay”. Bear in mind too, that the best case for the citizen’s income is that it steeply increases the financial incentive for the poor to work.

The best case against the citizen’s income is not the employment effect. It’s that we ought to give money to those who need it rather than those who don’t. But that means accepting that you will never, never, fix the problem of the benefit trap. It means accepting that enterprising fraudsters will be able to bend the rules. It means accepting that you will be stuck in a reductio ad absurdum on immigration. This is, in fact, what More was saying in Utopia. He was not arguing directly for an ideal state. He was saying that if you believe in the republic then you must give up your belief in private property. If you believe this, then you cannot also believe that.

Our New Monetary System

Change rarely happens fast. It tends to creep up unnoticed, stealing its way into the world. Like evolution, it often becomes evident only long after the transformation. Even setting such a low bar, though, economic change since the financial crisis has made plate tectonics look hurried.

Since the foundations of orthodox economic thinking were blown apart in 2008, the tired old battle lines between pro-stimulus Keynesians and pro-market neoliberals have dominated the debate. It’s as if a bunch of old men from the 1950s has been trading blows with flash financiers from the 1980s, oblivious of the crowd of hipsters buying lattes with bitcoins on their smartphones. Economics needs to move on.

The financial crisis destroyed conventional thinking. The theory that efficient markets correctly set prices was proved a fantasy when the global banking system froze as investors realised that they had no idea what anything was worth. Risk measurement models that had become financial belief systems, such as value at risk, turned out to be totally wrong.

Utterly undermining Milton Friedman’s claim that “inflation is always and everywhere a monetary phenomenon”, trillions of dollars of quantitative easing since the crisis have not stoked prices. In fact, the opposite has been the case. The world is in a disinflationary cycle. Even Japan’s experiments with Keynesian demand management failed to restore growth, serving only to pump up the national debt disastrously.

This week the Bank of England drew a line in the sand. Launching a new research agenda, Andy Haldane, the Bank’s chief economist, admitted that economics simply doesn’t have the answers any longer. But at least it is beginning to ask the right questions.

Since the monetarist revolution in the 1980s under Ronald Reagan and Margaret Thatcher, markets have provided a conveniently measurable framework with which to understand how people, money and incentives interact. As the crisis demonstrated, however, it was too convenient, too facile. Reality is much more complicated. Forward-thinking economists are looking to psychology, biology, anthropology and computer and behavioural science for ideas. Reason in economics has given way to sentiment and emotion.

Take the “taper tantrum” as an example. In the space of a few weeks in spring 2013, emerging countries’ debt-servicing costs suddenly rocketed simply because markets grew nervous. The underlying fundamentals of the assets had not changed one iota. What changed was the prospect that the United States might start to slow its quantitative easing programme. The taper tantrum nearly triggered catastrophe for economies such as India, and it was all caused by feelings.

In the UK, the interest rate on government debt has nearly halved in the past year. In theory, the yield ought to track official interest rates, but those have not changed. Debtservicing costs have been driven down by global markets, which are responding to sentiment — be it a flight to safety because of concerns about a eurozone break-up or fears of endless weak growth and deflation.

Think about what that means. The collective emotions of a bunch of traders are more powerful than a central bank with its hand on the interest rate lever, and nobody knows how to measure those emotions. Forget Keynesianism vs neoliberalism — that puts economics in uncharted waters.

Mr Haldane said it best this week. “Financial markets often do really strange things,” he said. “You cannot make sense of some of the prices by using conventional components like cashflows and risk premium. You need other stuff, like risk appetite and sentiment and emotion.

“That poses a measurement problem. We are quite good at measuring cashflows and profits but not very good at measuring emotions and sentiment . . . Our existing theoretical models are really struggling.” As he explained, the ramifications are huge. “Shocks to global sentiment are more important than national factors in driving behaviour, both financial and economic. So, whither monetary policy if it is taking place on a national basis when the real action is happening globally?” he asked.

Economics has been in a period of improvisation since the crisis, with QE, forward guidance, and — in some countries — negative interest rates. That has freed up thinking. For example, are policymakers “chasing a mirror”, as Hyun Song Shin, of the Bank for International Settlements, wondered this week?

If central bank communication is guiding markets while, at the same time, using market prices to inform the policy outlook, is there a danger that economics becomes dangerously self-reflective? Perhaps, but it is how the Bank of England works. And it’s not alone.

The Bank is encouraging researchers to think innovatively. In the Scottish referendum last year, it tracked the frequency of tweets that included the names of the banks and the words “Scottish referendum”, “panic” and “run” to see whether they needed to prepare for Northern Rockstyle mass deposit withdrawals.

In true open-source spirit, it has released a huge cache of data online to help progressive economists to test and develop new theories. There have been numerous new ideas since the crisis, from Nudge, Richard Thaler’s 2008 book on behavioural economics, to Daniel Kahneman’s Thinking, Fast and Slow, published in 2011. The Bank wants to move them from the fringe to the centre of a new economics.

Where all this will end up is anyone’s guess. Inflation targeting, which has been the gold standard of economic management since 1990, may need to be replaced or modified. New instruments may be invented to manage global capital flows. Maybe a global central bank will be necessary in future in such a financially interconnected world.

Economics and finance have always tacitly acknowledged the unknown, which they call risk. What the crisis revealed was the scale of the risk in the system, the amount of mistaken thinking and the volume of unanswered questions. It’s taken seven years, but at least the economic establishment is finally confronting its shortcomings.

Robber barons and silicon sultans

IN THE 50 years between the end of the American civil war in 1865 and the outbreak of the first world war in 1914, a group of entrepreneurs spearheaded America’s transformation from an agricultural into an industrial society, built gigantic business empires and amassed huge fortunes. In 1848 John J. Astor, a merchant trader, was America’s richest man with $20m (now $545m). By the time the United States entered the first world war, John D. Rockefeller had become its first billionaire.

In the 50 years since Data General introduced the first mini-computers in the late 1960s, a group of entrepreneurs have spearheaded the transformation of an industrial age into an information society, built gigantic business empires and acquired huge fortunes. When he died in 1992, Sam Walton, the founder of Walmart, was probably America’s richest man with $8 billion. Today Bill Gates occupies that position with $82.3 billion.

The first group is now known as the robber barons. The second lot—call them the silicon sultans—could face a similar fate. Like their predecessors, they were once revered as inventive mould-breakers, delivering gadgets to the masses. But just like Rockefeller and the other “malefactors of great wealth”, these new capitalists are losing their sheen. They have been diversifying into businesses that have little to do with computers, while egotistically proclaiming that they alone can solve mankind’s problems, from ageing to space travel. More pointedly, they stand accused of being greedy businessfolk who suborn politicians, employ sweatshop labour, stiff other shareholders and, especially, monopolise markets. Rockefeller once controlled 80% of the world’s supply of oil: today Google has 90% of the search market in Europe and 67% in the United States.

Together, the two groups throw light on some of the most enduring themes of American history—both the country’s extraordinary ability to generate vast wealth and its enduring ambivalence about concentrations of power. Henry Ford, the youngest of the robber barons, once said that history is more or less bunk. He was wrong. The silicon sultans have the advantage of being able to learn from their predecessors’ mistakes. It is not entirely clear that they are doing so.

History rhymes

All business titans have certain things in common—a steely determination to turn their dreams into reality, a gargantuan appetite for success and, as they grow older, a complicated relationship with the fruits of their labour. But the robbers and sultans have more in common than most: they are the Übermenschen of the past 200 years of American capitalism, the people who feel the future in their bones, bring it into being—and sometimes go too far.

The most striking similarity is that they refashioned the material basis of civilisation. Railway barons such as Leland Stanford and E.H. Harriman laid down more than 200,000 miles of track, creating a national market. Andrew Carnegie replaced iron with much more versatile steel. Ford ushered in the era of the automobile. Mr Gates tried to put a computer in every office and in every home. Larry Page and Sergey Brin put the world’s information at everybody’s fingertips. Mark Zuckerberg made the internet social. Just as the railroad made it possible for obscure companies to revolutionise everything from food (Heinz) to laundry (Procter & Gamble), the internet allows entrepreneurs to disrupt everything from retailing (Amazon) to transport (Uber).

Both relied on the relentless logic of economies of scale. The robber barons started with striking innovations—in Ford’s case, a more efficient way of turning petrol into power—but their real genius lay in their ability to “scale up” these innovations to squeeze the competition. “Cut the prices; scoop the market; run the mills full,” as Carnegie put it. The silicon sultans updated the idea. Mr Gates understood the imminent ubiquity of personal computers, and the money to be made from making their software. Messrs Brin and Page grasped that their search engine could create a massive audience for advertisers. Mr Zuckerberg saw that Facebook could profit from inserting itself into the social lives of a sizeable chunk of the world’s population.

Economies of scale allowed the robber barons to keep reducing prices and improving quality. Henry Ford cut the price of his Model T from $850 in its first year of production to $360 in 1916. In 1924 you could buy a much better car for just $290. The silicon sultans performed exactly the same trick. The price of computer equipment, adjusted for quality and inflation, has declined by 16% a year over the five decades from 1959 to 2009. Each iPhone contains the same amount of computing power as was housed in MIT in 1960.

The robber barons denounced regulators in the name of the free market, but monopoly suited them better. Rockefeller rued the “destructive competition” of the oil industry, with its cycle of glut and shortage, and set about ensuring continuity of supply. The first trust, Standard Oil’s, established in 1882, was designed to persuade his rivals to give up control of their companies in return for a guaranteed income and an easy life. “The Standard was an angel of mercy reaching down from the sky and saying ‘Get into the ark. Put in your old junk. We will take all the risks’,” he wrote.

Others followed. Although the Sherman Anti-Trust Act of 1890 outlawed these devices as restraints on free trade, the barons either neutralised the legislation or got round it with another control-preserving device, the holding company. By the early 20th century trusts and holding companies held nearly 40% of American manufacturing assets. Alfred Chandler, the doyen of American business historians, summed up the hundred years following the civil war as “ten years of competition and 90 years of oligopoly”.

The silicon sultans have it easier. They sometimes brush with the law—Google and Apple have been scolded for creating informal agreements to prevent poaching wars—but network effects, whereby the more customers a service has, the more valuable it becomes, mean that their businesses tend towards monopoly anyway. In the digital world, the alternative is often annihilation. As Peter Thiel, PayPal’s cerebral founder, put it in “Zero to One”: “All failed companies are the same: they failed to escape competition.”

The result, in both cases, is an unparalleled concentration of power. A century ago the barons had a lock on transport and energy. Today Google and Apple between them provide 90% of smartphone operating systems of; over half of North Americans and over a third of Europeans use Facebook. None of the five big car companies, by contrast, controls more than a fifth of the American market.

The 0.000001%

The silicon sultans are some of the few businesspeople who can compete with the robber barons in terms of ownership. Carnegie made a point of always owning more than half of his company. Today most firms are widely held by large numbers of shareholders: the largest individual shareholder in Exxon, the grandchild of Standard Oil, is Rex Tillerson, the company’s chief executive. He owns 0.05% of the stock. But tech is different. Together Google’s two founders, Sergey Brin and Larry Page, and its executive chairman, Eric Schmidt (who also sits on the board of The Economist’s parent company) control two-thirds of the voting stock in Google. Mark Zuckerberg owns 20% of Facebook shares but almost all of its “class B” shares, which have ten times the voting power of ordinary shares.

The tech titans are not as rich in relative terms as the robber barons. When Rockefeller retired in the early 20th century, his net worth was equal to about one-thirtieth of America’s annual GNP. When Mr Gates stepped aside as CEO of Microsoft in 2000 his net worth might have equalled 1/130th of it. But they nevertheless represent the most significant concentration of business wealth in the world. In 2013 34% of billionaire-entrepreneurs aged 40 or under made their money in high tech.

What makes these concentrations of wealth all the more striking is that they followed on the heels of two of the most egalitarian periods in American history. The 1830s-40s saw America (outside the slave-owning South) establish itself as the land of participatory politics and individualism that Alexis de Tocqueville celebrated in “Democracy in America”. The years between the second world war and the late 1970s were years of low inequality of income in the United States.

Both the robber barons and the silicon sultans helped to create a very different America, divided by class and obsessed with money. In “The Theory of the Leisure Class”(1899), Thorstein Veblen showed how an egalitarian society was becoming an aristocratic one. In “Capital in the Twenty-First Century” (2013) Thomas Piketty made similar claims for the past 40 years.

The culture they helped to create troubled barons of both eras. Andrew Carnegie, who had risen from bobbin-boy to steel magnate in 17 years, worried about the contrast between “the palace of the millionaire and the cottage of the labourer”. Though he stretched the bounds of good taste when, as perhaps the richest man in the world, he wrote a pamphlet entitled “The Advantages of Poverty” (1891), he was nevertheless sincere in worrying that class division was producing “rigid castes” living in “mutual ignorance” and “mutual distrust” of each other. Mr Thiel contrasts the egalitarian Silicon Valley of his childhood, in which everybody lived in identikit houses and attended first-rate state-funded schools, with today’s divided Valley. But they have taken their strictures only so far. Carnegie bought a ruined castle in Scotland, Skibo, for $85,000 and maintained a staff of 85. Mr Thiel bought an oceanfront spread in Maui for $27m.

No sooner had they transformed themselves from challengers into incumbents than the robber barons succumbed to the two great temptations of a successful middle age: undisciplined growth and unqualified self-belief. Rockefeller spilled into a succession of adjacent businesses—he bought forests to supply his company with wood, established plants to turn the wood into barrels, produced chemicals for refining and bought ships and railroad cars to carry his products. Harriman turned from financing railways to dabbling in finance more generally.

The tech barons are following a similar arc. Google is pouring its super-profits into a succession of loosely related industries: robotics, energy, household appliances, driverless cars and anti-ageing. The company may well be fashioning a world in which it has a hand in everything humans do—driving them to work, adjusting their thermostats, making (and monitoring) their phone calls, and, of course, organising their information. Facebook has spent $2 billion on a start-up that makes virtual-reality equipment. Elon Musk, one of the founders of PayPal, has moved into electric cars and rockets. Jeff Bezos, Amazon’s founder, is also investing in private space travel.

Both groups started dreaming ever bigger dreams. The robber barons turned their hands to solving social problems. Ford led a peace convoy to Europe to put an end to war. When he arrived in Norway and gave the locals a long lecture on tractor production in faltering Norwegian, a local commented that you have to be a very great man to say such foolish things. In the Valley, extending life to 100 or 120 is a passion; Mr Thiel even talks about abolishing death. Reforming the state is another hobby; again Mr Thiel takes things to the limit with a project to establish a collection of floating city states in international waters outside the reach of governments. Reinventing food—creating meat substitutes in particular—is another recent craze: Messrs Brin, Gates and Thiel have invested in alternative food companies.

The most controversial sideways move the robber barons made was into day-to-day politics. A critic once wrote that Rockefeller’s company did everything to the Pennsylvania legislature except refine it. The Senate was known as “the millionaire’s club”. Robber barons bought newspapers—Ford turned the Dearborn Independent into a mouthpiece for his cranky views on the Jews. Not content with establishing what Arthur Schlesinger junior called “government of the corporations, by the corporations and for the corporations”, a growing number of robber barons and their children went into politics themselves. Two of Rockefeller’s children became governors—Nelson of New York and Winthrop of Arkansas—and Nelson went on to be Gerald Ford’s vice-president.

The silicon sultans swore that they would not repeat this mistake, and indeed they have gone nothing like as far as their predecessors. Yet politics is both necessary to business and irresistible to the self-important. This year Google’s political action committee spent more on campaigns than Goldman Sachs, a company legendary for its political connections. Mr Zuckerberg has founded a pressure group, fwd.us, to push for immigration reform. The prospectus for the group, headed by one of Mr Zuckerberg’s former Harvard room-mates, boasts that the tech industry will become “one of the most powerful political forces” because “we control massive distribution channels, both as companies and as individuals”. These “channels” include old-media redoubts such as the Washington Post (bought by Mr Bezos) and the New Republic (bought by Facebook’s Chris Hughes) as well as new media empires such as Yahoo. Silicon Valley is now a regular stop in fundraising and an established part of America’s revolving-door culture. Al Gore, a former vice-president, has been a senior adviser to Google. Sheryl Sandberg, Facebook’s chief operating officer, started her career as chief of staff to Larry Summers when he was treasury secretary.

The backlash

The age of the robber barons led inexorably to the age of populist revolt, with mass strikes, anti-monopoly legislation, social reforms and, eventually, the New Deal of the 1930s. The robber barons had ruined too many people and broken too many rules. Ida Tarbell (whose father had been ruined by Rockefeller) proved to be the most devastating critic: a series of brilliant articles in McClure’s magazine aired Rockefeller’s dirty laundry and popularised the term robber baron. Theodore Dreiser, a novelist, skewered the new rich in “The Titan” and “The Financier”. Some economists worried that America was becoming as unequal as Europe.

A cohort of politicians and lawyers fairly swiftly translated the backlash into policy. Teddy Roosevelt thundered against the “criminal rich”. Woodrow Wilson followed up with even more vigorous attacks on corporate America. The 16th amendment to the constitution introduced an income tax for the first time, and the 17th amendment decreed that senators should be elected by popular vote rather than appointed by local legislatures.

That the tech barons have attracted only a fraction of the ire of the robber barons is not surprising: with relatively small, highly paid workforces, they are not involved in the battles with unions that turned the robber barons into ogres. In 1901 US Steel, Carnegie’s creation, employed a quarter of a million men—more than the army and navy combined. Today Google employs more than 50,000, Facebook 8,000 and Twitter 3,500. The electronic toys the tech barons make also inspire more affection among consumers than the commodities or infrastructure that the robber barons produced. But there are nevertheless growing rumbles of discontent. Starting in 1994, the American government successfully prosecuted Microsoft for predatory pricing and undermining competition. The EU is currently mulling various ways of reducing Google’s dominance in the search market, and has even proposed splitting its search engine operations in Europe from the rest of its business.

Aside from monopoly and inequality, the main gripe against the tech barons concerns privacy. The tech industry makes much of its money from hoovering up private information.“We know where you are,” says Mr Schmidt. “We know where you’ve been. We can more or less know what you’re thinking about.” The EU is drafting a privacy directive, to come into effect in 2016, which could introduce strict rules about data collection.

Despite these growing worries, there is no sign that the trend will reverse. For all the dramatic changes between the railway age and the silicon age, America still has the right formula for producing entrepreneurs. It sucks in talent from all over the world: Carnegie was the son of an impoverished Scottish textile weaver, Mr Brin the son of Russian immigrants. It tolerates failure: the list of barons who failed at least once before they succeeded includes R.H. Macy, H.J. Heinz, Henry Ford and Steve Jobs. And it encourages ambition. Mark Twain and Charles Dudley Warner put their finger on an enduring national trait in “The Gilded Age” (1873): “In America nearly every man has his dream, his pet scheme, whereby he is to advance himself socially or pecuniarily.” Walt Whitman did the same: he celebrated “the extreme business energy, and this almost maniacal appetite for wealth prevalent in the United States”. And the ability to produce such men has allowed America, once again, to pull ahead of the rest of the West.

At the same time, the backlash against the robber barons points to another enduring theme: the tension between big business and democracy. Americans’ admiration for self-made millionaires leads them to be suspicious of huge organisations. Charles Francis Adams, a great-grandson of America’s second president, warned that companies were bent on “establishing despotisms which no spasmodic popular effort will be able to shake off”.

Louis Brandeis, one of the greatest Supreme Court judges, became the voice of the campaign against “the curse of bigness”. “Mere bigness” is an offence against society, he argued, because democracy “cannot endure” when you have huge concentrations of wealth in the hands of a few. Today’s Supreme Court is as comfortable with bigness as Brandeis was uncomfortable with it. Presidents habitually cuddle up to huge organisations in order to raise the money they need to run for office. Yet suspicion of size is growing once again on both the Tea Party right and the Democratic left.

So is bigness capable of redeeming itself? The final enduring theme in the story of the American barons is the story of philanthropy. Carnegie pronounced that “the man who thus dies rich dies disgraced”. The robber barons (including Carnegie) did not exactly die poor. But almost all of them became philanthropists in old age. Carnegie tried to make equality of opportunity mean something by founding 2,811 public libraries. Rockefeller’s intellectual legacy, the University of Chicago, is one of America’s greatest.

Mr Gates’s foundation is one of the largest in the world; and he and his fellows are following their predecessors by applying the same mixture of imagination and hubris to philanthropy that they applied to business. In America entrepreneurs do not just create bigger fortunes. They also cast longer shadows.

Asking for a range of prices

.... the researchers wanted to know whether certain negotiation tactics, even if they might work in squeezing a few more dollars out of your partner, might incur a likability cost.

Overall, their results suggest that range offers are the way to go. If you're selling a laptop on Craigslist and hoping to get $400 for it, then all things being equal, you're better off asking for "Between $400 and $440" than simply $400 — you'll likely get more for the laptop, and there's little evidence you'll be seen in a worse light. You can't draw perfectly straight lines between this sort of study and real-world negotiations, of course, but the researchers are pretty sure they know what's going on here: Simply put, the presence of two values causes the perception of the reservation price to climb upward a bit relative to what it would be if only the lower number were there.

In other words, when I see on a Craigslist ad that someone wants $400 for a laptop, I'll likely think "I can probably get it for $350." If I see they want between $400 and $440, I'll probably think twice about making that sort of counteroffer — maybe I'll offer $380 instead. Probably worth keeping in mind the next time you apply for a job that asks you to request a salary.

Getty Rich

What a dismal way to go — semi-naked and bleeding after a “traumatic injury to the rectal area” in the bathroom of his mansion in Los Angeles. Yet it seems that the oil heir Andrew Getty, 47, whose death was reported last Tuesday, actually lived as he died — in bloated and secretive excess; a man who “took so much coke”, said a friend, “I wouldn’t be surprised if his heart just gave out”.

I’m not sure his “friends” were actually his friends — he was a drinker, a gambler and a “loner”, said another friend — but, I’m afraid, the rest of it does rather ring true for a descendant of the oil billionaire Jean Paul Getty.

I’m actually surprised there are as many as two Gettys left in the world, given all the kidnappings and overdoses and accidents that have dogged the family. A second Getty popped up in court last Wednesday, after police found him so drunk at the wheel of his Range Rover that he could barely walk to the pavement. Joseph Getty, 26, said he felt “stupid” and wished he could “turn back the clock”. I’m not sure turning back the clock would help, though — the rich, you see, don’t really learn.

F Scott Fitzgerald claimed they were soft and silly and fundamentally “different” simply because they had too much stuff and enjoyed it too young, but I don’t buy this. The rich are exactly the same as the rest of us, changing only when truly affected, as Jean Paul Getty pointed out, by “events, circumstances”. The rich live in a thinner place, stuffed with stupider things, peopled by nastier people.

Nearly every member of the family has suffered unspeakable losses or absurd blows, because of either their own stupidity or the hatefulness of others. John Paul Getty III had his ear sliced off, but only because his stingy grandfather refused to pay the ransom when he was kidnapped by the mafia in 1973. The old man eventually lent the money to his son at a rate of 4% interest, on the pretence of what he described as being practical — if he paid up for one grandchild, he’d have 14 kidnapped grandchildren — and what I describe as having so much money you’ve actually lost your faculties.

There comes a point when someone has bought so many expensive paintings, trashed so many cars, killed so many prize animals and wept into so much priceless cashmere that they cease to feel like a normal human being at all. Getty didn’t refuse the ransom because he didn’t want to part with the money; he refused it simply because he could — in much the same way as the Prince of Wales refuses to squeeze his own toothpaste and dashes off his “black spider memos”. Charles does these not because he wants to, but because he can.

The letters, incidentally, perfectly reveal the sheer derangement of someone who has too much money and thinks he has too much power. One fragment of a pompous missive about the advantages of homeopathy, which I have to say was alleged to have been written by Charles but obviously could not have been written by anyone else, revealed usage of insane block capitals and reams of Georgian whimsy on the subject of “Beauty” and “TRUTH”.

It is inaccurate to say the rich are different or cursed; they are special in one aspect only: that they have to cope with superhuman levels of boredom.

This is why someone like Andrew Getty takes half a floor of a five-star hotel for a gambling trip to Vegas, or why he poses, slightly tragically, as James Bond; or why Joseph Getty simply cannot be bothered to do something as mundane as book a taxi; or why Eva Rausing, the tragic wife of the Tetra Pak heir Hans Rausing, ends up trying to smuggle crack cocaine into the American embassy.

Vast wealth creates a kind of blindness, a zero-visibility blizzard of selfimportance, entitlement, disgruntlement and obsession. Like Getty, Rausing died sadly and alone, under a pile of bin bags after a two-week crack binge. The rich aren’t really different; they just think they are.

Price of Paintings and Income Inequality

We don’t yet know who agreed to pay $179.4 million for a Picasso in an auction Monday night — or where the money came from, or what motivated that person or persons to spend more than anyone has before for a single piece of art at auction.

But this much we do know: The astronomical rise in prices for the most-sought-after works of art over the last generation is in large part the story of rising global inequality. At its core, this is the simplest of economic math. The supply of Picasso paintings or Giacometti sculptures (one of which sold for $141 million in the same auction this week) is fixed. But the number of people with the will and the resources to buy top-end art is rising, thanks to the distribution of extreme wealth.

One of the most important findings of the leading economists who study inequality is that wealth and incomes at the very top are “fractal.” What they mean is that when you zoom in on the upper end of wealth distribution, patterns repeat themselves in an ever more finely grained pattern.

Partners at law firms who are in the top 1 percent of all earners have seen their incomes rise faster than successful dentists who are in the top 10 percent. But by a similar margin C.E.O.s of large companies who are in the top 0.1 percent are seeing incomes rise faster than those law firm partners. Hedge fund managers in the top 0.01 percent are similarly outperforming the C.E.Os.

And the kind of people who can comfortably afford to pay a nine-figure sum for a Picasso, the top 0.001 percent, say, are doing still better than that. You can draw that conclusion by reading the work of the French economists Thomas Piketty and Emmanuel Saez. Or you can form it by looking carefully at the market for the work of a certain Spanish painter.

Let’s assume, for a minute, that no one would spend more than 1 percent of his total net worth on a single painting. By that reckoning, the buyer of Picasso’s 1955 “Les Femmes d’Alger (Version O)” would need to have at least $17.9 billion in total wealth. That would imply, based on the Forbes Billionaires list, that there are exactly 50 plausible buyers of the painting worldwide.

This is meant to be illustrative, not literal. Some people are willing to spend more than 1 percent of their wealth on a painting; the casino magnate Steve Wynn told Bloomberg he bid $125 million on the Picasso this week, which amounts to 3.7 percent of his estimated net worth. The Forbes list may also have inaccuracies or be missing ultra-wealthy families that have succeeded in keeping their holdings secret.

But this crude metric does show how much the pool of potential mega-wealthy art buyers has increased since, for example, the last time this particular Picasso was auctioned, in 1997.

After adjusting for inflation and using our 1 percent of net worth premise, a person would have needed $12.3 billion of wealth in 1997 dollars to afford the painting. Look to the Forbes list for that year, and only a dozen families worldwide cleared that bar.

In other words, the number of people who, by this metric, could easily afford to pay $179 million for a Picasso has increased more than fourfold since the painting was last on the market. That helps explain the actual price the painting sold for in 1997: a mere $31.9 million, which in inflation-adjusted terms is $46.7 million. There were, quite simply, fewer people in the stratosphere of wealth who could bid against one another to get the price up to its 2015 level.

More people with more money bidding on a more or less fixed supply of something can only drive the price upward. On Monday, the auction was for fine art. But the same dynamic applies for prime real estate in central London or overlooking Central Park, or for bottles of 1982 Bordeaux.

That helps explain why the recent Picasso sale represented a 462 percent gain since its previous auction in 1997, a span in which the Standard & Poor’s 500 index returned 215 percent, including reinvested dividends. (The comparison isn’t entirely apt, in that the painting would have required spending each year on security, storage and insurance, lowering returns. On the other hand, the Picasso looks better on one’s living room wall than a mutual fund prospectus.)

What does that mean for the future? There is no free lunch, even for people paying millions of dollars for a painted canvas. Art prices are vulnerable to fashion, of course. Picassos could go out of favor, relatively speaking, in the years ahead, in which case the anonymous buyer this week may not see the same type of exceptional financial return the previous owner enjoyed.

There are legal risks. Already, the Chinese government is cracking down on official corruption and particularly on showy displays of wealth, which could crimp Chinese demand for fine art in the years ahead. American and European authorities may wish to put further effort into preventing art transactions from being used to launder money or evade taxes, as the economist Nouriel Roubini has argued is commonplace.

But any billionaire spending astronomical sums for a painting or sculpture should hope most of all that this basic global inequality trend — of the wealth of the ultrarich growing faster than the world population overall economy — remains intact. Because as long as it does, there will always be another potential buyer out there with the potential to fuel a bidding war like the one that took place this week.

Investment Funds

Every year hundreds of funds are merged or removed from the market altogether, enabling their managers to erase their poor performance figures from the league tables, Times Money has found.

A study by Morningstar, the fund research group, shows that in the past ten years a staggering 1,502 funds have disappeared from the market in this way, leaving investors with a distorted picture of the industry’s past track record.

This is because when a fund is merged or closed its track record usually ceases to exist. It either disappears with the defunct fund or is often set aside in favour of the performance history of the fund with which it is being merged.

David Norman, of TCF Investments, says: “If you merge a better-performing fund with a poor one you are effectively rewriting history. The merged fund will typically take on the track record of the better performer, meaning that investors in the less successful fund will have no way of obtaining details of their past history.”

He adds that removing funds on a large scale like this also distorts the wider performance figures for entire sectors and the industry as a whole. As the Morningstar research demonstrates, the sheer scale of the turnover means that a large chunk of the funds present at the outset of any ten-year period won’t be there at the end. Underperformance

There were 2,200 funds in existence at the start of 2005. Since then a further 2,077 have been launched, but 1,502 have been merged or closed. Chris Traulsen, of Morningstar, says: “Our research shows that funds that were closed or merged have, before closure, underperformed their Morningstar sector averages over most three-year periods stretching back to 2005.”

Mr Norman says: “Anyone looking at the five or ten-year performance of a sector is only looking at one half of the story — the good half. Many of the poor-performing funds that would have dragged down the overall performance are no longer there. This phenomenon of ‘survivor bias’ means that investors should be wary of past performance tables because they present a rosier picture than the reality.”

To counter this problem Mr Norman would like to see sector performance figures adjusted to include the record of merged or closed funds. He is also calling for merged funds to be tagged with an M in any performance tables.

Daniel Godfrey, of the Investment Association, the fund industry trade body, says: “More poor performers disappear than good ones, but that is not surprising. It is a Darwinian process where the funds that do well grow, while those that don’t do well struggle to attract money and may fail because they don’t have sufficient funds to be viable.”

Mr Traulsen says part of the reason for the rapid turnover of funds is that investment houses track the inflows of money assiduously and try to create products that will tap into investor demand. If a particular theme doesn’t work out, he says, financial groups are quick to close the products down.

Renaming

One classic example of a theme that drew in billions of pounds and then suffered a dramatic collapse was the technology boom of the late 1990s. As the millennium loomed there were more than a dozen tech funds in existence and they dominated the performance tables. Aberdeen Technology produced a return of 801 per cent in the seven years to January 2000, while Scottish Equitable Technology returned 619 per cent.

However, tech stocks plummeted in early 2000. The Framlington NetNet fund showed a loss of 90 per cent at one point, while other funds were posting similarly eye-watering falls.

A massive reshuffling exercise took place. Aberdeen Technology was sold to New Star and became the New Star Technology fund and later the Henderson Technology fund, after Henderson had taken over New Star. It then became the Henderson Global Innovation fund and, later, the Henderson Global Growth fund. The NetNet fund was merged with the Framlington Nasdaq fund and renamed the AXA Framlington Global Technology fund, though, unusually, NetNet’s performance record was retained. In other cases mergers erased the trail of poor performance. Jupiter Global Technology was wrapped into Jupiter Global Managed fund, Artemis New Enterprises became part of Artemis UK Special Situations while M&G Global Technology resurfaced as part of M&G Global Growth.

By the early 2000s the technology sector had shrunk to a shadow of its former self, but it has survived and is now going through something of a renaissance.

Rebranding

Another example of large-scale rebranding after funds had experienced a further bout of boom and bust came in the aftermath of the banking collapse in 2008. A whole raft of New Star funds, including some that had been heavily promoted on advertising hoardings up and down the country, were first renamed and then merged into a whole suite of new funds following the takeover by Henderson.

The New Star Select Opportunities fund and the New Star Hidden Value fund, which had both enjoyed a spectacular rise and fall, were merged into the New Star UK Alpha fund. This became the Henderson UK Alpha fund.

Just as with the Henderson takeover of New Star, the acquisition of Scottish Widows Investment Partnership (SWIP) by Aberdeen has triggered a series of mergers. In a number of cases a poor-performing “dog” fund has been combined with a better-performing Aberdeen fund. The laggard SWIP Income fund has been merged into the more successful Aberdeen UK Equity Income fund, while another mediocre fund, SWIP UKOpportunities, became first the Aberdeen UK Opportunities fund and then the Aberdeen UKEquity fund, which has outperformed over the past five years.

Merging

Anna Haugaard, an analyst at Brewin Dolphin, the wealth manager, says: “Fund mergers usually take place because of poor performance and inability to attract new investors. Fortunately, this usually coincides with a change of manager and sometimes strategy as well.”

Jason Hollands, of Tilney Bestinvest, the wealth manager, adds: “It is understandable that where two companies have merged, some overlapping products will be removed to create a more tidy shop window. The same thing might happen where a fund group has run parallel onshore and offshore ranges and wants to rationalise them. An important safeguard is that investor approval has to be sought.

“These cleaning-up exercises are also an opportunity to close down or absorb funds that have poor track records, as well as funds that might be all right but are too small to be viable. Cynics might say that this is evidence of fund companies trying to bury the history of funds that have failed to deliver, but I think it is right to address the problem.

Gold Hoarding

A little less than four years ago, the world looked like it was about to end and gold hit an all-time high of $1,895 an ounce.

The United States had manufactured a debt crisis, and Europe hadn't been able to manufacture a solution to its actual debt crisis, so panicky investors sought safety in the same place they had for 5,000 years: a shiny rock. The only problem, as you might have noticed, is that the world did not, in fact, end. It's still here, so gold prices aren't. The yellow metal has fallen 42 percent from its peak—and 8 percent in just the last month — despite the fact that the Federal Reserve has printed more than $1.5 trillion in this time. That, after all, is what gold aficionados said would make its price go to the moon, if not infinity and beyond. So what's happened? Well, exactly what economists said would happen.

When you think about it, a bet on gold is really a bet that the people in charge don't know what they're doing. Policymakers missed yesterday's financial crisis, so maybe they're missing tomorrow's inflation, too. That, at least, is what a cavalcade of charlatans, cranks, and armchair economists have been shouting for years now, from the penny ads that run on the bottom of websites — did you know that the $5 bill proves the stock market is on the cusp of crashing? — to Glenn Beck infomercials and even hedge fund conferences. Indeed, John Paulson, who made more fortunes than you can count betting against subprime, has been piling into gold for six years now, because he thinks "the consequences of printing money over time will be inflation." They all do. Goldbugs act like the Federal Reserve's public balance sheet is a secret only they have discovered, and that it's only a matter of time until prices explode like they did in the 1970s United States, if not 1920s Germany.

But economists do, for the most part, know what they're doing. Sure, they missed the crash coming in 2008, but that wasn't because they didn't understand how bank runs work. It was because they didn't understand that unregulated lenders had become vulnerable to runs. And the economists who haven't forgotten their history knew that this inflation fear mongering was all wrong too. Specifically, there's a difference between the central bank buying bonds, a.k.a. printing money, when interest rates are zero and when they're not. In the first case, money and short-term bonds both pay the same amount of interest — none — so, as Paul Krugman has explained over and over again, printing one to buy the other won't change anything. Banks won't lend out any new money, and will just sit on it as a store of value instead. That's what happened when interest rates fell to zero in 2000s Japan, and it's what is happening now in the U.S., U.K., Japan, and Europe.

That didn't mean, though, that gold wasn't a good short-term investment. It was. Just not for the reason goldbugs thought. Now, the problem with gold is it doesn't pay any interest or dividends, but it does cost money to store. So you have to pay up in the hope that it will pay off by going up in price. That usually makes it a pretty lousy investment. That calculus changes, though, when you're being paid to borrow—that is, when you're paying a negative real interest rate. But when does that happen? Well, when inflation is high but interest rates aren't quite as high, like in the 1970s, or when inflation is low but interest rates are lower still, like today. And that, as Paul Krugman and Larry Summers argued, is why gold prices were going up so much even though inflation wasn't.

It almost makes you feel bad for the goldbugs, until you remember that some substantial number of them are just trying to scare seniors out of their money. But the ones who aren't really thought the 1970s showed that gold went up when inflation did, so the fact that gold was going up now meant inflation couldn't be far behind. They didn't understand that the price of gold doesn't depend on how much inflation there is, but rather on how much inflation there is relative to interest rates. So now that rates are rising, gold, as you can see below, is falling. Wait a minute, rates are rising? Well, yes. The Federal Reserve hasn't actually raised rates yet, but it has talked about it enough that markets have reacted as if it already did. That's been enough to make real rates positive again.

That sound you hear is goldbugs insisting that this is just a flesh wound. Sure, gold is down a lot, but that makes this is a buying opportunity! Just wait until China starts snatching up gold as an alternative to the dollar. Then prices will shoot back up. That, at least, was the story they told themselves until earlier this week, when China revealed that it hasn't been purchasing nearly as much gold as people had assumed. Not only that, but a big fund dumped its gold in the middle of the night, driving the price down to a 5-year low. That's left the goldbugs most impervious to empirical reality with nothing to say other than that "gold hasn't lost any value, the dollar has just strengthened." Right, and my stocks aren't worth any less, I'd just get less money for them if I sold them.

But don't feel too bad for the goldbugs. The best thing about predicting the apocalypse is you get to try again and again and again.

Clever ForEx Machine

Hidden away in many homes is a jar stuffed with foreign currency, perhaps a €5 note, a couple of US dollars, some old Deutchmarks and dozens of coins. Rarely enough to take to a bureau de change, but worth something, all the same.

Jeff Paterson knows it better than anyone and the co-founder of Fourex is unapologetic: “We’re after that jar.”

He and his colleague Oliver du Toit have built a money exchange kiosk that is about to appear at Underground stations across London. The machine takes any note or coin from 150 currencies, however small in value, and exchanges it for sterling, euro or US dollars at an exchange rate that is updated daily.

“Most people now take only around £50 with them when travelling and pay the rest on cards, but the market we’re after is whatever they use over there and bring back — and no one else is looking at this,” Mr Patterson said.

There is not even any need to sort out that hypothetical jar of random foreign currencies, as the Fourex kiosk rapidly scans the coins using a system similar to the one relied on for face recognition technology. “We can scan one coin every ten milliseconds, which is effectively real time,” said Mr du Toit, 60, who used his background as an electrical engineer to help to develop the software. The machine even accepts currencies that are out of circulation, so travellers can get rid of that long-forgotten £7.50-worth of Italian lira.

The two South Africans came up with the idea while living and working in Abu Dhabi for Ethihad Airways, where Mr du Toit was project manager for building the airline’s head office. Both travelled abroad regularly and realised that they had each amassed a drawer of foreign currencies in denominations too small to take to a bureau de change. “We saw this massive opportunity in the market and we just had to just work out how to do it,” Mr Patterson said.

Having spent three years perfecting the machine, Fourex recently secured a deal with Transport for London to launch in King’s Cross, Blackfriars and Canary Wharf underground stations from next week, before rolling out nationwide. They also have secured a contract with Westfield London, the shopping centre. The pair picked Tube stations, rather than airports, on the principle that most people are too tired on their return from travelling to remember to exchange their money. “You’ll walk past that machine five times a week on the Tube, whereas at the airport you only pass it maybe once a year,” Mr du Toit said.

Fourex, which is based in Strood, Kent, and has a staff of five, initially struggled to find funding, with most investors telling the company to come back when it had a prototype. Both men sold their houses to finance the start-up before coming across crowdfunding. “I had never heard of crowdfunding until I moved to the UK 16 months ago, but it’s fantastic as the response from the general public to the idea was phemonenal,” Mr Patterson said. Fourex raised £670,000 within two weeks, two and a half times its target, and was able to build ten kiosk machines. The company expects to employ 70 staff by the end of the year to sort the money from the machines.

Spurred on by the success of their crowdfunding experience, the two entrepreneurs entered and won Sir Richard Branson’s Virgin Media Business “Pitch to Rich” competition for start-ups. “Winning it was just phenomenal,” Mr Patterson said. “The biggest benefit has been the exposure from Virgin — our logo splashed all over one of Richard Branson’s trains is worth £1 million to us.”

One benefit of the machine highlighted in the competition is that it offers customers the chance to round down the final sum to avoid getting more coins and giving the extra to one of six charities, such as Unicef and Guide Dogs for the Blind.

Mr Patterson and Mr du Toit initially will make their money from the margin on the currency exchange, but they hope that Fourex kiosks can be franchised across the world. “We don’t want to go to somewhere like Saudi Arabia and struggle against regulation,” Mr Patterson said. “Our idea is for a local company to franchise it for us, so we manufacture and put 500 machines in Saudi Arabia, where there are millions of pilgrims travelling from across the world.

“We can change the language, the currency, it only takes a day of modifying the machine, so this is such a beautiful franchising model.”

What People Think of Capitalism

Almost two thirds of Britons believe that capitalism makes inequality worse, while three quarters think that big business has damaged the environment, dodged taxes or bought favours from politicians.

According to a YouGov poll for the Legatum Institute think tank, 64 per cent believe that “the poor get poorer and the rich get richer in capitalist economies”. This is higher than the United States, where 55 per cent agree with the statement, but significantly less than Germany, where 77 per cent are sceptical about capitalism. Similarly, Americans appear more likely to believe that free enterprise is better at lifting people out of poverty than government, with 49 per cent backing that view, compared with 39 per cent across the Atlantic.

“On the face of it, these are devastating findings,” the institute’s report says. “At the very least, they suggest that people no longer believe that capitalism is the universal engine for social mobility it was.”

The think tank commissioned polls in seven countries to test attitudes towards capitalism, free markets and the role of the state. It also tested comparative attitudes to inequality in nations as diverse as Indonesia and America, as well as the merits of welfare spending against infrastructure investment in all seven countries.

Its report highlights that the public has even less faith in government’s ability to improve the lot of the poor, particularly so in Brazil and India, where many people’s experiences are of bureaucratic, corrupt or inefficient public administration. According to the report, a majority of Brazilians and Indians believe that free enterprise is a better mechanism for economic progress than government, by margins of six to one.

Corporate scandals and media stories about bonus payouts to financiers have taken their toll on the reputation of corporate Britain. The pollsters found that more than 70 per cent of people in Britain, Germany, Brazil, India and Thailand believe that big business has, to some extent, bought, cheated or polluted its way to success.

For the business community, the silver lining is that at least two thirds of people in Britain, the US, Brazil, India and Indonesia believe that successful business people and investors are just as important to society as doctors, teachers and charity workers.

Doubts about the importance of tackling inequality, rather than addressing absolute poverty, also emerge. At least six out of ten people in each country polled agreed with the suggestion that poverty was a bigger problem than inequality and unemployment was a bigger problem that some people being super-rich.

“Inequality is the vogue concern of much of the international left, but it is not seen as a priority by the people polled by YouGov for this survey,” the report states. The survey reveals that British people are the most likely nationals from the seven countries to believe that government spends too much on welfare and not enough on roads, railways and other infrastructure.

There is a greater pessimism about the future in developed countries, which is not shared by emerging economies. Half the citizens in Britain, America and Germany do not expect the lives of their children to be better than their own. The US is especially pessimistic, with only 14 per cent agreeing that “the next generation will probably be richer, safer and healthier than the last”, compared with 19 per cent in Britain.

“It’s hard to find more conclusive evidence that the American dream is dying in many American hearts and minds,” the survey concludes.

The American Banking Scandal

Are we on the brink of the next crash? If questions like this bother you in the first bear market since 2008, with China dragging the world economy into a slowdown, the wisdom of Michael Lewis will not be reassuring.

"If the Chinese bubble bursts there'll be a collapse in demand and that will affect our economies," the author of The Big Short said on Thursday night. That day the European Central Bank halted a panEU sell-off only by promising unlimited injections of cash reminiscent of the euro crisis.

Davos shivered, and not just from the cold. On Tuesday the FTSE 100 index had lost £ billion in a single trading session. A few days before that, Lewis was asked if he thought a crash like the one that triggered the Great Recession could happen again. "It could all happen again," he said.

Like Austen's Darcy, Lewis is handsome, clever and rich, but he is not a banker. He's a former banker who turned on his tribe to write blockbuster exposes of the financial industry. The first was Liar's Poker. The most recent was Flash Boys, about the scandal of high-frequency trading by faceless Wall Street firms that use ultra high-speed fibre optic networks to rig the markets in their favour. In the middle came The Big Short, acclaimed as the best book on the crash. The film of the book opens in Britain this weekend after rave reviews, forecasts of Oscars and warnings that the lessons of the book and the crash have not been learnt.

The reviews are richly deserved. The film, in which Christian Bale and Steve Carell play two socially inept financial geniuses who foresaw the 2008 meltdown, is surely the only comedy that will ever be attempted based on credit default swaps and collateralised debt obligations.

The warnings often boil down to a lament: why has not one senior banker gone to jail for his part in an avoidable crash that destroyed millions of jobs, trillions in savings and much of the US housing market?

Lewis names plenty of villains in the book, including one who sued him unsuccessfully when it was first published. But he cautions against obsessing about individual bankers.

"It seems to me that the problem in 2008 was so systematic that putting people in jail was almost beside the point," he said. "We need to change the system. It isn't that you had a couple of bad guys. You had a whole system that was rotten; thousands and thousands of people behaving very badly because the system basically instructed them to do it."

And have we fixed that system? "No, we have not." Wolfing down scrambled eggs and salmon on a flying visit to London, Lewis offered two consolations for anxious Times readers watching their investments shrink. The first is a personal view that this week's Chinese-led market swoon will not in fact precipitate an immediate crash. He worries, as many do, about "whole Chinese cities where no one lives", which may yet come to symbolise a prolonged Beijing bust after an equally long boom. But he reckons western banks are sufficiently insulated this time round to stay afloat whatever happens in Asia.

The second consolation is more surprising. It is the idea that the best hope of salvation for the global financial system lies not in New York, or Shanghai, or Davos for that matter, but in Britain.

"If I had to pick a lead regulator to oversee global financial regulation, it would be the Bank of England," Lewis said. "It has been very good about being loud about [bankers"] cultural issues and behavioural problems. How do we get people in the financial sector to realise there are consequences to their behaviour for all of us? How do we restore a sense of responsibility?" He singled out Andrew Haldane, the bank's chief economist, for his frequent condemnation of the "ethical drift" behind the Libor and foreign exchange scandals, but everyone at the bank gets his vote for "speaking in a moralistic language, which nobody in the United States does".

The people trying to reform Wall Street, Lewis argues, "think it's a dry technical matter, and it's not. These institutions run essentially on trust, so they cannot be allowed to trick us all the time. The Bank of England speaks that language and I think our people can learn from them. I think they kind of get it."

As a magazine writer, Lewis commands the astonishing rate of $10 a word. He insists nonetheless that he is a mere reporter, not an oracle, and indeed there is no particular reason to take his word for it on the finer points of financial regulatory reform. Even so, people do. He tells a revealing story about a phone call he received from the FBI after the 2008 crash. "They asked me in just to say what they should be looking for. They were really nice, smart people but it was clear that they just didn't know very much. I don't want to disparage them. They were truly doing their best, but they were a little overwhelmed."

They weren't the only ones. The financial crisis was also a law enforcement crisis because American financial laws and the FBI's financial expertise were geared towards uncovering insider trading on the stock market. The sub-prime mortgage disaster was rooted in a different and vastly more complex sort of fraud, on the bond market.

The banks, as is now well known, were selling mortgage-backed bonds that were designed to fail, and were betting against them. New York's ratings agencies were complicit, talking up the bonds without bothering to investigate what if anything they were worth. The Feds were blindsided. The result has been a broad failure to prosecute individuals or reform institutions as they needed to be reformed, leaving the film of The Big Short to note, just before the end titles, that Wall Street banks are once more selling high-risk repackaged debt that almost no one fully understands. A recent screening left the packed house groaning as well as applauding.

Lewis has his critics. He has been accused of over-simplifying complex concepts and exaggerating the importance of the characters in his books. But he understands high finance and low skulduggery better than most. His first job after an art history degree in the US and a masters at the LSE was a four-year stint on the trading floor of Salomon Brothers, the investment bank. That stint coincided with the invention of mortgage-backed bonds. They were followed, as the American mortgage market ballooned in the Clinton years, by credit default swaps ostensibly insurance policies against the failure of the bonds; in practice, gambling instruments with which to short them.

Wall Street called the swaps "innovation". Lewis smelled a rat. "We have an idea that innovation is good, innovation is wealth, the idea that dreaming up new things is what makes our lives easier every day," he said. "In finance, innovation can and often has been totally toxic." Like Haldane, Lewis believes markets should offer social utility. Credit default swaps offered none, obscuring risk instead of clarifying it. Blythe Masters, a JP Morgan banker credited with inventing them, has since said she wishes she never did. The parallel with Oppenheimer and the atom bomb is hard to miss.

Lewis's time as a banker gave him the material for Liar's Poker, a truelife companion piece to that other study of unalloyed 1980s greed, Oliver Stone's Wall Street. The book was meant as a cautionary tale.

Instead it has brought a new sort of shameless grasper to Wall Street, attracted by its very amorality. Many of them wrote to Lewis to thank him. By the time 2008 rolled round he found himself thinking, "Jesus f***ing Christ, I've created this crisis".

Be that as it may, Liar's Poker opened doors for Lewis. It meant that as the crisis unfolded he knew exactly whom to approach to find out who among the herd of lemmings in New York's financial district had seen the cliff-edge coming and headed in the opposite direction. That person was Meredith Whitney, a prescient analyst who foresaw it all at Citigroup. She directed him to Steve Eisman, an eccentric fund manager at a subsidiary of Morgan Stanley, played by Carell in the film.

Lewis also found Greg Lippmann at Deutsche Bank, played by Ryan Gosling; two free-thinking selfstarters named James Mai and Charlie Ledley who got help gaining access to the markets from a maverick former trader called Ben Hockett (Brad Pitt); and Michael Burry, a physician with Asperger's syndrome and a glass eye, who seldom left his Californian lair and predicted precisely when the sub-prime bond market would implode based on a scheduled rise in interest rates. He is played by Bale, a mesmerising screen presence in Burry's own clothes.

They are all now rich beyond imagination, and Lewis hasn't done too badly either. Moneyball, his winning tale of parsimony and statistics at a second-rank baseball team, has also been made into a film starring Brad Pitt. He's working on another book, the subject of which he refuses to divulge except that it is about finance and sport, and he hopes to write and produce a TV series on Wall Street in the 1920s. He lives what he admits is a great life on the east side of San Francisco Bay, with his third wife and three children.

Unlike many of his admirers, Lewis doesn't indulge in much moral outrage. He does maintain, however, that three categories of Wall Street rascal should have been held accountable under the law: the ratings agencies' analysts who gave what were essentially junk bonds the top triple-A status because if they didn't their rivals would; the bankers who foisted doomed bonds on their own customers in order to short them; and a notionally independent cadre of bond managers paid by the banks to support the fiction that those customers' best interests were being protected.

"Give me a dozen noble citizens who are not one way or another on the payrolls of Wall Street firms and we could sensibly reform this industry so we're not at their mercy," he declared. No bank would be too big to fail, no ratings agency would be paid by the banks, and no banker would be incentivised to defraud his clients.

"It's not that hard, except the minute you start to do it billionaires show up in Senate offices saying, "It's all very complicated Mr Senator" and, "You really don't want to do this" and "if you do I'm not going to put money into your political campaign"

Which is a fair summary of US attempts at regulatory reform under President Obama. Lewis holds out little hope that the film will change anything, but that doesn’t mean he holds out none.

Panama Papers and London House Prices

We've reached peak Panama. Or so the government hopes. The indignation over Cameron's shares in an offshore trust and George Osborne's dividend payments from a family firm that paid no corporation tax for seven years appears to be over. After days of embarrassing headlines and prime ministerial agitation, the fallout has been contained and we can all move on.

Which goes to show how spectacularly we have all been missing the point. The problem the Panama papers has revealed cannot be solved by the release of a handful of politicians' tax returns.

For the first time we have some real insights into the industrial scale of corruption and tax evasion. From Russia to Argentina we can see how the wicked and the super-rich have exploited the system to ensure they don't have to pay for the services that keep our countries civilised. Between a tenth and a quarter of the world's wealth is escaping taxation and oversight in this way. And yet for the past ten days our parochial approach to this global scandal has been to demand details of MPs' financial affairs, culminating in the revelation that an absent-minded Jeremy Corbyn paid £270 too much in tax last year.

It's as if we're present at the aftermath of a bank robbery, with gold bars discarded on the pavement by fleeing gangsters. But we don't notice because we're raking through leaves in the gutter hoping to find a forgotten coin or two.

Resentment of our politicians is so deeply entrenched we've forgotten that their failings aren't the only reason the world isn't working well. It's their political, not private, behaviour we need to change. It's urgent action on legislation and international agreements we need from them, not details of their tax affairs.

Political leaders have always seen tax evasion as an unpleasant fact of life, impossible to eradicate and difficult to control. Shutting down money launderers and fake companies was pointless as long as other countries were willing to let them flourish somewhere else. David Cameron, to be fair to him, has for the past three years been urging more international co-operation on tracing criminals and their money, even if he hasn't done enough himself.

The wave of anger generated by the Panama papers, however, is a game-changer. We can capitalise on that anger so long as we understand why we should care.

In Britain, the reason it matters can be summed up in one word: housing. The leaks shed new light on how criminal and laundered money has poured into the London market, forcing prices up in every area, and snatching houses away from the people who live and work here. One hundred thousand properties in London have been bought through secret offshore companies. They include almost all the homes in Kensington Palace Gardens, Britain's most expensive street, and 64 of the 76 apartments in One Hyde Park, London's most expensive new development. The land owned by these companies across the UK covers an area three times the size of Greater London. Until 2013 these purchases even escaped the stamp duty that ordinary people had to pay. These anonymous buyers include friends of Bashar al-Assad, and an associate of a former Kazakh secret police chief accused of murder.

London house prices have doubled since 2007, and last year the head of the National Crime Agency, Donald Toon, warned bluntly that the London property market has been skewed by laundered money. Prices are being artificially driven up by overseas criminals who want to sequester their assets here in the UK.

It is staggering that we have allowed this to happen. Three quarters of under-35s in the capital don't earn enough to buy a property here, because in the competition to buy homes they're effectively competing with the richest and most corrupt people in the world. A whole generation either can't move to the capital or can't afford to live together and start families here, since anything beyond a shared room is unaffordable. And now foreign investors are moving into the regional cities too.

We're crippling the next generation's lives in favour of the financial interests of tax evaders and foreign crooks. It's madness and it has to stop. We're meant to act in the interest of the people who live and pay taxes here, not in the interests of the corrupt and the global super-rich.

The government needs to break open the secrecy of British tax havens, making the ownership of their companies public knowledge, and, at next month's anti-corruption summit in London, proposing international action to track, tax or confiscate the world's hidden wealth.

Here and now though, MPs should demand that we hit the tax evaders where we can: when they buy. Impose punitive taxes of 50 or 100 per cent on all property bought by offshore companies, add annual taxes of 5 or 10 per cent on any property bought by people who aren't British residents. Rewrite the rules so that it's the people who live, work, vote and pay taxes here who no longer have the scales tipped against them by the greediest and most ruthless people in the world. Make the Panama revelations count.

Charity Video Games

Florence's Medici Class

In the early 15th century, Florence was not only the creative hub of Renaissance Europe but its trading centre too — and a source of huge wealth for the merchants who drove that commerce.

Six centuries later, researchers at the Bank of Italy have discovered that the families who made their fortunes at the height of the city’s influence have managed to hang on to them ever since. By comparing city tax records in 1427 and 2011 Guglielmo Barone and Sauro Mocetti found “a glass floor that protects the descendants of the upper class from falling down the economic ladder”.

The ability to hold on to wealth was all the more impressive, they wrote, considering the tumult through which Florence had passed; from dominance by the Medici family to republican government to rule by the Holy Roman Empire and Napoleon before incorporation in the newly unified Italy in 1861.

The richest man in Florence in 1427, according to his tax return, was Palla Strozzi, from a banking family. His wealthy descendants still live in Florence. Their Tuscan country home, Villa Cusona, was a regular holiday retreat for Tony Blair.

The top earners of 2011 “were already at the top of the socio-economic ladder six centuries ago — lawyers or members of the wool, silk, and shoemaker guilds; their earnings and wealth were always above the median”.

Florence families perfected the art of nepotism, ensuring their descendants access to family trades while keeping outsiders at bay. The four highest-earning surnames of 1427 are all above average in the present-day earnings table, with three of the four in the top 10 per cent. They have not been publicly identified for reasons of privacy.

“Today there are at least 15 noble families in Florence living in the same palazzi as they were then,” said Prince Ottaviano de’Medici di Toscana, a Medici descendant who is studying the city’s dynasties.

Northern Italian noble families had invested in industry, sometimes losing their fortunes, while those from the south suffered the ups and downs of invasions over the centuries, he explained. Florentines stayed rich by focusing on education, political careers and philanthropy. He was gloomy, however, about the future for the city’s elite. “Many rich families are now moving out. Mass tourism is ruining the city as millions come to see the beauty that rich families built up over the centuries. We are victims of our own success.”

Why do you choose to be poor?

Cecilia Mo thought she knew all about growing up poor when she began teaching at Thomas Jefferson senior high school in south Los Angeles. As a child, she remembered standing in line, holding a free lunch ticket. But it turned out that Mo could still be shocked by poverty and violence – especially after a 13-year-old student called her in obvious panic. He had just seen his cousin get shot in his front yard.

For Mo, hard work and a good education took her to Harvard and Stanford. But when she saw just how much chaos and violence her LA students faced, she recognized how lucky she had been growing up with educated parents and a safe, if financially stretched, home.

Now, as an assistant professor of public policy and education at Vanderbilt University, Mo studies how to get upper-class Americans to recognize the advantages they have. She is among a group of scholars trying to understand how rich and poor alike justify inequality. What these academics are finding is that the American dream is being used to rationalize a national nightmare.

It all starts with the psychology concept known as the “fundamental attribution error”. This is a natural tendency to see the behavior of others as being determined by their character – while excusing our own behavior based on circumstances.

For example, if an unexpected medical emergency bankrupts you, you view yourself as a victim of bad fortune – while seeing other bankruptcy court clients as spendthrifts who carelessly had too many lattes. Or, if you’re unemployed, you recognize the hard effort you put into seeking work – but view others in the same situation as useless slackers. Their history and circumstances are invisible from your perspective.

Here’s what has gone wrong: hard work and a good education used to be a sure bet for upward mobility in the US – at least among some groups of people. Americans born in the 1940s had a 90% chance of doing better economically than their parents did – but those born in the 1980s have only 50/50 odds of doing so.

As the dream has faded, however, its effects have not. Several elements of normal psychology combine to keep many across the economic spectrum convinced that the rich and the poor deserve what they get – with exceptions made, of course, mainly for oneself. This error “lays the groundwork for beliefs that would tend to justify [systemic] inequality,” says Arnold Ho, principal investigator for the psychology of inequality lab at the University of Michigan.

A great example of what the fundamental attribution error looks like in real life can be found in the bestseller Hillbilly Elegy. JD Vance writes of seething with resentment as he worked as a teen cashier, watching people commit fraud with food stamps and talking on cellphones that he could only “dream about” being able to afford.

From his perspective, the food-stamp recipients were lazy and enjoyed selling food to support addictions rather than working honestly. But he had little idea how they saw it from within – whether they were using illicitly purchased alcohol to soothe grief, pain and trauma; whether they were buying something special to celebrate a child’s birthday; whether the hard life that he had been able to manage had just gotten the better of others who were born wired differently or who didn’t have any supportive family members, as he did with his beloved grandmother.

Another instance can be seen in this quote found in an article in the Washington Post about immigrants from a retired factory worker in Pennsylvania: “They’re not paying taxes like Americans are. They’re getting stuff handed to them,” the retiree complained. “Free rent, and they’re driving better vehicles than I’m driving and everything else.” He may not have known – or didn’t care – that immigrants do pay taxes (and so do millions of undocumented immigrants) or that they don’t typically get free rent either.

Indeed, this type of complaint – that undeserving people “cut the line”, as sociologist Arlie Hochschild puts it – is so common in coverage of Trump voters that it was recently caricatured by Katha Pollitt in the Nation: “‘I played by the rules,’ said retired rancher Tom Grady, 66, delving into the Daffodil Diner’s famous rhubarb pie. ‘Why should I pay for some deadbeat’s trip to Europe?’”

Another aspect of this phenomenon is known as “actor-observer bias”. When we watch others, we tend to see them as being driven by intrinsic personality traits, while in our own case we know that, for example, we acted angrily because we’d just been fired, not because we’re naturally angry people.

“We tend to see the world through our own experiences,” explains Stephen Pimpare, lecturer in American Politics at the University of New Hampshire and author of the forthcoming Ghettos, Tramps, and Welfare Queens: Down and Out on the Silver Screen. “We often think it is structure or circumstance that constrains our choices, but it’s the behavior of others that alters theirs.”

In other words, other poor people are poor because they make bad choices – but if I’m poor, it’s because of an unfair system. As a result of this phenomenon, Pimpare says, poor people tend to be hardest on each other. He gives the example of a large literature in anthropology and sociology about women on welfare published since the 1980s. “It finds over and over again that some of nastiest things you ever hear about women on welfare come out of the mouths of women on welfare.” For instance, one woman will talk about how another down the hall is lazy and sits around, exploiting the system – even though her own behavior could be viewed from the outside as virtually identical. Some will even go so far as to deny that they even get welfare payments, he adds.

Biases about the nature of inequality, of course, don’t only affect poor people.

Among the wealthy, those biases allow society’s winners to believe that they got where they are by hard work alone and so they deserve what they have – while seeing those who didn’t make it as having failed due to lack of grit and merit.

“The myth of meritocracy turns out to be deeply anti-meritocratic,” says Richard Reeves, author of Dream Hoarders, a new book that suggests that it’s not only the 1% who need to take a look in the mirror when complaining about inequality – more like the top 20%.

“It’s something of vicious circle,” he says, describing how rising inequality increases physical and geographical segregation by class, which then reduces cross-class contact and decreases the ability to interact and empathize. Less empathy then fosters greater political polarization and justification of inequality, which in turn causes the cycle to repeat.

Cecilia Mo’s experience of the effects of inequality on education came during a stretch with Teach For America, a selective program that allows top university students to spend two years teaching in poor communities. It inspired her to study that organization, to learn whether close contact with people across class can change attitudes.

She figured that the elite students who wanted to join the program were already inclined to see structural disadvantages but found that, even for them, real experience deepened their commitment.

Intimate contact – such as the experience if teaching in the inner city, mentoring, other types of services that allow people to connect despite class difference – builds empathy. The more you engage with with people unlike you and learn about their lives and stories, the harder it is to see them as stereotypes or to dismiss their challenges as trivial.

While not everyone can participate in such intense service, the more we can recognize biases in ourselves, the less likely we will be to fall prey to them.

Billionaires

Perhaps the most controversial episode in a long time was #790 on the economic impact of billionaires. This episode studied a single question as reported in recent research, what effect do billionaires have on a nation's economic growth. The research found that this is determined by how that nation's billionaires acquired their wealth: if it was through corruption, as in Russia, they hurt economic growth; if they became billionaires through normal means such as business or inheritance, they tend to have no net impact.

Feedback was enormous, almost all negative. This, from listener Sarah, was typical:

Billionaires have far too much power in the world. How billionaires choose to spend their wealth has an impact on everyone else on this planet, and often it's in a harmful way... These people can use their money and power to politically lobby against systemic changes that would empower the worker or protect the environment. They would rather protect the bottom line for themselves and their investors than truly make life easier for the working class... The fact that people who clearly don't care about global wellbeing have so much sociopolitical power is indeed very very dangerous.

Again, a really typical reaction to the episode. It seems I shouldn't have to point this out, but Sarah and many others wanted this episode to be about a completely different topic. Rather than examining a single objective science finding by economists, they wanted instead a subjective evaluation of the personal characters of billionaires.

Well, I also shouldn't have to point this out, but all groups of people include all kinds of people. Any generalization about any group is necessarily false, e.g., all billionaires are greedy and immoral. Painting any group with such a broad brush can only result in a factually wrong conclusion. That's one reason Skeptoid episode topics are never about such things. There are over 700 billionaires in the United States alone; I bet most of us couldn't even name 10 — and yet some listeners want me to do an episode of Skeptoid claiming I've determined all 700 as a group are greedy and immoral. I hold Skeptoid to a higher standard than that, and I would hope you do too.

You might not like the finding reported in the episode (that American billionaires don't hurt economic growth), you might even think it was an inappropriate episode topic; but I think it was a perfect one because it challenged so many of our preferred conclusions.

Other Resources

• Books About Money
• Anecdotes About Money
• Quotations About Money