I refute Piketty thusly

Nelson Bunker Hunt, who has died aged 88, was a multi-billionaire Texan oilman who, with his brother Herbert, attempted to corner the world silver market. They went spectacularly bankrupt, threatening to bring down the American financial system in the process, and were forced into a humiliating “fire sale” of their prized collections of coins, art and racehorses.

The Hunts’ fortune had been built up by their father, Haroldson Lafayette Hunt, a farmer’s son from Illinois who became a professional poker player known as Arkansas Slim. Famous for his claim that “Money doesn’t mean anything to me. It’s only the way you keep the score”, HL Hunt went on to become a “wildcat” oilman (independent producer), forming a partnership with a man called “Dad” Joiner, who had discovered a massive oil field in east Texas (and later insisted that Hunt had cheated him). He built his company, Hunt Oil, into the largest independent producer of oil and natural gas in America and, by the time of his death in 1974, was one of America’s three richest men, alongside Howard Hughes and Paul Getty.

The empire Hunt had created was spread among the 12 living children he had fathered by three different wives, who had lived, dotted about the country, in blissful ignorance of one another’s existence. But the bulk of the family businesses were run by Bunker, Herbert and Lamar, sons of his first marriage to Lyda Bunker.

Great wealth does not inevitably accumulate over the generations. Sorry, but it just don’t.

Fun (possibly apocryphal) story about a meeting during the bankruptcy proceedings. His daughter turned up wearing shoes that had glass heels with live goldfish in them.

23 thoughts on “I refute Piketty thusly”

  1. I caught a cold playing chemmie at the Drones a while back, lost an entire Hebridean archipelago and some of Berkshire’s finest moors to Bufton Chynne-Lessgit. Am now living above a whorehouse in Boulogne with the pox, a pet rat and the last six bottles of port from the old cellar. I’m even having to use cava to polish me boots, demmit.

  2. So Much for Subtlety

    There will always be some people who go from clogs to clogs in three generations. Not sure even Picketty would deny it.

    The question is whether the rich have, on average, a means to hold on to their wealth. I suspect they do. In which case, what is it? I imagine it is things like being tight fisted, and being up tight about things like heroin and marrying the help.

    That the son of a gambler with broad contempt for society’s values with respect to monogamy should have turned out to be a gambler with broad contempt for society’s values with respect to monopolies is not a surprise. One was lucky. The other was not.

    By the way, Hunt’s swindle of his partner was supposedly the basis of the back story for Dallas. For those who can remember that fine peak of American television.

  3. Data is not the plural of anecdote.

    In fact if anything, we’re all-too-often misled by anecdotes. The most common one is “smoking doesn’t do any harm, my grandmother smoked 40 a day until the age of ninety”.

    That’s not to say Piketty is right or wrong: just that this does not constitute evidence.

  4. Tim if somebody else had written this you’d be calling them idiots.

    You know about averages and stuff, right?

  5. In fact Nelson Bunker Hunt *did* corner the American silver market owning just over 100% of the contracts on the (I think) CME Exchange and a dozen traders were bankrupt. So the CME (or CBOE, whichever) retrospectively changed the rules declaring some trades invalid to bail out the gamblers who had gone uncovered short. Nelson went bankrupt when the silver price collapsed after thousands of people sold their old teapots, toastracks etc and the dealers melted them down producing a temporary glut.
    Nelson did *not* ignore the rules on monopoly because he was not a monopolist, he just cornered the silver market on one US exchange.

  6. @Edward Lud

    ‘I caught a cold playing chemmie at the Drones a while back, lost an entire Hebridean archipelago and some of Berkshire’s finest moors to Bufton Chynne-Lessgit. Am now living above a whorehouse in Boulogne with the pox, a pet rat and the last six bottles of port from the old cellar. I’m even having to use cava to polish me boots, demmit.’

    That is pretty much the life story of John Mytton, my favourite English eccentric/maniac.

  7. @Luis

    How many of the tech billionaires came from wealth?

    And Hunt is just one of many, many people we can all name (and there must be more we can’t name) who had millions or billions and somehow contrived to lose it.

  8. @ Interested

    On the other side we can name lots of people who inherited lots of wealth*. Anecdotes do not constitute proof.

    *Rockefeller, Duke of Westminster, HM The Queen, etc

    Bad Timmy

  9. SMFS,

    “The question is whether the rich have, on average, a means to hold on to their wealth. I suspect they do. In which case, what is it? I imagine it is things like being tight fisted, and being up tight about things like heroin and marrying the help.”

    Some of them are tight-fisted. The first generation rich are. They’re the people for whom creating the business was about building something. The extravagances weren’t what drove them, and what made them rich was often about having a “cheap” mindset – working out how to do things for less. And they are also smart – that’s how they succeeded.

    It’s generally the idiot children or grandchildren that are the problem. The son of the founder of MFI that is “rewilding” the Highlands. The Woolworth heiress that blew it all on high living. The people who put millions into terrible dotcoms.

    What really destroys their wealth is technology. A silk farm millionaire is going to find themselves poorer when nylon comes along. They might not sell the farms to an idiot and buy shares in Pretty Polly. Or they might put their money into a hosiery company run by idiots.

  10. Stigler,
    A silk farm millionaire is going to find themselves poorer when nylon comes along, but the Duke of Westminster is no poorer for Milton Keynes or Shenzhen having come along. There are only two things that can upset the Duke’s wealth: Germany invading (and winning), or rising sea levels rendering central London uninhabitable. Neither looks particularly likely.

    Piketty would have been much closer to the mark if he had written about land wealth, rather than all wealth.

  11. Yeah, but that’s actually even worse, land wealth. For the value of (agricultural) land plummeted in the 1870s and the fortunes of the aristocracy in general have never recovered. Darcy had £3,000 a year, wasn’t it? Or 3,000 acres let out. That would be a nice income these days (£300,000 a year maybe) but not the sort of grand wealth that Austen portrayed Darcy as having. Darcy’s wealth is taken to be rather larger than that of a middling City accountant….

  12. We’ve had this argument about Mr Darcy before, IMO you can’t just index his income for inflation, you have to look at what he could purchase with his income, how much labour he could employ to work for him. Which would come out that his £3k/yr puts him on par with the highest paid sports stars today, perhaps £10m/yr. Not in the Russian oligarch league but still not to be sniffed at, considering he had the capital asset that the income was derived from as well. You also have to consider he would have paid c.10% in income tax, whereas Wayne Rooney loses around half to the State.

  13. Tim,

    You’re cherry-picking agricultural land, just as the example of the Duke of Westminster is cherry-picking prime urban land.

    Besides, parts of Mr Darcy’s agricultural land would have been built-on at some point between 1870 and today, so you can’t take the land use (agricultural) as a constant.

    Even £300,000 a year (ignoring Jim’s objections) is hardly poverty either. One of the best features of untaxed land ownership is that its value never falls to zero. Yes it may wax and wane with the times, but it’ll never go bankrupt like shares in a company, nor default like a bond. It nearly always generates income too (unlike art, wine, classic cars, gold, etc.). Even Detroit’s homes only fell into negative value because of high property taxes.

    Jim – For the purposes of my argument, I’m assuming that Mr Darcy’s wealth is always in land: that he (and his first-born male heirs) continue to own X acres of land in Derbyshire. His income derives from leasing the land, initially to farmers but over time to commercial tenants too.

  14. Andrew M/Tim W,

    “Piketty would have been much closer to the mark if he had written about land wealth, rather than all wealth.”

    Well, yes, but as Timmy points out, even that fluctuates in value. The Boleyns were fabulously wealthy, owning a large estate near Burbage with lots of farm land. Someone who owns a small house in Kensington is richer today than a farmer in mid-Wiltshire today.

    Land values fluctuate for various reasons. Changes in technology, but also according to where government spends. It’s not even just the Germans invading. If we had a revolution in this country and moved the capital to Manchester along with the BBC and the arts, stopped subsidising London’s transport system, and subsidised Manchester’s, the value of the Duke’s land holdings would collapse to the value of the same footage in Manchester. I don’t think that’s going to happen, but I do sense a change in the air politically to rebalance spending in this country away from the billions that have been showered on London in the past 2 decades.

  15. New wealth is made all the time, but the previously-wealthy absorb the newly-wealthy fairly efficiently, especially in a system with titles, through the mechanism of marriage.

  16. > “Owned just over 100% of the contracts”
    What does that mean?

    What the Hunt brothers and their associates had was future contracts on which they could, funding permitted, demand the delivery of about as much silver as could possibly be available for delivery (taking into account that the Hunts had already bought up a lot of the stuff). So it was unclear whether the traders on the other side of the contracts would be able to deliver, or would instead have to buy out the contracts at any price.

    So CBOT and COMEX introduced strict limits on the amount of silver contracts any investor could hold, increased margin requirements for the contracts, and then barred new investors from the market. The effect was that the Hunts and other speculators became forced sellers, with no new buyers coming into the market, and the price collapsed.

    Unquestionably the Hunts were stitched up. But that was a risk they could have foreseen – the meta-rule was that the exchanges could make up whatever rules they fancied.

  17. So Much For Subtlety

    The Stigler – “Some of them are tight-fisted. The first generation rich are. They’re the people for whom creating the business was about building something. The extravagances weren’t what drove them, and what made them rich was often about having a “cheap” mindset – working out how to do things for less. And they are also smart – that’s how they succeeded.”

    I agree with that. And the second generation tends to be a bit wild. But the fifth generation less so. The question is what makes a family able to make it to the fifth generation. There are studies of surnames which show that many middle class families are at least in the fifth generation of being wealthy. Not mine as it happens, but a lot of people’s. A lot of the upper class are five generations of more down that path.

    I think that it is a certain puritanism. The temptation to do something spectacularly stupid with your money is always there. The families that raise sons to be responsible and always think about the *next* five generations will do well. But that really means self control.

    It doesn’t always work as people do produce the odd heroin addict. Byron p!ssed away a family estate held since 1066.

    And I also think it is probably partly genetic – the upper class are known as chinless wonders for a reason. I expect that producing sons with lower than average testosterone would help.

    “It’s generally the idiot children or grandchildren that are the problem. The son of the founder of MFI that is “rewilding” the Highlands. The Woolworth heiress that blew it all on high living. The people who put millions into terrible dotcoms.”

    The Gettys. The Rockerfellers. Yeah it is a problem. Still, we all benefit from their idiocies. They greatly enrich the nation – amuse it too sometimes. The dotcom is what old money should do – the newly rich mostly invested in that. But you want to bet that in the end the average return on dotcom stocks won’t be much more than 5%?

    “What really destroys their wealth is technology.”

    If they remain enamoured of buggy whips.

  18. SMFS: “There will always be some people who go from clogs to clogs in three generations. Not sure even Picketty would deny it. The question is whether the rich have, on average, a means to hold on to their wealth. I suspect they do.”

    Indeed. I raised this with a friend who had, in point of fact, just read Piketty and confirmed that Piketty deals with precisely this point by showing that clogs-to-clogs in three, while a known phenomenon, does not occur often enough to reverse the accumulative pressures he identifies.

    There are better reasons to disbelieve Piketty’s analysis, which do not rely on data (where, it must be admitted, he is pretty strong though not invincible) but on his attempt at constructing an economic theory. He ignores the law of diminishing returns and fixes the wrong variable in his capital formation model, if my memory is working properly, and consequently his theory produces kooky predictions at the levels of economic growth we are currently experiencing.

  19. @ PaulB
    You’ve got the data that I am trying to remember BUT there is no question that the Hunt brothers were *cheated*
    Why should they expect the rules to be changed retrospectively? That is contrary to the rules of natural justice. There was NO meta-rule that the exchanges could invent retrospective rules. If that happened today in the EU, the Hunt brothers would be granted judgement plus costs and interest by the ECHR.
    The tendency of the US Congress to create retrospective legislation to benefit their voters at the expense of non-voters post-dates this cheat by several years – and may have been inspired thereby.
    In my view “Unquestionably the Hunts were stitched up. But that was a risk they could have foreseen – the meta-rule was that the exchanges could make up whatever rules they fancied.” is invalid. Until then only “banana republics” (which includes Zimbabwe but not Southern Rhodesia) went in for retrospective legislation.

  20. What do you mean, “retrospectively”? the exchanges imposed new trading rules, they didn’t backdate anything. And CBOT and COMEX could do what they wanted subject to the approval of the CFTC, which certainly wasn’t going to act to protect speculators trying to corner the silver market.

  21. So Much For Subtlety

    john77 – “Why should they expect the rules to be changed retrospectively? That is contrary to the rules of natural justice. There was NO meta-rule that the exchanges could invent retrospective rules.”

    There may have been no metarule, but there is a metarule that says, in effect, you cannot win so big as to upset the system. You cannot reasonably expect that you can corner the silver market and no one will notice. Or that no one will do anything about it. The system will come first.

    “If that happened today in the EU, the Hunt brothers would be granted judgement plus costs and interest by the ECHR.”

    I doubt that. Very much. There is probably law against it already. But if not, the US actually has a better record than the EU. Take, for instance, Magnus Gäfgen.

    In the case of Magnus Gäfgen, who was suspected of kidnapping 11-year-old Jakob von Metzler and arrested in October 2002 by German police. Police surveillance had observed Gäfgen pick up a €1 million ransom demanded from the von Metzler family and proceed to go on a spending spree. After the ransom was paid, the boy was not released. Fearing for the boy’s safety Frankfurt’s deputy police chief, Wolfgang Daschner, had Gäfgen arrested and when he would not talk threatened to cause Gäfgen severe pain. Gäfgen told police where he had hidden von Metzler’s body. In this case torture was threatened, but not used, to extract information that, in other circumstances, could have saved a boy’s life.

    The US courts would have tossed the confession and everything that came from it – fruits of the poisoned tree. He would have walked. The EU Human Rights Court bent itself into a pretzel. Admitting his human rights were violated and awarding him compensation. But even though they cited EU law saying that his confession should be tossed, they did not let him walk. They upheld his conviction on some of the most specious legal reasoning you are likely to see.

    “Until then only “banana republics” (which includes Zimbabwe but not Southern Rhodesia) went in for retrospective legislation.”

    And the West when it really wants to – as in the odd Nuremberg Trial.

  22. @ PaulB
    They imposed new trading rules *after* Bunker Hunt had cornered the silver market All his trades had been done in accordance with the rules that existed at the time that he made them. The Exchange then changed (I think it was settlement) so that the traders who wrre irretrievably short got let off the hook.
    It was as straight as a corkscrew.

  23. SMFS,

    “There are studies of surnames which show that many middle class families are at least in the fifth generation of being wealthy. Not mine as it happens, but a lot of people’s. A lot of the upper class are five generations of more down that path.”

    But “wealthy” isn’t really telling you much. I imagine it’s going to take quite a few generation for Bill Gates’ descendants to be getting welfare cheques. Someone with a business worth £10m is going to get there faster.

    We could probably tax people at 99% over £100m of wealth. We’d maybe collect quite a lot of money doing so with few disincentives. But we’re talking handfuls of people across the world. It isn’t going to change the generation problem much.

    All you can really do is to remove barriers to competition and stop the state propping things up which is where the most nepotism seems to come from. All those MPs that are the sons of other MPs, broadcasters that are the daughters of other broadcasters.

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