Doesn’t Nauru Just Kill Thomas Piketty’s Idea That Money Makes Money?


One of the ideas in Thomas Piketty’s book, Capital, deserves rather more attention than it gets. On the basis that the idea is laughably wrong but it’s also a central support for his insistence that wealth must be heavily taxed. His proposition being that wealth begets wealth.

If you’ve a pile of cash then you can – and do – hire good money managers who then go on to increase your wealth through investment. This is actually crucial to Piketty’s thesis, that we’re in or about to be a rentier society. Those who have capital will gain ever more of it, never lose it and those working for a living will never be able to catch up. And he’s very clear that the evidence really only supports this if it is true that richer people make higher returns on their investments than the non-rich.

In one sense this is obviously true. That plutocrat who became so through founding her own firm quite obviously has made better returns than others – that’s why she’s a plutocrat. But Piketty insists this applies to passive investments as a capitalist.


The story of tiny Nauru, once one of the wealthiest states per capita in the world, is a tale of rapacious colonialism, epic mismanagement, and avarice.

Australia, New Zealand and Britain had nearly exhausted the viable deposits of phosphate by 1968 when Australia granted Nauru sovereignty, leaving behind one of the world’s worst environmental disasters.

It might look like a Pacific island paradise but, thanks to phosphate mining, its interior is a moonscape of jagged limestone pinnacles unfit for agriculture or even building.

There was talk in 1963 and again in 1970 of moving the 10,000 inhabitants to an island off Queensland, which the Nauruans opposed. Instead, the islanders have soldiered on as one of the smallest and most geographically isolated nations.

The royalties from phosphate accumulated in a trust by the Nauruans – worth A$1.7bn at its peak – were squandered in the years following independence.

$1.7 billion? Aye, that’s real money. Can buy some good advice and management with that. Except that’s quite clearly isn’t what happened, is it? There are other examples, the billionaires who owned Schlitz lost the lot while they were simply passive managers of that brewery.

The having of pots of money does not mean, necessarily at least, superior investment returns. Thus a central plank of Piketty’s thesis fails. As does another one of course. Here it was a government wasting the cash, wasn’t it? Which isn’t a good reason for governments to tax private wealth so they can piss that away too, is it?

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