Wealth Inequality Isn’t Actually Problem.
Wealth inequality is a hot-button issue that is only going to get more divisive as the world gets richer, but is wealth inequality a problem?
The wealthiest people among us today live a life unparalleled by any other human throughout history. The greatest kings and emperors could only dream of the life afforded by today’s billionaires. It doesn’t end there, even multi-millionaires are living through a time where they have access to information, unhindered mobility, and limitless personal comforts but this is all taking place in a time where a swirling population of people is struggling to make ends meet — The issue of wealth inequality is a hugely controversial one.
Wealth inequality is a hot-button issue that is only going to get more divisive as the world gets richer, but is wealth inequality a problem? It’s never nice to read stories about a billionaire getting their fifth mega-yacht while single mothers are struggling to pay their bills but, is one causing the other? If we were to put emotions and morality away to answer these questions, we would have to look at a few key factors:
WHY IS THE WORLD BECOMING MORE UNEQUAL?
ARE THERE ANY BENEFITS?
IS THIS A ZERO-SUM GAME?
WHAT ARE THE DRAWBACKS?
Perhaps, the reason wealth inequality has come to the forefront of the public consciousness in recent decades is that it is getting more and more severe. Today, the wealthiest seven people in the world have more collective wealth than the poorest 50%. People are frustrated that technological innovation has not made humanity richer but rather, it has only made a handful of people richer. Although that’s not entirely correct. Inequality itself is more just a side effect of prosperity.
Imagine a tribe living in a time before the first civilizations took shape; these were people using very basic tools and living in groups no larger than a hundred or so. These societies had very little wealth inequality. The richest member of such a society might be a chief or an elder; they might not need to go out and hunt or gather as much, they might live in a slightly larger hut and get the first pick of food but there wasn’t a huge difference. If we look at Maslow’s hierarchy of needs, we will see that a majority of the difference came from the more social levels of the pyramid. These societies spent most of their time trying to stay alive. When a society is living meal-to-meal there isn’t much room for the disparity — apart from respect, honor, and relationships.
Fast forward a few years into the Middle Ages and you would see a very similar situation. Now, there are kings, queens, and lords who live in castles and enjoy a regular diet grown by their peasants toiling in the fields. Inequality has grown because there was more room for it to grow. Society had developed from where humans were animals in the wild — struggling day-to-day to survive — to basic farmers. This step-up in technological prowess gave people like kings, queens, and lords to exist. But, even the richest and most prosperous kings from these times would not hold a candle to the quality of life enjoyed by an average American today.
People from developed countries have robust housing, the ability to regulate temperature year-round, and they have robotic slaves that do their laundry. Even the bottom dredges of society like graduate students can travel almost anywhere in the world - quickly and comfortably. This is of course to say nothing of the miracles of modern medicine or boundless access to information. The extreme pace of technological innovations over the past three centuries has meant that quality of life by almost all metrics has massively improved for everyone. But of course, in the same way, farming, steel weapons, and basic architecture gave rise to a class of nobility; the information age has given rise to a modern global upper-class.
Dingy castles without running water? Huh, try a 17-room bedroom with a 5-car garage and underfloor heating. Gold plate horse-drawn carriage? How about a private jet that travels 98% the speed of sound?
This all to say that the absolute pinnacle of wealth in society has increased as the general wealth in society has grown with it. In 300 years, it’s not inconceivable to think that we will be reading heart-wrenching stories about a single mother unable to make payments on her spaceship that she needed to get to her second job on Mars (okay, maybe that’s an exaggeration but you get the idea). This leads us neatly on to the often-overlooked benefits of inequality.
When the issue of wealth inequality is explored, people often agree with the fact that wealth inequality drives motivation to be better. People wouldn’t go through the effort of tertiary education, long arduous careers, or even putting in some overtime if there wasn’t the promise of higher standards of living. This isn’t to say that everyone going to college expects to be a millionaire but rather they do intend to increase their standard of living through more readily available work, better conditions and yes of course, more competitive remuneration. A common counterargument to this is that often higher compensation can lead to lower performance. This shows that wealth inequality doesn’t produce higher performance. However, I think that huge compensation might not make people’s performance day-to-day BUT it does make people far more motivated to attain the skills they need to perform a role tomorrow.
Okay, so inequality means that people are motivated — nothing revolutionary there. However, what is often overlooked is some of the more subtle benefits of huge accumulations of wealth. The first steam engines were assembled by wealthy nobles effectively as a hobby. The Renaissance and the resurgence of science that came along with it were fueled by the patronage of wealthy families and modern spaceflight was something that was only made possible by pooling the collective cash of the wealthiest nations in the world. Steam engines, modern space flight, and a myriad of other developments have all been hugely beneficial to the life in the modern world; None of these technological marvels would have been if it weren’t for the huge concentration of wealth.
Now, wealth driving innovation simultaneously motivating a more productive workforce is great; most people don’t have any problem with individuals becoming extremely wealthy as long as they didn’t get there by pushing others down. There is an increasingly popular narrative that the world’s modern billionaires are becoming wealthier by pushing others down into poverty.
Graphs that show a majority of the United States’ wealth being hoarded amongst a few, certainly back up this idea. The reality of this is rather unsatisfying though. There are billionaires today that have genuinely added a huge amount of value to society and have been rewarded for it.
Think of individuals like Bill Gates — say what you will about his shady business practices, but Microsoft has revolutionized the way we do business. One person with Microsoft Excel can do the work of twenty bookkeepers with an abacus; the increase in productivity by this everyday business software has delivered incalculable increases in global efficiency. The same is true for a lot of other innovators — they got rich by sharing in a slice of the value that they added to society. On the other hand, there are individuals that rightfully deserve some criticism. Intermediaries like payday loan companies, gambling institutions, and black-market criminals are claiming more money for themselves than what they are contributing to the collective wealth of the society. To enrich themselves they are making society poorer which is undoubtedly a very negative outcome.
This all exists on a spectrum from radical innovators — that massively contribute to society and get rewarded for it, on one hand, all the way down to the leeches on the other.
It is easy to categorize every extremely wealthy person as an equally ruthless tyrant but this anger probably distracts us from the real problem here; It’s much more important to stop people from getting wealthy by leaching off society, rather than stopping extreme wealth altogether.
All that being said, even if someone becomes wealthy through the most virtuous of means and makes great contributions towards the future of humanity, it doesn’t necessarily mean that the wealth they receive from these actions is going to cause a great benefit. If anything, else, it can cause a misguided market.
Economists will look at people’s marginal tendency to consume and save. What this means is that for every extra pound someone receives, how much will they spend and how much will they save. Average people spend a good majority of their income make because well, living is expensive. There are bills to pay and mouths to feed; extremely wealthy individuals tend to spend a lower portion of their income — they spend more overall but less in relative terms because there are only so many cars, planes, and bottles of champagne you can realistically buy. This means that wealthy people accumulate money — the rich get richer as it were. Most of the time these wealthy people will try to invest their money in the stock market, real estate, or whatever that will increase in value to make them even wealthier but there is a problem: if too many people become too rich, the opportunities for good investments dry up.
If a group of billionaires is waiting for the next promising tech company to go public, they can start a wild bidding war driving the price up for something reasonable to something that makes it a pretty poor investment. The same is true for high-end real estate. Eventually, these people accumulate more money than they know what to do with which is a problem. They could put it in a bank, but low-interest rates make that an unappealing decision. So, they are forced to invest in less and less promising ventures in the hope to achieve some return — this is referred to as a glut.
Savings glut are a real problem for the economy. Extremely wealthy individuals are running out of safe havens to hoard their vast piles of money. This has only been accelerated by the economic fallout of 2020 which has rocked markets that were once thought to be very stable. A savings glut is what led to a hoarding of mortgage-backed securities before 2008. Today, we see very wealthy investors putting money into companies with no plan to ever turn a profit simply because they don’t have anywhere else better to put it.
Recessions are caused by debts and poor investments; these debts and poor investments are facilitated by money that has nowhere better to go. Now an important thing to note here is that savings gluts are less of a problem if it is from the lower or middle classes. (1) middle-class earners don’t have the capacity to hoard quite as much capital as the truly wealthy elites of the world, (2) they’re able to invest it towards smaller-scale projects. The world today is full of fantastic opportunities but loaning someone $5000 to start an online business is not worth the attention of a billionaire. Even if this business could return a 300% return on investment in the first year, it wouldn’t pay for the fuel that took the billionaire’s jet to come and see the investment pitch. If a billion dollars were spread out amongst 20,000 households, the money is more likely to go towards small-scale and promising businesses.
Wealth and power are always going to be controversial issues, issues argued back and forth between the words of many who can only make so much noise and, the voices of a few who make quite a lot. Wealth inequality and the misallocation of capital is an issue but it’s not the type of issue that most people think it is. Why is inequality on the rise? Well, because the world is getting wealthier. Are there any benefits? YES! Some of mankind’s greatest achievements have come from extreme concentrations of wealth. Does the wealthy getting wealthier means average people are becoming poorer? Well, in some cases unfortunately yes. What are the drawbacks of wealth inequality? They are there and they are serious but, some billionaire spending $200m on a yacht is not a drawback. If anything, building a yacht is a great way to employ yacht-builders and crew members. Outrageous spending makes for better headlines, but the real issue is outrageous investing.
“A nation will not survive morally or economically when so few have so much and so many have so little”