Risk & Progress| A hub for essays that explore risk, human progress, and your potential. My mission is to educate, inspire, and invest in concepts that promote a better future for all. Subscriptions and new essays are free and always will be. Paid subscribers gain access to the full archives.
If you are reading this right now, you are a billionaire, you may just not realize it yet. In the discussion surrounding growth and progress, the topic of inequality often takes center stage. But the “problem solving machine” that evaporates our world enables us to become wealthy in two ways. Yes, by raising our incomes, but also be reducing the cost of goods and services. A sole focus on wealth inequality distracts from some key benefits of progress and obscures our view of genuine economic challenges.
A Larger Pie
Today’s economic discourse is dominated by concerns about economic inequality. One might hear, for example, proclamations that all of today problems can be solved if the “rich” were not selfishly “hoarding” all of the wealth. Statements like these illustrate legitimate frustration and feelings that the “system is rigged.” These feelings are not completely without merit, as I will discuss in a moment. But blanket statements of this kind also illustrate a fundamental misunderstanding of how wealth and prosperity come to be and harmfully conflate inequality with unfairness.
As we have seen, progress is somewhat of a paradox and the nature of wealth is no exception. We always ask, for example, why are certain people poor in our quest to help them, but this is the wrong question. Poverty is the default state of humanity; our species spent most of its existence in material poverty! We should instead ask why some became wealthy and how we might enable more to partake in that process. Here, our propensity to fall for zero-sum fallacies takes hold. Economic growth is not a zero-sum game; there is no giant pot of gold that is being hoarded by the world’s billionaires. Wealth is essentially a measure of society’s accumulated knowledge, its ability to use matter and energy in beneficial ways. Therefore wealth, like knowledge, is not finite. The “pie” can grow to an infinite size; Jeff Bezos's billions do not make you or I necessarily poorer.
In fact, wealth inequality is, to some extent, a mathematical consequence of economic development. In the US and many countries, wealth inequality has grown over the last 50 years. Billionaires are certainly getting a larger piece of the economic “pie.” But looking only at the size of the slice misses a key fact: the pie itself has also gotten bigger, much bigger. The poor and middle class today may have a smaller proportion of that pie, but their slices are still much larger overall.
Time Cost
Admittedly, the fact that the poor are wealthier today than in years past is likely of little solace to many. But we need to take this analysis a step further, because at the end of the day, what really matters is not the number of dollars in your wallet, but what you can do with it. In Enlightenment Now, author
notes that when defining poverty by what we can do with wealth, rather than the raw dollars earned, the poverty rate in America plunged 90 percent from 1960 to 2018, to a mere 3 percent of the population. The reason is that a dollar today, even when adjusted for inflation, buys a much greater quality of life compared to a dollar 60 years ago.This sounds incredibly unintuitive, don’t prices trend upward with inflation? Doesn’t everything get more expensive? Of course they do, but inflation data is flawed in that it fails to fully capture technological improvement and the rising wealth of consumers. For this reason, we have to turn to an alternate measure of cost. That measure is called the “time cost” or the “time price.” Pioneered by
and in their book entitled Superabundance, Pooley and Tupy illustrate the simple math behind the concept. To compare the true cost of a good or service over time, one simply calculates the number of labor hours of work required to buy it by dividing the dollar cost with the individual’s/household’s earnings per hour.To compare the “time cost” of goods and services for a large population of people over time, we can divide that cost by the median income of the group. We use the median income as opposed to the average because a few extremely wealthy individuals can skew averages upward and distort the data. The “time price” is a superior method for capturing true change in prices over time because it avoids the subjectivity inherent to inflation data and the challenges of currency exchange rates between countries. Also, because innovation reveals itself in both higher incomes and lower prices, it better captures the impact of innovation and the problem-solving machine.
When we measure the time cost of common goods and services, we find that we are all getting very rich, and we are becoming more, not less, equal. As we saw, basic commodities have become more affordable. To calculate this, we can index the time cost of wheat, corn, and rice, staples that represent most of the calories that we humans consume. The trend is clear; for Americans since 1960, the time cost of these commodities dropped by about 78 percent. The growing wealth of India and China saw time costs plunge by an even starker 81 percent and 96 percent respectively. This is despite the global population more than doubling in that time.
The general population only seems to acknowledge this effect in terms of computing. We all know, for example, that consumer electronics have become more affordable over time. Televisions, especially so. But price compression is everywhere. The time price of refrigerators, for example, has fallen about 92 percent since 1956. This means that the median American worker in 2022 can purchase over 13 refrigerators today for the same hours worked in 1956. In that same period, the time cost of air conditioning units fell 97 percent, enabling one to buy 36 AC units for the price of one in the 1950s.
This doesn’t even fully consider technological improvements; not only are they cheaper, the new model refrigerators and AC units are also a lot more energy efficient too. TVs are larger, lighter, produce more vivid colors and have higher resolution. Smartphone prices may have trended upward over the last 15 years, but they also replaced many separate products one used to individually buy; a pager, scanner, phone, camera, music player, video camera, dictionary, address book, calculator, alarm clock, maps, timer, flashlight, radio, voice recorder…etc. The smartphone collapsed a host of consumer goods into a single device. Thus, enabling our incomes to go further and do more than they did in the past.
In sum, you may not have as much money as Jeff Bezos, but the phone in his pocket is probably not much better than yours, nor are the clothes on his back. Even the poorest among us live like kings compared to the wealthy of generations past. Progress may widen inequality as expressed in dollars, but it appears to narrow inequality in just about everything that matters.
Inequality and Unfairness
Many will remain unconvinced by the arguments presented above. They will still hold that wealth inequality is fundamentally unfair. The preceding arguments are not meant to dismiss frustration with the status quo, but instead to properly frame the questions that we should be asking about inequality, fairness, and growth. If we begin from the basis that inequality is severe, getting worse, and fundamentally unfair, we will draw the wrong solutions. But now that we understand the true nature of inequality, we can address these questions from a position of reason instead of emotion.
I admit that, to the extent that wealth is “unearned” or achieved through “rent-seeking,” in economic parlance, inequality is a problem. Indeed, a surprising amount of unearned wealth comes from the location value of land. Land and resources are not the fruits of physical or intellectual labor. Thus, allowing the matter of the Earth to be privately captured by individuals is genuinely problematic. Similarly, imperfections in the market system allow certain players to yield significant unearned wealth at the expense of everyone else. While most businesses and billionaires create prosperity for all, those that rely on rent-seeking do unfairly extract wealth in a zero-sum manner. Policymakers, therefore, should narrowly tailor policy to people and industries that rent-seek, not the wealthy in general.
The idea that wealth accumulation is not a zero-sum game conflicts with our biological “wiring” which always assumes finite resources. This fundamental misunderstanding of the nature of wealth distracts from technological, economic, and social progress. Wealth does not come only from increasing the size of the wallet or adding zeros to the stock portfolio, it comes by compressing the cost of everything we do with it. We best not neglect the latter with a sole focus on the former.
You also may like…
The idea that we don't live in a purely zero-sum world is deeply counterintuitive to most people and is, as you point out, one of the major hurdles in the way of more public support of progress, growth and wealth generation.
I would add though that while the absolute amount of wealth inequality isn't necessarily a problem in economic terms or as a matter of improving human wellbeing (as the pie is getting bigger for all), the "feeling" of living in a society with higher inequality seems to be a big problem for human psychology, as it drives a sense of unfairness. This in turn leads to social unrest and political challenges. So from that pov, there might be a need to curtail the extremes of wealth inequality as much as possible
Where to start, um, the wealthy don't create wealth; they capture it. Innovation creates wealth, which the wealthy distort for their own purposes. They control innovation by dictating laws favorable to themselves and then use ROI to distort what innovation can and will come to market. People believe the wealthy capture most of the wealth is because they do. Once they have captured innovation with investment and foolish right to exclude patent law, they then proceed to capture as much of that wealth as possible.You have conflated the creation of wealth with the capture of wealth. So, even though the pie has grown, their share of it has grown faster. Adam Smith not so famously wrote,
"... the rate of profit does not, like rent and wages, rise with the prosperity, and fall with the declension of the society. On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin. "
So, this pursuit of high ROI, according to Smith, is leading us to ruin.
Smith also wrote,
"... but to narrow the competition must always be against it, and can only serve to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens."
Smith again wrote,
"It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. "
Your argument isn't with the public but with the observations of Adam Smith in Wealth of Nations.
No amount of smartphone upgrades can hide that. Of course none of this matters. Given the sheer volume of toxic waste being dumped into the environment every minute, all this discussion is doing is rearranging the deck chairs on the Titanic.