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A World of Billionaires
Wealth inequality matters less than you think
If you are reading this right now, you may not know it, but you are a billionaire. In popular discussions concerning economic growth and progress, the topic of inequality often takes center stage. But a sole focus on wealth inequality is a distraction from the 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 “justice” and inequality. One might hear, for example, proclamations that we need to “eat the rich” who are 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 I have written before, many of the factors that give rise to progress are counterintuitive to our brains and the nature of wealth is no exception. Economic growth and wealth generation are not a zero-sum game where someone else’s win is your loss. There is no gigantic pot of gold being hoarded by the world’s billionaires. Wealth is not finite; Jeff Bezos's billions do not make you or me necessarily poorer.
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 getting a larger piece of the “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 as well.
Time Cost vs Wealth
Admittedly, the fact that the poor are wealthier today than in years past is likely of little solace to someone who proclaims a desire to “eat the rich.” 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 Steven Pinker, 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? They do, but inflation statistics fail to capture technological improvement and the rising wealth of consumers. If we measure the time it takes for the median worker to buy a particular good or service, or its “time cost,” we find that we are all getting very rich indeed. Going further, when we account for how much those products have improved over time for the common person, we are becoming more, not less, equal.
Think of it this way, smartphone prices may have trended upward over the last 15 years but median incomes have also risen. Meanwhile, smartphones replaced many separate products one used to buy; a pager, scanner, phone, camera, music player, video camera, dictionary, address book, calculator, alarm clock, maps, timer, flashlight, radio, voice recorder…etc.
Progress reduces the cost and improves the quality of the goods and services available. The time price of refrigerators, for example, has fallen about 92 percent since 1956. This means that you can purchase over 13 refrigerators today for the same price as a single model in 1956. The new model is a lot more energy efficient too.
Basic commodities have also 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.
A few hundred years ago, books were reserved for an elite few because a single manuscript, adjusted in today’s dollars, cost about $35,000 to produce. Compare this with today, where your smartphone and an internet connection can grant you access to almost the whole of humanity’s knowledge…virtually for free. You have billions of dollars of information at your fingertips, something only can only dream of just 30 years ago.
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 wealth inequality, but it narrows inequality in everything that matters.
But Still, Isn’t Inequality Unfair?
Many will remain unconvinced by the arguments presented above. They will still hold that wealth inequality is fundamentally unfair. But the aforementioned 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 and fairness.
If we begin from the basis that inequality is severe, getting worse, and fundamentally unfair, we will draw solutions similar to the “eat the rich” crowd and call for the confiscation of and redistribution of wealth. But now that we understand the true nature of inequality, we can address these questions from a position of reason instead of emotion.
To the extent that wealth is “unearned” or achieved through “rent-seeking,” in economic parlance, inequality is a problem. As I discussed here, a surprising amount of unearned wealth comes from the location value of land. Land is God-given, as are the minerals beneath it, no human creates it. Land and resources are not the fruits of physical or intellectual labor.
Thus, allowing the fruits 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 actually 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. We know how to do this already. A distributed profits tax that targets supernormal profits can soak up unearned rent from the economy without harmfully stifling the wealth generation system from which we all benefit. Further, land value taxation and zoning reform would make society a great deal more equal without arbitrarily and spitefully extracting wealth from those who have more.
Progress is unintuitive. The idea that wealth is not zero-sum conflicts with our biology which assumes finite resources. This fundamental misunderstanding distracts from technological, economic, and social progress. It leads us to ask the wrong questions and therefore to draw out the wrong “solutions.” Only when we understand the nature of the challenges at hand, can we arrive at the correct prescriptions for a more just and prosperous world.