by Elliot Campbelton
Dec 2019
The wealthiest among us today live a life unparalleled by any other human throughout history.
The greatest kings and emperors could only dream of the life afford it to today's global billionaires and it doesn't end there, even meir multi millionaires are living through a time where they have access to preferential information, unhindered mobility and limitless personal comforts, all taking place in a time where a swirling population of people are struggling to make ends meet.
The issue of wealth inequality is a hugely controversial one. People from either extreme debate/advocate for absolute wealth accumulation or bringing back the guillotines.
Wealth inequality is a hot-button issue that is only going to get more divisive as the world gets richer but is wealth inequality actually a problem?
What is the correlation between the gain in wealth of the already wealthy and the rise in living standards that affords, and the relative plate of the masses when are struggling to make ends meet, in short, does one cause the other. To answer this questions we would have to look at a few key factors :
- Why is the world becoming more unequal?
- Are there any benefits to wealth inequality?
- Does the wealthy getting wealthier mean average people are becoming poorer?
The problem in context
Perhaps the reason wealth inequality has come to the forefront of the public consciousness in recent decades is because it is becoming increasingly stark.
The wealthiest seven people in the world have more collective wealth than the poorest 50 percent. That equates to 7 people having more wealth than 3.9 billion people. These people are frustraighted 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, what is truer to say is that this discrepancy is a side effect of prosperity.
Imagine a tribe living in a time before the first civilisations 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, between their objective once, and the objective wants of their subjects.
In fact 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.
The majority of this societies time was spent just staying alive. When a society is living meal to meal there isn't much room for disparity apart from respect to our human relationships and other factors that do not directly rely on technology to produce. If we push this society forward a few thousand years into the Middle Ages we would find a very similar situation.
Now there are kings 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 basically animals in the wild struggling day to day to survive, to basic farmers, tending the land. This step up in technological prowess gave people like kings and queens and Lords the ability to exist but, even the richest and most prosperous of Kings from these times would not hold a candle to the quality of life enjoyed by the average American today.
To the preesent day
In the modern day people from developed countries have robust housing with the ability to regulate temperature year-round, they have robotic slaves that do their laundry and even the bottom dredges of society (like students :)) have the ability to travel almost anywhere in the world comfortably and quickly. This is of course to say nothing of the miracles in modern medicine or our boundless access to information.
The extreme pace of technical innovation over the past three centuries has meant that quality of life by almost all metrics has massively improved. However, of course, in the same way that 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.
This is all to say that the absolute pinnacle of wealth in a society has increased as the general level of wealth in a society has grown along with it. In 300 years it's not inconceivable to think that we will be reading heart-wrenching stories about a single mother who was unable to make payments on her spaceship that she needed to get to her second job on Mars. This leads us neatly on to the often overlooked benefits of inequality when the issue of wealth inequality is explored.
Are there benifits?
It is agreed by both advocates and oppositional alike that wealth inequality drives motivation to be more efficient. People wouldn't go through the effort of tertiary education or 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 university expects to be a millionaire but rather they do intend to increase their standard of living through more readily available work better conditions and more competitive remuneration.
A common counter-argument to this is that often higher compensation can lead to lower performance. A popular study asked people to shoot basketball hoops for varying prizes from modest sums all the way up to very significant amounts of cash. It was found that the higher the prize was the worst the expected results were.
People have used this practical demonstration to show that wealth and equality doesn't actually produce higher performance, however this is actually a pretty terrible model for a few reasons. The first is that most business is not based on performance in a single moment. If a life-changing amount of money was offered to someone who could throw ten three-pointers in a row that person may dedicate a year to do nothing but getting really really good at throwing three-pointers.
In the same way if someone was offered two million dollars to design a bridge they might not design a very good bridge because they would be distracted by thinking about the new boat they would like to buy, but if the role of chief engineer and huge civil projects attracted a seven-figure income you might find that people go to school for many years to get the technical knowledge they need to perform that task.
Huge compensation might not make people's performance better day to day but it does make people far more motivated to attain the skills they need to perform a role tomorrow.
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 was fuelled by the patronage of wealthy families in the same way that modern spaceflight was something that was only made possible by pooling the collective cash of the wealthiest nations in the world. Steam engines and modern science Space Flight and a myriad of other developments have all been hugely beneficial to life if it can be quantified that and individuals value, can in someway be ascribed to the time the individual lived in.
None of these technological marvels would have been possible if it weren't for the huge concentration of wealth. The idealistic notion of trickle-down economics has been heavily criticised by most economists. Promoting that "trickle-down" is actually a phrase used to discredit economic theories. Though a another way of looking at this would be that it is not wealth that trickles down in the form of cash, rather it trickles down as technical innovation.
By extension if we were to speculate about the future of humanity it's not inconceivable to foresee billionaires being the bridge between Earth and Mars bringing along with it all the prosperity that would come from being a multi-planetary species.
The rise on envy, and exploitation of the system.
So wealth driving innovation and simultaneously motivating a more productive workforce is definitively a benefit, with most people not having an issue with individuals becoming wealthy ( so long as they didn't get there by pushing others down).
However, there is an increasingly popular narrative that the world's modern billionaires are becoming wealthier by pushing others down into poverty. Graphics 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. Considering individuals like Bill Gates, Microsoft has revolutionised the way that we do business. Today one person with excel can do the work of 20 bookkeepers with an abacus. The increase in productivity accommodated by this everyday business software has delivered incalculable increases in global efficiency. The same is true for a lot of other innovators who accumulated wealth 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 or black market criminals, are clearly claiming more money for themselves than what they are contributing to the collective wealth of society. In fact to enrich themselves they are actually making society poorer which is very clearly a negative outcome.
This all exists on a spectrum from Radek 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 categorise every extremely wealthy person as an equally ruthless tyrant, but this anger probably distracts from the real problem here it's much more important to stop people getting wealthy by leaching of society, rather than stopping extreme wealth altogether.
The measurable impact of having money
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.
Economists will look at people's marginal propensity to consume and save. This means for every extra dollar someone receives how much will they spend vs save. Average people spend a good majority of the money they make, by contrast extremely wealthy individuals tend to spend a lower portion of their income (though they spend more overall but less in relative terms).
This means that wealthy people accumulate more wealth relatively than those on lower incomes, investing it into businesses and real estate, however challenges arise when considering the opportunities for a good return on investment dry up. For example if a group of billionaires are waiting for the next promising tech company to go public they can start a wild bidding war driving the price up from something that is reasonable, toward the speculative. The same is true for high-end real estate
A recent paper by the National Bureau of Economic Research, authored by Harvard professor Ludwig Straub talks about the modern savings glut of the rich. In this paper it is identified that the wealthy elite are running out of safe havens to hoard their wealth. 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 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. In short it can be said recessions are caused in no small part by debt and poor investments, these debts and poor investments are facilitated by money that has nowhere better to go.
An important point here is that savings glutes are less of a problem if it is from the lower and middle classes. For one lower earners don't have the capacity to hoard quite as much capital as the truly wealthy elites and secondly, they have more ability to put it towards smaller scale projects that have a net equalising affect on global society.
The world today is full of fantastic investment opportunities but loaning someone five thousand dollars to start an online 2D glasses business is just 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 billionaires jet to come and see the investment pitch. If a billion dollars was spread out amongst 20,000 households though, then the endeavour of capital redistrebution would find much more traction. Thereby ensuring more money would go towards promising small-scale businesses and less money would go towards not so promising large-scale businesses. Hence the issue of access to capital by those that could use it to ultimately equalise society is sadly wanting.
Wealth and power is always going to be a controversial issue, and an issue argued back and forth between the words of many and the voices of a few. So to our original questions, some answers in as few words as possible, as you will doubtlessly need another cup of tea having read this far.
Why is the world becoming more unequal?
Ans : Because it is becoming wealthier
Are there any benefits to wealth inequality?
Ans : Yes some of mankind's greatest achievements have come from extreme concentrations of wealth.
Does the wealthy getting wealthier mean average people are becoming poorer?
Ans : Well in some cases unfortunately yes, funded not by the lifestyles of the rich, but rather by highly speculative investing.