Greedy Goblin

Monday, June 20, 2016

Wealth inequity is a good thing

I claim something that nobody claimed before: the increasing wealth inequity (the rich is getting richer and the poor is getting poorer) is necessary for the GDP growth of the World. No, I don't mean that it's "righteous", as free market enthusiast often claim, because that's moral term and probably wrong: a doctor saving lives deserve more reward than a media mogul. From laws that allow innovation the wealth inequity grows automatically, but not as a by-product. If we'd do something against it, it would slow down the economic growth.

Why is inequity necessary? Because only a few people actually need material wealth to increase production. A policeman, a teacher or a shop assistant are all hard working people providing essential services, yet they need nothing but themselves to do it. If a New York City cop would arrive to Los Angeles with nothing but what he wears and apply for the LAPD, they could employ him and use him perfectly. On the other hand businessmen need money to be any useful. What could a construction company owner build without a dollar in his pocket? He need machines, he needs raw materials and he needs to pay his employees to build the first building that he sells before he sees any income. Any policy that would take his money and give to the cop would decrease his efficiency without increasing the efficiency of the cop. A construction company with 1 million dollars investment could start more buildings. How could a cop spend a million dollars to become a better cop? Buy a Lamborghini for patrol car? Dubai Police did that and then only use the cars for shows instead of actual pursuit.

Now the above doesn't explain the increased personal spending of the businessmen, but "being human" does. Do you find it "normal" that someone who tosses around a million dollar a day in his job will spend only $30K a year for personal expenses? It's theoretically possible and there are even examples of very modest and frugal billionaires, but most people (from cop to businessmen) want to buy nice things and the businessman can. Don't get me wrong, it is a waste for the World, but since both of them would have a same waste rate, it's better to leave the money with the one who can also spend it well.

Why does the wealth inequity increases? Because with startups and angel investing more and more people take the business route and they also aim at more and more people with their services. The products of the IT sector are in the hands of even the impoverished. Hell, I see smartphones in the hands of refugees. This means that the poor people are giving them their money (becoming poorer) and them receiving money (becoming more rich). But the poor is actually not more poor since he traded his money for something he sees more utility in (if he is a moron and wasted it, that's a different issue).

I believe that in an World of saints the wealth inequity would be total: the working people wouldn't have or need any wealth since they can create value with nothing at their name. They would only need salary to pay rent, buy consumables, entertainment and save for their pension and between-jobs time without actually accumulating anything. All wealth would be in the hands of those who have the best ability to allocate it into projects (please note that being moral saint doesn't make you smart or able to do stuff). Since they would be saints too, they would spend it all on the projects and would live in the same rental building eating the same food as their workers. None of us is a saint, but you get the picture.

Please note that my "Utopia" doesn't actually offers better wealth equity, it offers better wealth equity among neighbors, which has the psychological benefit, without the GDP loss.


Anonymous said...

You're forgetting that businesses need customers, products need consumers. Both customers and consumers need cash.

Giving complete control to businesses that only care about profit will be just as bad as the USSR.

Eaten by a Grue said...

You seem to needlessly mingle the terms "wealth" and "capital". Capital is money to be used for reinvestment, while wealth is more personal. One way wealth disparity could be kept under control is by keeping capital in the corporation.

Gevlon said...

@Anon: customers need cash (monthly income), not wealth (accumulated money).

@Eaten by a Grue: theoretically true, practically irrelevant. As owners and managers control the corporation, it's impossible to stop them to use its devices for personal purposes. The only limit is profitability, if they overdo it, they'll go bankrupt.

luobote kong said...

Ok so wealth inequality will always exist. It is a contemporary issue because the of the increasingly disproportionate ratios between those that have the wealth and those that don't. The middle class are being absorbed into the working or poorer classes. The assumption that wealth will be deployed by those that havw it to increase production is now a fallacy. Interest rates and growth wouldn't be close to zero if that were the case. And there lies the tale. There are currently better ways of the already wealthy to generate more wealth that don't involve increasing production. The wealth justdoesn't trickle down no matter how hard you push the ideology. There is an inevitable crisis point. The wealthy are only wealthy so long as it is tolerated by everyone else. If that consent is lost by not paying a police officers wages through taxes then you have a different scenario to contend with. When the wealthy and powerful gathered in Davos they discussed this eventuality. So even they don't buy into your vision.

Rodolphe Ortalo said...

I can also easily imagine situations where wealth inequity increases while the overall GDP decreases. Oh, wait, I do not even have to imagine that, in fact I just need to look around or in economic history and I find much more situations where high wealth inequity lead to extremely negative situations than the converse.

Your whole economic philosophy seems to be *based* on the idea that wealth naturally goes to those that use it in the more efficient way for the long term and the common interest. But that hypothesis remains to be demonstrated... or most probably refuted.
Try to operate without this hypothesis and realize what real people do with real unshared and uncontrolled power in the real world. That's not good for the economy.

Shivaro said...

Even the IMF researchers which was the flag bearer of Neoliberalism agenda for years now, claim that "Instead of delivering growth, some neoliberal policies have increased inequality, in turn jeopardizing durable expansion".
Maybe you are right in some ideal world. but in the real world people and organization that have a lot of capital corrupt the system in a way that give them advantage (monopoly, higher barrier for competition etc') and as you know this thing degrade the economy performance.
Just look at the history of human kind - when a new system is in place everything works fine, but then some people manage to bend/corrupt the system enough in order to farther them self. at the end the system become so corrupted that the simple people just overthrow the current system. That's what we humans do for the last 10000 years.

Shivaro said...

BTW i just realize your last paragraph describe Communism.

Sab said...

" You seem to needlessly mingle the terms "wealth" and "capital". "

Is it feasible and does it solve anything to make different currencies for capital and wealth?
(Then by wealth i mean money that helps product/service circulation, and is in some kind of controlled correlation with job for workers and capital for businesmen.)

Just a economy layman

Anonymous said...

Businessmen don't need wealth to be productive. If they have a good idea they will get money from investors or banks. That's what most silicon valley success stories are made of. Relatively few of the biggest companies were founded by already rich people.

Ekareya said...

I just read your article, and the form of it gave me the "it feels wrong" feeling in my gut.

"A policeman, a teacher or a shop assistant are all hard working people providing essential services, yet they need nothing but themselves to do it"

Speaking from experience about the teacher part, you are so wrong on that point. Sure you are most of the time alone with your student. But you need other people to do your job in the most efficient way.
It's like saying a scout in the army or in EVE can work alone. Sure the person is alone most of the time. but without the rest of the team as back up ... you get the point ^^.

"What could a construction company owner build without a dollar in his pocket?": nothing, well maybe a small hut in the wood if he is good.
"What could a construction company owner build with a million dollar in his pocket?":
Same answer. Though he can hire people and buy stuff to get shit done.

Now same question with the police officer:
What could a police officer do (about his job) without a dollar in his pocket?: do his job.
What could a police officer do (about his job) with a million dollar in his pocket?: do his job, buy stuff and hire other people to help him out. ( unless he is a M/S but in that case he shouldn't have been given the money in the first place.)

so same answer as the owner.

You kinda suffered from the selection bias on this one. And what do you think a non M/S "builder" who love his job in a construction company would do if he was allowed to spend 1M ?

"Do you find it "normal" that someone who tosses around a million dollar a day in his job will spend only $30K a year for personal expenses? " people who manage public money do that everyday.

that's all i have to say about the form.

about the content i agree with @luobote kong and @Shivaro. And from what you are saying, you should read about the work of Bernard Friot, I don't know if you can easily find stuff in english ( he is french and all the talk or writing i know of him are in french) but for me, what you are trying to think have a lot in common with his vision.

My comment is a mess, but i hope it helped.

Anonymous said...

Hell, I see smartphones in the hands of refugees.[..] But the poor is actually not more poor since he traded his money for something he sees more utility in (if he is a moron and wasted it, that's a different issue).
there is no utility reason for a smartphone, he wasted it! the only thing working are so called "social media" the rest it's a piece of crap. Sure the arabic revolution propaganda bassed on social media is a nice PR stunt to push these things over the globe. but I can't be too hard I guess. thanks to these bullshit things ARM cpus are getting better and better till their full of crap like AMD and Intel. BUT the appstore will ruin PC world for good by then. if you thought windows 10 is full of shit wait and see, just wait and see. Also don't whine afterwards ... this is what monopole and too much market power gets you. and we will buy it because the new games only run on the newest version microsoft so heroically give us ... it is great to be dependent.

Gevlon said...

@Ekareya: a police officer can't hire other police officers, that's the job of the city major.

"And what do you think a non M/S "builder" who love his job in a construction company would do if he was allowed to spend 1M ?" Go bankrupt. Doing building and managing it are very different jobs.

@Anonymous: investors and bank owners are businessmen themselves.

Anonymous said...

You're starting from the end result and looking backwards instead of figuring out what events lead to the current result. "Wealth inequity" isn't a real thing; people get what they deserve. The size of that inequity is relative to the cost of living. If the top makes 100k and the middle makes 50k, it's not so bad when living costs are 10k, but much worse when it's 45k. That's the problem, and THAT is caused by people accepting low wages. A company's capital is worthless if there are no employees to do the work, but the people won't vote with their feet and leave because they were raised to believe "hard work" and "not being welfare leech" is the better option—even when smart work or welfare is mathematically worth more!

Anonymous said...

Gevlon, you've clearly never run a business of any size. Businessmen do not invest their own money into their businesses unless they have no other source of funding. Instead, their incorporated business borrows money from others. The corporation is a legal entity; by borrowing money through the corporation, the businessman is protected from liability if the corporation goes bankrupt or is subject to civil or criminal sanctions. The larger the corporation, the less need it has for the businessman to contribute any money at all as guarantee against default.

Now that we recognize this fact, let's face another fact: the corporation does not care whether it borrows money from a single billionare, or from a hundred 'ordinary' people through a pension fund or bank. Therefore, the argument that wealth inequality promotes 'useful' investment anywhere outside of the deep third world is complete bullshit.