The Rich Get Richer – And That’s a Good Thing

We are constantly told that the rich are getting richer, and the poor are getting poorer. In fact, this phrase has been resurfacing here and there for the last 200 years. Surely, it has been mentioned more frequently in the last few decades, but then again, everything has been mentioned more frequently in the last few decades. On the aggregate, we just publish more things nowdays.

But here we are again, with the same storm in a teacup – the Oxfam came up with the next shocker: the 85 richest people, it claims, are “as wealthy” as the poorest half of the world, all together. In the original report, Oxfam was complaining about increased influence and control of the rich. However, the “85 vs half” factoid was grabbed by the media and made into the main issue – and this is what this post will concentrate on.

There are two problems with that fact. The first one is that it is wrong.

It is easy to see why. Take one of the richest people in the world – Warren Buffett. Could you tell that he is rich by looking at him? He lives in a house he bought for $31,500 in 1957; owns no yachts or expensive automobiles; goes to work every day even though he is 83 as of this writing. There is nothing in what Buffett is doing that would help you identify him as “rich”.

The wealth that Buffett “owns” is mostly shares in different corporations. These corporations are companies that produce stuff that every one of us, rich and poor, consumes. Buffett has holdings in American Express, Costco, DISH, DirecTV, Exxon Mobil, General Electric, General Motors, Goldman Sachs, IBM, Visa, and many, many others. In a way, this portfolio represents where Buffett exercises control, but is pretty much useless as a measure of wealth inequality.

As far as wealth inequality goes, we have to look at spending, not at net worth. And as the spending goes, the poorest half, or even tenth, will beat the richest people of the world hands down – mega-yachts and all. So the claim that this net worth disparity is somehow reflective of wealth inequality is simply wrong.

Control-wise, it is absolutely right, the rich control the means of production. But rather than thinking how we can take that control “away from the rich” and “give it to the poor”, we should channel our energy into creating an environment where becoming rich is only possible by showing good judgement and insight – the very qualities we need in people whom we entrust with the control of our most important industries. This will assure that the most important decisions are made by most capable people – who are generously rewarded for that. I freely admit that we may not be quite there, but that is a different issue.

The second problem with the “85 vs half” fact is that growing disparity in net worth between the rich and the poor is actually a good thing. As our economy grows, we build more and more capital. We build more factories, more machines, more technology, extract more raw materials. As our quality of life increases, there is more we produce. There are more factors of production – there is more for the rich to own.

As there is more stuff to go around, people who have less of it, can get more. People who already have more of it, can get more still. So when the rich get richer, we should all be happy: this means our economy is growing.

The poor get richer as well: the poor today are way better off than the poor 50 years ago; and those are better off than the poor 100 years ago. But the poor live paycheck to paycheck, and do not accumulate significant net worth – by their very definition. When the poor start accumulating net worth, they cease being poor and drop out of the statistics. Therefore, even as their purchasing capacity increases, the net worth stays low, and this is where this “disparity” can be seen.

So let’s not let the envy define our politics. Envy is a bad thing, and it clouds reason. There’s always someone richer than you. We should think about how we become rich ourselves, rather than how we take things away from people who have more than we do.

 

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