There’s been a lot of furor in the past few years about the 99%, the federal minimum wage, and general socioeconomic inequality. Lots of people are complaining, and a few are even offering suggestions. We’ve come a long way in a lot of fields – medicine, space exploration, neuroscience, you name it. But it seems like despite lots of very smart people studying it for literally thousands of years, economic theory still hasn’t been able to come with a good solution for everyone. Yes, maybe there really is a great theory out there and it just hasn’t been implemented. I have another theory.
Let’s imagine a society just starting out, with everyone at the same, roughly subsistence level of wealth. (Of course, this has never been the case. But in the first years of the United States, for example, it was fairly close.) The thing is, unless everyone is absolutely self sufficient, you need a unit of exchange. And once you have a unit of exchange, it has to be finite in order to have value. So in this theoretical society, let’s call it Generation 0, everyone starts out about the same, just subsisting. There is a finite amount of wealth and resources, but almost unlimited opportunities. This is the American Dream.
Well, just in terms of probability, never mind humans making mistakes or being lazy or being crazy motivated or genius or not very bright, some of the people in Generation 0 are going to end up pulling ahead a bit. The majority is going to pretty much just maintain. And some people – just in terms of probability – are going to fall behind. And this would be just fine if everything reset at the next generation. But that’s not what happens.
The people who pulled a bit ahead in the last generation, maybe a couple have kids who squander everything. But most of them continue to add to the success. And in modern America, this means logarithmic growth, not linear. A few people who were just maintaining last time round, maybe break out a bit. And a very few of those who fell behind catch up. But that’s balanced by others who fall behind. Remember, there’s a finite amount of wealth and resources. So after many generations, you have a handful of people who’ve continued to grow and grow their wealth. Now they hold about 90% of the nation’s wealth and resources. Those who were sustaining, the middle class, now they are the working poor. And those who fell behind and kept falling behind, they’re well below the poverty line. Additionally, there are now fewer opportunities. Fewer and fewer of the middle class are ever able to pull ahead, let alone the lowest class. (I’m not making this up. See this NYT article: http://opinionator.blogs.nytimes.com/2013/02/16/equal-opportunity-our-national-myth/.)
And then the state as a whole gets poorer. Think about it: If wealth is finite, and 90% of it is locked up in these families and their investments, even considering that some will be spent or go into business ventures, there’s still less available to the economy. I think. This is where details get so complicated, I don’t actually know if this is true. It’s clear that money in the hands of few isn’t in the hands of many, regardless of whether it’s in a bank, owning a small island, growing a business, or whatever. It isn’t so clear to me how this affects the overall wealth of the state. Does banking help the whole economy, or just the banks and the investors?
Let’s cut the whole big business stuff right here though. At this point, Joe Schmoe isn’t becoming CEO of Walmart, let alone Jane Schmoe. Yeah, the business is providing jobs. Sort of. Except that they’ve got all the leverage, and, more and more, you don’t. See Walmart’s success in preventing unionization. There’s simply no way that rich people getting richer helps anyone except rich people. So please don’t even bother to tell me that.
As I consider the state of economies throughout history, this model really seems to fit. Over and over, in every country that develops a civilization, you have economic inequality growing to the point where the poor start to revolt or at least make everyone else very nervous, and then either there’s a revolution or a dictator of some sort is elected. Land and wealth is redistributed, the noble class is shook up a bit, and things improve for another couple of centuries. It’s repetitive to an almost ironic point.
One exception I see today, I also think fits the model. In the small middle eastern countries such as Bahrain, UAE, Qatar, etc., I think the high standard of living is made possible because the economy is so small compared to the amount of wealth flowing in from other countries, that wealth and resources are quite literally not finite. Of course, that’s simply not possible for the whole world. You have to have a huge trade imbalance in favor of your country, and that’s clearly not possible for every country.
What I want to know is: If you’re an economist, if you know anything about economics, is this basic model true? And if so, what, as an economist, can you hope to do about it? Gandhi said he was going to make everyone realize his way through nonviolence, because violent redistribution of wealth would never end well. But I don’t think that’s ever going to happen in the real world.