Distribution of Wealth in Capitalist Societies
One of the biggest, most pervasive complaints about Capitalism is that it results in an uneven distribution of wealth.
While the claim is certainly borne out by the facts, it is not something worthy of complaint any more than we should complain that the gravitational constant is just so naggingly constant.
Fact of Reality Number 1: Not all men are created equal.
When our good friend Tommy Jefferson said that all men are created equal he didn’t mean it the way that I mean it. He meant it on a very basic, fundamental level and I mean it on a very specific, individual level. He and I are in profound agreement that all men are men and in that way they are equal. I have no doubt that he would agree that not all men are the same.
So, face it: Not everyone is just like everyone else. We’re individuals! And that’s a good thing.
Some people can do some things that other people cannot. Some people are smarter than others. Some people are stronger than others. And even then some people are smarter in some things than some other people and some people are stronger in some way than others.
Fact of Reality Number 2: Context is Ever-Important
Do you know what ‘gleeting’ is? Some people call it ‘snaking.’ It’s when you pool saliva under your tongue and then compress it with your tongue and direct the resulting pressure toward the front of your mouth. The result is a fine spray of saliva.
I have a cousin who was really good at it. He could hit with roughly 75% accuracy targets over 6 feet away. I watched him do this a lot on the bus ride home from school and was even the victim of these attacks on occasion.
Sadly, while I can gleet, I do not possess his skill in this.
Sadly for him, this is not a marketable skill and my cousin, to my knowledge, does not possess many highly-marketable skills.
If you consider my cousin and I without context, you would probably judge him as the superior individual. He is stronger and faster. He is well-muscled and of good humor. I, on the other hand, have a small, wiry frame and am often contentious in conversation.
But we are not without context. I am smarter than he is and though my muscles cannot provide me with direct protection from the elements, liberal application of my mental faculties has benefited me far more greatly than his strong arms have him.
Further, in the context of a market economy, my brain-power is far more profitable than a strong back. The same may not be said in a communist system. (I may have been left in the hills as an infant in ancient Sparta, actually. My mom seriously thought I was retarded, but as it turned out I just refused to touch cold floors with my bare skin.)
Fact of Reality Number 3: The amount of matter and energy in the Universe is limited
This is getting outside of my area of expertise, but the Law of Conservation of Matter and the Law of Conservation of Energy are indirectly important to economics but economists call it ‘scarcity.’
Not everyone can have the same number of BMWs. There just aren’t enough of them. Not everyone can have a money bin to swim around in like Scrooge McDuck because there’s just not that much money, land, or money bins.
Anything you can name, there really isn’t enough of it to go around equally.
If there are more Widgets than Sparkle-widgets then plain Widgets will be cheaper because they’re not so rare and more people can have them. This is the simple premise behind supply-side pricing.
This is how limited resources plays on the economy, too.
There are not unlimited hours in the day to work. Not everyone has the same great ideas or is even capable of coming up with the same great ideas in those limited hours in the day.
Conclusion: (Differences in individuals + Context of existence) * Scarcity = Inequality of Wealth
So, let’s take ten cave men. Each of them have 10 clams and they’re all sitting around trying to come up with ways to get more clams. There are only 100 clams out there and each one thinks that it would be ideal if they had all 100 of them.
Suddenly, Caveman 1 has a brilliant idea and he invents fire by rubbing two sticks together. So, he sets up his business where he will start fires for people for 10 clams. No one in their right mind is going to give up all of their clams for a fire, so he winds up lowering his price to 1 clam and he gets some business from some of the other cavemen. He now has 12 clams and two of them have 9 and the rest of 10. Already inequality is surfacing.
Then, Caveman 2 invents the cigarette lighter. He won’t start the fire for you, but he’ll sell you a cigarette lighter for a clam. Eight of the other cavemen buy one. Now, Caveman 2 has 18 clams, one of them has 12, one of them has 8 and seven only have 9.
Rounds of invention go on and on and on and the distribution winds up looking something like this:
1 caveman has 51 clams
1 caveman has 10 clams
2 cavemen have 7 clams
3 cavemen have 6 clams
2 cavemen have 3 clams
1 caveman has 1 clam
Already you can hear the Marxists howling and we’ve only just become Cro-Magnon. 10% of the population is in possession of 51% of the wealth! 80% of the population is in possession of just 39% of the clams out there! “This is an outrage!” they say.
Now, let’s pretend that one of them finds a way to get more clam shells, namely he digs them out of the sand at the beach.
Suddenly the wealth distribution looks like this:
1 caveman has 51 clams
1 caveman has 10 clams
2 cavemen have 7 clams
3 cavemen have 6 clams
2 cavemen have 3 clams
1 caveman has 901 clam shells
Outrage! Outrage! Outrage!
But rather than call for an uprising of the proletariat just yet, we let our market experiment continue. Overnight, the amount of wealth in the system has increased by ten-fold.
I’m not even going to get into the macroeconomic impact of what would happen if you multiplied the amount of money in the system by 10 in the span of a day, but I think you can observe post-WWI Germany to get an idea. In our example this is not a multiplication of money, but a multiplication of the actual wealth, or capital, in the system.
See, money in itself is worthless, particularly for those of us unfortunate enough to live in a system that has abandoned objective medium of exchange.
Money is just a tool for exchange. A dollar corresponds to a unit of work and it’s not particular about what kind of work, either. It could be that you got a dollar for lifting a heavy rock or for coming up with a great idea for making fire. In our example, we use clam shells.
So, one particular caveman, Og, has 901 clam shells. What will he do with them? He’s not terribly bright, but he did get all these shells and now he can spend them any way that he wants.
He buys a Kristin-Dor (They’ve only invented two vowels and no diphthongs at this point in history.) grass skirt for his honey with 20 of his clams. He pays two other cavemen to make an addition onto his cave for 500 clams. And so things go.
As trading continues, quickly the wealth distribution winds up looking like this:
1 caveman has 490 clams
1 caveman has 120 clams
2 cavemen have 75 clams
2 cavemen have 70 clams
1 caveman has 35 clams
2 cavemen have 25 clams
1 caveman has 15 clam
What’s the problem here? Well, not only is the distribution of wealth pretty much as uneven has it was before, the difference between the wealthiest and the poorest cavemen is even greater! Before the richest caveman only had 50 clams more than the poorest. Now, he has 475 clams more!
When there were only 100 clams to be had, we might have said that anyone with less than 4 clams is poor; 4 clams is the poverty level and at that time, 30% of the population was living under the poverty level.
Now that the number of clam shells has increased we naturally change our standards for poverty because no one has less than 4 clams! It would be ridiculous to measure poverty like that! So, we say that anyone with less than 40 clams is poor. If wealth increased by tenfold, then it makes sense to just multiply the poverty level by ten, right? So, now 40% of the population lives under the poverty level.
Oh my goodness there is so much outrage by the champions of the little guy that I can’t even begin to describe it except by saying outrage more times. Outrage! Outrage! Outrage! Outrage! Outrage! Outrage! OUTRAAAAAAGE!!
This is where people start making the claim that the “rich keep getting richer and the poor keep getting poorer.”
That’s patently untrue. The poor actually got richer. The poorest caveman actually got richer by 150%, too. Can you imagine getting a 150% raise over the span of a year? Or four years? Can you imagine getting a 150% raise over the span of even 20 years without having to do any more work at all; just by showing up and meeting the minimum qualifications of your job?
That is unheard of. And yet folks protest it.
Another not-so-widely published fact about this is that I did not say that the caveman with the fewest clams at the beginning was the caveman with the fewest clams at the end. Reality also illustrates that mobility in Capitalist systems is a fast-moving, two-way street.
In our example, the poorest 10% was given a HUGE booster shot of wealth. He was the wealthiest 10% for a time. In reality, the chances are that he didn’t fall all the way back down the ladder either. He certainly could not maintain his growth in wealth because the way he obtained it was not sustainable, but there’s a chance that someone talked to him about sound investing and he was able to hang on to a bit of it and get a return that would keep him out of the lowest 10% bracket.
The reality of Capitalist systems is certainly that wealth gets concentrated in the hands of a relative few in the system, but that’s not a bad thing. It’s neither good nor bad; it’s just a fact of how things work.
History bears out the fundamentals of the example I painted for you, too. What’s more history also shows us that attempts to ‘even the playing field’ and ‘redistribute the wealth’ fail consistently.
Posted by Flibbertigibbet at November 14, 2004 12:59 PM
