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Wealth Distribution Fallacies

The argument for and against wealth distribution are pretty common. Conservatives will often believe that wealth distribution will stunt job growth because the rich will stop creating jobs. Liberals believe that if money is distributed everyone will have a higher quality of life. They are both wrong and this can be deduced by a simple deduction of basic facts.

#1 Money does not equal products
World hunger can easily be solved, we just need to print an infinite amount of money and we would have an infinite amount of food, right? The people that believe wealth distribution would actually work don’t understand what money is. Money is just an arbitrary representation of your time you exchange for products, it doesn’t actually represent products. People that don’t have a lot of money will often look at the wealthy and assume that everyone can live the way they do but that would be an impossibility. If everyone had infinite amounts of money not everyone could buy a Ferrari because Ferrari’s take a certain amount of time to make.

There is also this illusion that the wealthy are massive consumers. Sure they might have a larger house or a fancier car but outside of that their consumption rates are some what comparable to everyone else. Even if they did actually consume 5x more then everyone else, distributing their wealth would only help (maybe) an extra 5-10% of the population. The only thing distributing wealth would do is max out the means of production and ultimately reduce the availability of items for everybody which would lead to preferential treatment based on other criteria. You don’t need a sophisticated understanding in economics to get this principle.

#2 The wealthy create massive amounts of jobs
On the opposite side of the spectrum you have the belief in the “trickle down” effect. The reason this idea is fallacious is because a lot of wealthy people usually don’t spend their own capital on projects and even if they do in the case of some billionaires, assuming their projects are successful (4/5 are not)  their endeavors won’t really become true job creators until they get public funding through the stock market.

While it is true that the wealthy usually have a better understanding of this process, they can execute the process without ever spending a cent of their own money. A venture capital firm might be entirely funded by means of the stock market (the public) and while the wealthy might buy shares and fund indirectly their impact to the total funding amount is relatively small. This principle has direct business applications as well. Who makes more money wal-mart or Neiman Marcus? In 2011 Neiman Marcus made 4 billion gross, wal-mart made 446 billion in 2012. Public investment is always worth more then private wealthy investment.

Part of the misconception is that only the wealthy invest in the stock market but the public will actually invest in the stock market indirectly. For instance, mutual funds buy into the stock market on behalf of the public. A lot of people who have retirement funds usually have mutual funds and by this process are actually investing into the stock market.

Money Sinks
In video games where they have fake currencies generated all the time there is a common problem of inflation which is important to the designer because it makes elements in the game have less value and because of that the overall good experience of the game is reduced. What game designers do to combat the issue of increasing amounts of money is to create money sinks and these are methods that occur to pull money out of the system indefinitely.

The wealthy act as a money sink. They pull money out of the system and then don’t spend it. This process is important because it increases the value of everyone’s money. It is even more important when you have a government that insists on creating new money all the time. The wealthy or corporations are actually what is stopping inflation from actually rising at an even faster levels then they already are.

Potential Solutions
Our economies revolve around a variety of balancing acts. We want to maintain quality of life, introduce social programs, but at the same time we want to encourage competition via free market but not have abuse of the general populous in the process. I am not sure what processes are the best, the only thing I am sure of is that no pure system would be without fault.

Whether it is capitalism or socialism, all systems that exist exist for the same reason and that is to overcome the problem of not having enough to go around. Capitalism links the amount of stuff you can get to your effort or innovation (hopefully) and socialism gets you more stuff via rationing.

There would be some, of course, that argue we need to learn to live with less but this is highly ideological and wouldn’t work because of the human ego always demanding more. It is unrealistic to expect or hope everyone to change their consumption rates. The easiest way to solve our economic problems is through technology and making material items valueless because we can create them so easily. From this view point, at the current time capitalism seems to be the best motivating force for reducing production times and devaluing materialistic items.

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  1. August 3, 2012 at 4:31 pm

    I’m curious to know what you mean by jobs only being created when it get’s public funding. also, I see public funding as money being taken from taxpayers instead of letting the business spend its own money. If the money has to come from taxpayers, then aren’t you first stopping the money from being spent?

    I’m also curious to know how the wealthy work as a ‘sink’ where it they keep it and don’t spend it. Don’t they put it in banks who then lend it out to those that want it in order to earn interest? doesn’t that mean that the wealthy couldn’t stop the money from being spent even they wanted to (unless they hide physical bills under their mattress)?

    • August 3, 2012 at 6:10 pm

      When I say Jobs only being created when it get’s public funding, I mean large amounts of jobs. When I am talking about “public funding” I am talking about the stock market not taxes. I will correct my post. The stock market actually has some socialist properties because it allows corporations to be owned not by single individuals but by the public. Though this is not perfect because the people who end up owning the most shares will tend to be mutual funds which act as an intermediary between the people and the corporation. The wealthy will make more off of stock price rises because they have more vested individually, but everyone who owns shares indirectly through say a mutual fund will also benefit and as a whole make more then the single individual wealthy person.

      Well notice I didn’t say perfect sinks, but banks don’t need the money of the wealthy to lend large amounts of money because they work off leverage. They would have enough money to lend out without the 2% helping them. Theoretically even if the bank are giving out credit (which does cause inflation) it shouldn’t be that rapid because of credit rules. By this I mean their income should be limited by how many loans they can give out. Of course when the rules pretty much vanish, in the case of sub-prime mortgages, it has disastrous results.

      Since there isn’t a 1:1 ratio of how much the wealthy are earning against how much banks are loaning this does add a dampener. Also banks in themselves are sort of sinks because the money and credit they earn they usually also bury. The problem is when you have a government printing money handing out to the banks to be given back to them with interest charged, this is what the fed does.

      If the government needs a billion dollars for a project (which is a really a loan on the people) they will pay the fed interest, so they will always need to take more then required and this creates a massive loop which ultimately leads to inflation. Inflation would not be an issue if money was only printed based on some other ever increasing economic variable such as gold but it doesn’t necessarily have to be gold, it could even be the expected average production of each person born. I know Ron Paul is a big supporter of gold standard, I don’t necessarily agree with this because our economy is no longer based on or needs gold like it did in the past, so this idea is a little silly to me.

      • August 3, 2012 at 7:06 pm

        I don’t see the gold standard having anything to do with the need for gold – it’s more about the fact that it’s something physical that people.

        The argument is that if the paper money was tied to something (it doesn’t have to be gold – it can be whatever the people decide to do) the government and banks can’t lend out money it doesn’t have – which is what causes inflation. they will be limited (at least more limited) to only lend out what can be traded back for whatever is used to back it. Does that make sense?

  2. August 3, 2012 at 8:01 pm

    I agree with you. They could actually use gold if they set a fixed multiple of it. The problem is without any kind of fixed standard there is nothing stopping government from printing unlimited money. Printing money isn’t necessarily a problem if the net gain ends up being positive. For instance if the government prints a billion dollars and builds an infrastructure project which leads to people making 2 billion dollars or an increase of GDP by 2 billion then the print (or loan on the people) was a valuable investment. A lot of the money doesn’t end up adding value to the economy unfortunately.

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