I’ve been trying to write this piece on “Reasons why Inequality is a problem for Rich People” for three days now – but I got side-tracked by:
- Foolishness (The US Inequality Myth); and
- Ascribing blame (The US Inequality Culprits: Women, Asia and Insatiability).
To begin, an anecdote.
I live in Johannesburg, and one of my favourite parts of the day is the highway loop around the central city on my way to work (it might well be the reason that I go to work). I have a deep attachment to all the old buildings that make up the City skyline. It feels like the crumbling 1970s: dark grey government blocks, beige open-face brick, and orange reflective glass windows.
But it really is crumbling though. Apart from a small edge of head offices and museums along the side of the M1, most of the buildings are filled with squatters, or they’re derelict; and some are literally burned-out husks with carbon shadows around empty window frames.
Central Johannesburg is not quite urbanely awaiting its regeneration: because it’s barely happening. But not for lack of expectation: most of these old buildings have been snapped up by young businessmen and start-up couples that work in the glitzy suburbs of Johannesburg North; in the hope that one day, their buildings will be their gold mines. That, or they continue to be held by the large corporates that see no reason to sell them when the best selling price is a pittance.
The trouble is: urban regeneration begins with the cool people moving into these areas, spending plenty of money on renovation, and starting the trend. But if all those buildings are held by investors whose only intention is to sell them to developers when the regeneration trend is in full swing, then no one is renovating.
It’s a stalemate.
And this, to my mind, is very similar to the main issue with wealth inequality: the money is welling up in the corner of the fortunate few. And from that corner, it will not flow.
Marginal Propensities To Do Stuff
Because we’re economists and we inherit the label from academics with large vocabularies, we’ve developed some terminology to confuse and distract the non-economists. So let me try and explain two concepts that are about to be quite important to my argument:
- The Marginal Propensity to Consume (MPC); and
- The Marginal Propensity to Save (MPS)
In economic terminology, “marginal” is used to describe anything that’s additional:
- So, let’s say that I get a pay increase of $400,
- Taking my salary up to $2,400 per month.
- $2,400 is my total salary, but
- $400 is my marginal salary (that is: my pay increase).
The next question is: what do I do with the marginal $400 that I just received?
- Spend it
- Save it (which includes “Invest it”)
- Bit of both
At this point, economists start to use the term “propensity” to describe my inclination toward each of those actions (spending and saving). So if I spend $300 on extra rent to get a nicer apartment, and increase the debit order on my monthly unit trust investment by $100, then we can say the following about my behavior:
- I have a Marginal Propensity to Consume of 0.75 (of the extra $400 I receive, I spend $300 – ie. for every marginal $1, I spend $0.75)
- I have a Marginal Propensity to Save of 0.25 (of the extra $400 I receive, I save $100 – ie. for every marginal $1, I spend $0.25)
You’ll also note that MPC + MPS = 1? So if I save everything, then I consume nothing. And if I spend everything, then I save nothing.
How This Changes
Unfortunately, those marginal propensities are absolutely affected by the total level of overall income. Some truisms:
- For the most part, the poor will use extra money to buy better food and other luxuries that they couldn’t afford previously. Therefore, the poor are likely to consume every extra $1 they receive (MPC = 1; MPS = 0); and
- The super-wealthy are already satiated on the food and luxury item front. I mean, sure, the occasional super-car/yacht/booked-trip-to-space-on-Virgin-Galactic. But on the whole, they are likely to invest every extra $1 (MPC = 0; MPS = 1).
Here’s how that ties into a symbiotic relationship:
Investment, by its very nature, requires there to be spending – otherwise, there is no market and there is no point. If there is no market, then there are no transactions; and if there are no transactions, then the medium of exchange (money) loses its meaning (and, therefore, its value).
What That Relationship Implies
Every healthy economy therefore needs:
- those that invest; and
- those that spend; and
- some of the wealth to sit in the hands of those that spend.
In other words, healthy economies require a healthy (and, preferably, expanding) middle class. Because while a middle class will have a relatively high marginal propensity to consume; they’ll also have good capital structures (savings, investments, etc) to support their spending.
Unhealthy economies have a large lower class that needs to spend but doesn’t have the money to do so, and/or an excessively wealthy upper class that doesn’t have the inclination or the need to spend its savings.
So when you look at the United States, and the other OECD countries, and you see this grand disparity of wealth occurring; what you are seeing is Capitalism failing because of the short-sightedness of its most ardent adherents. The wealthy need their wealth to flow through the system: not necessarily to make more money, but rather to make sure that their existing wealth endures.
The Republicans may be right that the socialist policies of the welfare state have caused some of this wealth gap – but they should be calling for tax hikes, not tax cuts, and using that as a bargaining chip to insist that the State use that money for development rather than social welfare.
You know that adage: give a man a fish, and he’ll eat for a day; teach him to fish, and he’ll have food for the rest of his life?
There is a missing middle class that needs to be taught to fish.
Because waiting for frozen fish fingers to be delivered is not going to fix anything. It’s going to make people fat, lethargic, and demanding more fish fingers than they’re getting currently.
And Apart From That
The economic self-interest issue aside, placing the wealth in the hands of the few creates a new kind of aristocracy that wields disproportionate political power.
That kind of business…has historically always ended in revolution.
So attention all Plutocrats: this will resolve itself, one way or another. But revolutions tend to involve you guys having a short and sharp encounter with a guillotine.
Use it, don’t use it.