What Creates Wealth Inequality?

On TV yesterday I saw an interview with the African American professor from Princeton who calls everybody “brother”. I forget his name but I know I like him. He has a happy disposition and seems genuinely interested in helping the poor.

Apparently he just completed an 18 city tour of the United States. The findings were troubling. There are millions of people right here in the US living in poverty. There are more than 40 million people receiving food stamps.

In a magazine recently, I read the stat that 5% of the population in the United States owns roughly 40% of the wealth.

This trend has been increasing in recent years. The middle class is being decimated and the rich keep getting richer. Real unemployment is probably in the 15%-20% range. Millions of regular working people are on the verge of losing their houses. Meanwhile, corporate American continues to give out record bonuses to CEOs.

What gives?

Our professor from Princeton blames capitalism. Its that damn dog eat dog competition of the free market. Its leaving all of us regular people behind. We’re unable to go up against centuries of amassed capital. What we need is more government regulation; more government redistribution of wealth; more government job training programs; and more money spent on public education.

It never ceases to shock me when a person who seems so smart and well meaning completely misdiagnoses the problem.

Wealth inequality has always been a problem. Everywhere and at all times throughout history there have been rich and powerful classes and laboring, poor classes. The poor have always clamored for reform. The rich are usually happy to give some token scraps from their table, but never a seat at the meal.

Let us consider, what is it that creates wealth in the first place? The answer is well known and universally accepted: capital accumulation and the division of labor.

Capital accumulation provides tools and machines. With tools and machines each unit of labor input is able to produce an increasing amount of consumable output. By applying the same amount of labor, people can produce more consumable goods. Everybody becomes richer.

A similar process occurs with the division of labor. Workers tend to specialize. They become experts at a particular trade or task. Methods are developed that apply to a very specific field of expertise. Each person becomes very productive in their little segment of the market. They then trade their output for the output of others. More consumable goods are produced and every becomes wealthier.

So, you see, the end game is always the production of more goods and services for consumption. Only the creation of more such goods is real wealth. After creating more wealth, we’d want the distribution of consumption to be spread out relatively equally across the population.

The first step, then, is to put in place a system that is extremely conducive to capital accumulation. We’d also want a system that is extremely dynamic in developing and integrating new, more productive technology. We also need a system where the division of labor can become more and more acute, each person becoming more productive in their respective field.

The last element that is needed for a growing economy, with acceptable income distribution, is free entry in to any and all industries. In other words, there must be an extremely competitive environment.

Firms with outdated equipment and an antiquated division of labor must be allowed to fail. New and cutting edge firms will hire displaced workers and set them to work on more productive machines. The old big shots will go under. New big shots will be constantly making their appearance on the scene.

In such an environment, the moneyed class would be under a constant threat of displacement. Old machines, old methods, and complacency would be their Achilles heal. Smaller, nimbler competitors would carry out constant guerrilla competition, stealing market share and diffusing wealth. More goods and services would be created and, significantly, the distribution of the those consumers items would be come more and more widespread.

Overall wealth is increased. The income gap is closed. Welcome to the free and unhampered market.

Of course, nothing like this has existed in the United States for close to a century. The dual rise of Progressivism and Conservative Militarism, also known as the Welfare-Warfare state, in the United States has made the rich richer and kept our economy from fully developing.

Government regulation and waste keep capital from accumulating. Instead of allowing the reinvestment of profits into new technology, taxes are levied that siphon earnings into unproductive endeavors. Instead of cutting edge jobs, we have a huge bureaucracy and close to a thousand military bases.

More expensive and expansive public education stunts the specialization process. Kids are forced to learn advanced algebra, take a full liberal arts curriculum, paint, run track, dissect frogs, and study a number of other subjects that won’t help them in the real world.

But most importantly, big business has gotten control of the government as they always do. They’ve convinced most of us that government is needed to protect us from free competition. The truth is that the government is needed to protect them from free competition. Free competition can only benefit the masses and can only harm vested interests.

Laws have been passed and regulations have been put in place that only huge companies can comply with. Innovative firms are buried in paperwork, distracting them from slaying giants. In the meantime, the powerful have whole departments dedicated to complying with the government’s demands. It is a myth that corporate America hates regulation. Pretty sneaky.

New money is printed and given to insiders. They get to spend it first while prices are still cheap. The inflation works its way through the economy raising prices all along the line. When it comes times for regular folks to buy gas or food, prices are higher. But we got none of the new money.

Finally, bailouts abound. In the recent financial crisis, we were on the verge of witnessing the greatest decentralization of wealth in the history of man. The big firms that own the government were going down. Their assets would have been sold off to smaller competitors. Regular people would have benefited from lower prices and increased competition. But, alas it was not to be. Against the will of the people, the congress voted a bailout and saddled us once again with our ruling class.

So, you see, the cause of our stagnant economy and the worsening inequality of wealth is government interference in the economy. The solution is an unhampered, free market.

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2 Responses to What Creates Wealth Inequality?

  1. I will be pouring through more of your previous posts as I have time. I like this one. I’m a big Thomas Sowell and Milton Friedman fan. I have posted a couple economic-oriented articles in the last few days, and will be doing more. We’re mostly aligned there too.
    Try reading A Conflict of Visions by Sowell…it helps you to understand people like this Princeton professor who don’t appear to be following any logic from the planet you’re on.
    – Jeff

  2. Thanks for the kind words Jeff. I’ve been swamped with work so haven’t been able to check out your new posts, but I will soon. I’m not a huge Milton Friedman fan, mostly because he was the itheoritician responsible for income tax withholding. Also, he thought that the federal reserve should be increasing the money supply 3-5% per year, which I disagree with. I am a big Thomas Sowell fan. He has an archive of new articles that he puts out a couple of times a week here, http://www.jewishworldreview.com/cols/sowell1.asp. My favorite economic writers are Henry Hazlitt, author of Economics in one lesson, Hans Sennholz, and Ludwig von Mises. I’ve got multiple books by those men sitting on my book shelf and I just keep reading them over and over again.

    Thank you again Jeff. Your feedback is always appreciated.

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