Entrepreneurship, Leadership and Life by Sam Huleatt

Income Inequality Continues Relentless Ascent

Very interesting article in the New York Times discussing the growing disparity in income among Americans:

The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent [article] on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.

While it seems impossible to many, the US now has a level of income disparity comparable to China. As many are (rudely) discovering, we are undergoing some really massive transitions; educational costs skyrocketing and the middle class continues to pay educational premiums (college, graduate school), though in many cases for less and less of a return. Many of my friends with tremendous liberal arts educations continue to struggle with the job search while also shouldering massive debts. Skills are at a premium. The increasing income inequality (and decreasing wages) reflect a new premium paid for skills and decreases in wages for the unskilled due to increasing competition.

On top of educational/skill shifts, the allocation of taxes against this disparity is also hotly contested. Business Insider produced a great info-graphic showing that the top marginal tax rate correlates inversely with the income share of the top 0.01% of earners.

Yet, despite what appears to be worrisome/shocking data points I’m also reminded of a great Paul Graham essay (hat tip to Quora) on the difference between ‘wealth’ and ‘money’ (see excerpt below).

Ultimately I’m unsure how, or if, this new disparity affects the overall ‘wealth pie’:

If you want to create wealth, it will help to understand what it is. Wealth is not the same thing as money. Wealth is as old as human history. Far older, in fact; ants have wealth. Money is a comparatively recent invention.

Wealth is the fundamental thing. Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. You can have wealth without having money. If you had a magic machine that could on command make you a car or cook you dinner or do your laundry, or do anything else you wanted, you wouldn’t need money. Whereas if you were in the middle of Antarctica, where there is nothing to buy, it wouldn’t matter how much money you had.

Wealth is what you want, not money. But if wealth is the important thing, why does everyone talk about making money? It is a kind of shorthand: money is a way of moving wealth, and in practice they are usually interchangeable. But they are not the same thing, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.

Money is a side effect of specialization. In a specialized society, most of the things you need, you can’t make for yourself. If you want a potato or a pencil or a place to live, you have to get it from someone else.

How do you get the person who grows the potatoes to give you some? By giving him something he wants in return. But you can’t get very far by trading things directly with the people who need them. If you make violins, and none of the local farmers wants one, how will you eat?

The solution societies find, as they get more specialized, is to make the trade into a two-step process. Instead of trading violins directly for potatoes, you trade violins for, say, silver, which you can then trade again for anything else you need. The intermediate stuff– the medium of exchange– can be anything that’s rare and portable. Historically metals have been the most common, but recently we’ve been using a medium of exchange, called the dollar, that doesn’t physically exist. It works as a medium of exchange, however, because its rarity is guaranteed by the U.S. Government.

The advantage of a medium of exchange is that it makes trade work. The disadvantage is that it tends to obscure what trade really means. People think that what a business does is make money. But money is just the intermediate stage– just a shorthand– for whatever people want. What most businesses really do is make wealth. They do something people want.