Thinking About Wealth

Wealth is a source of fascination and a magnet of human attention and endeavor.  It motivates people to work hard and achieve; live extravagant lives; wield power; impress with monumental projects; and leave behind outsized legacies.  But it comes with its own dark sides. 

The big picture about wealth in our days is this: never before humanity as a whole had so much wealth; despite the purported democratic nature of free markets, wealth is extremely concentrated in the hands of a tiny fraction of people; and despite more wealth, people in many countries, including the US, report that they are less happy than before.

So, thinking about wealth can be as fascinating as the subject itself.  Here are some questions I find interesting along with my short answers, leaving more elaboration to the reader’s curiosity and possibly future blog posts. 

How did wealth enter human history?  I suppose this happened when humans transitioned from an immediate return economy to a delayed return economy, that is, when the agricultural economy supplanted the hunter-gatherer and pastoralists economies.  Hunter-gatherers had to immediately consume the food they collected or at most rely on frozen leftovers in north climates.  Agriculture instead required to sow first and then wait to harvest and consume.  Food production required the use of physical capital (land, tools, and storage facilities) all of these being the early forms of wealth. 

How does its present composition differ from the past?  Not too long ago, most of the wealth was composed of tangible assets (land, buildings, machinery) and money, and long before that of tangible assets only.  Today the bulk of wealth (especially of very rich people) consists of ownership rights on intangible assets, that is, financial paper, like savings accounts, bonds and stocks.*  The funny thing is that the value of financial assets is itself mostly represented by the value of intangibles, like the future earnings streams and growth opportunities of the underlying businesses rather than the value of physical assets in place.  The value of future growth opportunities, in particular, is extremely vulnerable to political, social and economic disturbances.  This is important.  The very wealthy people and states of the world have a big stake in global stability and avoidance of war.

Why is so much more wealth created today?  Two words: globalization and technology.  Globalization expanded markets and revenues.  Contrast Facebook operating only in the 330 million people US market to Facebook operating in the 7.5 billion people global market.  Technology also has expanded markets and revenues.  Almost a century ago, a soccer or football match had a market equal to the capacity of a stadium; now, thanks to the radio, TV and internet, their market is global.  The result: super rich athletes.  It’s all a matter of scaling up.  If college professors could teach a class to millions of students their salaries would compete with those of news anchormen and anchorwomen.

Is extreme wealth concentration in society’s interest?  It depends on how wealth is created and how it is used.  If it is built on the pricing power of corporate monopolies and oligopolies, favorable taxation, political power, and depressed wages, then it is harmful to society.**  If it is built on an overt or covert class system that favors the offsprings of the wealthy through unrestrained inheritance rights or other exclusive privileges, then it is also harmful to society.  In short, wealth built on unfair distribution of economic output and opportunities undermines social trust and the citizens’ sense of justice and leads to degradation of solidarity and cooperation.  Worse, however, than concentration of wealth is the stability in the ranks of the wealthy.  Intergenerational perpetuation of riches amounts to having a plutocratic aristocracy.  It is very doubtful the interests of this class align with those outside.  The wealthy can rely on private wealth to buy good education, health and other services whereas the rest of the people rely on public services.  Thus, public priorities and tax uses are not aligned between the two groups.  In the words of economists Acemoglu and Robinson, societies decline when narrow elites organize society to their ends.  

Does wealth make us happy?  Not necessarily.  The Easterlin paradox (named after economist Richard Easterlin) shows that across time it is relative not absolute wealth changes that matter for one’s satisfaction.  (Interestingly, the importance of relative versus absolute reward has been found in experiments involving primates and monkeys.)  Therefore, a higher GDP can leave a lot of people unhappy if their relative standing worsens.  Indeed, despite more than a tripling of the real per capita income between the 1950s and 2010s Americans do not report that they are any happier.  Surveys taken during the pandemic period show that 53% of Americans agreed that wealth gave them piece of mind in 2021 down from 65% in 2018.  Americans also felt financially happy with less wealth during the pandemic than before.  All in all, making wealth creation a goal without paying attention to its distribution and overall context of circumstances is a misplaced public policy.

Why aren’t we always resentful against very wealthy people?  When we feel that wealth is the product of effort (work) and merit (skills, talent) we accept wealth as a fair outcome.  In the opposite case, we feel resentment, especially when wealth and pervasive poverty coexist.  This goes back again to our natural sentiment of justice, that is, reward must be commensurate to effort.  This sentiment cuts though both ways.  It can trigger resentment against wealthier people but also against poorer people whom we perceive to get more than they deserve.  A large segment of working class Americans seem to be more resentful of poor than wealthy people.  This reflects the above the global average weight Americans place on merit and effort as factors of financial success.  As a result, many Americans resent social programs that increase the spending power of disadvantaged people.  This perceived link of effort to success is a serious impediment to enacting more egalitarian policies in the US.

To make wealth creation compatible with a good society, how it is created and how it is used are among the critical policy questions we must address.

* As of the first quarter of 2020, households and non-profits held $42.65 trillion worth of physical assets and $104.77 trillion worth of financial assets. (Federal Reserve, 2021)

** According to a study, between 1952 and 1988, 100% of the growth of stock values was attributed to overall economic growth whereas between 1989 and 2017 only 24% of stock appreciation came from economic growth.  That leaves monopoly profits, lower taxes, and lower wages as the main suspects for the remainder value growth.