January 27, 2007
John Allen Paulos on Health, Wealth and Happiness
From ABC News:
First wealth. A recently released study says that the inequality in wealth throughout the world is extreme and growing more so. The report by the World Institute for Development Economics Research of the United Nations University paints an informative picture of the world's wealth distribution as of 2000, the last year for which figures are available. It states that the top 1% of the world's population - about 37 million adults - had net assets (note: not income) worth at least $500,000. This constituted approximately 40% of the world's assets.
In contrast, the top 50% of the world's people owned a bit less than 99% of the wealth, and this translated into a median wealth (half the world's population having more, half less) of just over $2,000. To be in the top 10% required net assets worth about $60,000.
More here.
Posted by S. Abbas Raza at 02:43 AM | Permalink
Comments
Is it me or is Paulos looking more and more like Riff-Raff?
Posted by: beajerry | Jan 27, 2007 5:12:59 AM
I've seen whole math departments that look like Riff-Raff.
Posted by: Levi | Jan 28, 2007 7:19:44 AM
Save on haircuts and fashion consciousness and join the top 5% of the world's riff-raff.
Posted by: aguy109 | Jan 28, 2007 9:19:03 AM
Why is income inequality important?
lets play devils advocate here for a sec. Capitalists have capital (duh), that they use to make and fund businesses, which creates/provides for new jobs and creates new wealth. Of course because the capitalists are the ones funding this new wealth creation the result is that they get the vast amount of the monetary benefit. A clear example of this is a restaurant owner. if a person opens a restaurant, he has to pay for the building, utilities, food products and employees. he pays his employees the market rate, and charges for his food what he can. At the end of the day once everything is paid he gets the profit (if there is any) Well, if the restaurant is successful, then of course the owner is going to be wealthier then his employees. he has to be because he was the one who invested his capital and took the risk to open the business. But you take that owner and you plug him in as a statistic of income inequality and the result is that his net worth is growing quite disproportionately more than that of his workers. Anything wrong with that? economically, the answer is going to be no, because in creating wealth for himself he is also providing new wealth to his customers (good food), and giving him employees jobs (increase in labor force). My point is that growing inequality is a byproduct of the rapid growth of the world economy. There are millions of would be restaurant owners like the hypothetical one I described, and they are causing the growing inequality. The rub is that inequality in such circumstances is not a bad thing at all. new wealth, new jobs, new technology is good for everyone, even if that 1% does reap a disproportionate reward. You can test weather its bad or good by looking at other metrics. Look for example at life expectancy around the world, or at living standards and affordability standards. Guess what you will find? That the richest countries in the world have some of the highest gross inequality in assets, but also some of the highest standards of living in the world. exhibit A: look at the USA and its metrics for housing/ownership, standards of living, annual income, average educational attainment, etc etc and then look at the GINI index to see how unequally wealth is distributed in the US.
If you didnt get all that my point is: great variation in wealth means squat in terms of whether people are better or worse off, so looking at inequality by itself is a pointless exercise.
Posted by: Anton lakshin | Jan 29, 2007 3:48:04 PM
anton,
your point is well made, but i don't agree with the statement that the hypothetical restaurant owner necessarily increases inequality.
your imaginary entrepreneur probably has a lot of capital to begin with and provides employment to people who presumably didn't have as good offers before. so comparing the initial and final situations, i don't think inequality is increased.
how about this scenario, then instead: a ginormous chain of restaurants sets up shop next doors, uses it's mass and underbids our imaginary friend with blitz and special offers, runs him out of business and consequently reaps the benefit from the captivated consumers.
so what i am asking you to consider is the trend where huge businesses gets huger and our non existing chef gets even more non existent. this without any
on the top of that huge chain is a ceo that earns 20 times what the entrepreneur could, while certainly not working 20 times harder or smarter than our unfortunate friend.
but even setting aside modeling the dynamics of culinary businesses, it is a simple fact that rising inequality is an indicator of instability, and a pre-cursor to revelutions in extreme cases.
whether their lot is fairly earned or not, the extremely poor will not tolerate the sight of the extremely rich indefinitely.
Posted by: oskar holm | Jan 29, 2007 8:58:20 PM
in response:
i used the restaurant precisely because it is a basic type of business that a lot of middle class people can get into. So, a few things I want to expand on in my example:
First, you are right of course that inequality will necessarily increase as a result of the restaurant owner. But, more likely then not, if the business is a success, it may end up creating inequality. take for example Michael Dell. Today Dell computers is the 2nd (correct me if im wrong) manufacturer of computers in the world, but like the restaurant his business started small. Similarly McDonalds started as a single hamburger restaurant that took on the chain model and is now a corporate monster. my point is, business's, at least most of them, aspire to largeness and to ever higher profits, and that will exacerbate inequality even as overall wealth increases. of course to start a business one needs capital, and that means that only the wealthy (or people with access to the funds of the wealthy) can aspire to creation of new wealth on a large scale. the fact that wealth correlates to other aspects like educational attainment in rich family only makes inequality worse, because now you have already rich people, who are well educated and know what they are doing, and who have access to capital markets, moving in and opening businesses. My point is that wealth will tend to bunch up in a class of a select few no matter what we do because regardless of the economic system, it is the elite who will have the connections and resources to create new wealth. My second point is as I said that thins is not such a bad thing. So long as long term wealth of society at large increases and people at all levels of society are better off the system should be maintained.
now in your example you bring up an interesting point, and one used by a lot of people who are against free market economics. the example you use is of a large corporation that swallows up small businesses. A prime example I would assume you would agree is Walmart. So lets look at walmart. Walmart started as a small business and grew to the monstrous size it is today: WHY? the answer is that they provided value to consumers via lower prices. (you allude to this) So what is wrong with that? Your argument is that it kils the small bsuiness owner who is unable to compete, which hurts the little guy. But what about all the jobs walmart creates? walmart is the single largest employer in the US (if you dont count the US government). Now you can say, well less people are now employed by small businesses. And yes, you would be right, but the employees of the small bsuinesses were being paid about the same wage that walmart pays to these same workers. i have never seen an economic study that shows the effect of job creation v job destruction as a result of walmart (if you have see one i would love to see it), but I am willing to bet that the jobs created v. lost more or less cancel themselves out. so whats left? Whats left is lower prices to the consumer, but not just any consumer, its the consumer with the lowest wages and the middle class, the very people who at one time or another end up working for a walmart. think about this economically. if walmart reduces prices on goods (and they do), then a dollar in a walmart is worth more that a dollar in another store, ie the purchasing power of the consumer increases. Rich people will continue to shop at Sacks because they dont care about dollar value or bargain hunting as much, but the shoppers at walmart care a great deal! a company like walmart surely destroys jobs, but it also creates them and provides new value to consumers which benefits all, especially the poor. but the side-effect is again increasing inequality.
Okay, for full disclosure I have to mention monopoly power. if a walmart were to open in a small town it WOULD probably be a very bad thing for the local economy because walmart would monopolise the local market. but thats why we have anti-monopoly laws, also local governments can take action to limit or prevent companies that are too large from entering certain markets (this occured for example here in san diego and walmart)
Bottom line: large businesses often create more value then small ones because of the synergy and the law of large numbers allows them to provide consumers greater values. We as consumers in turn response to their value by shopping with such companies, further increasing their synergy. The side effect is inequality, but again, inequality as the only measure tells you nothing about a countries well being.
As far as revolution, here is my take:
speaking generally you are correct, gross inequality is indeed a precursor to revolution, but you have to look deeper then that. We no longer live in a pre Communist pre revolutionary China where aristocrats owned everything. take the USA for example:
In the US over 60% of the population owns their own home. how likely is that population to revolt against their government? the answer is its not. Sure the CEO is getting paid 460 times the pay of the average worker in the company, but so long as that average employee can go to the company parking lot, get into his leased, brand new pickup, drive to his suburb home, grab a beer, and sit down in front of his plasma screen TV to play the latest Playstation game or watch some irrelevant citcom, so long as that is reality there will never be a revolution. now if we can say the same for the rest of the world, then perhaps there can be world peace.
my bottom line: I think that the way to have world peace is to start businesses and create jobs and new wealth. Even if i get 90% of the spoils of my labor and capital, the whole of the world will still benefit.
Posted by: Anton lakshin | Jan 29, 2007 10:04:51 PM
Always makes me laugh when people think that it is the business owner who is creating the wealth.
The wealth is in fact created by the workers. The business owner is merely a middle-man who on-sells the output of that work to others.
Capitalism provides a system whereby middlemen can obtain disproportionate amounts of wealth by individually 'taxing' or profiteering off each worker, rather than simply taking a good payment for a good day's work, as the workers themselves do.
There's no "creation of wealth"... it's profiteering. Reinvestment is only done in order to gain even more of this 'tax'.
The only apparently 'fair' thing about it is that (in theory at least) everyone has the same chance to gather wealth in this manner.. one just has to be a taker rather than a giver.
Posted by: Rob | Jan 30, 2007 6:11:09 PM
rob,
laugh all you like, but tell me, what alternative system of wealth creation do you suggest?
the idea of each according to his ability and to each according to his need has been tried and turned out to be as unjust and brutal as any capitalist system, with the added benefit of being completely inefficient.
i admit, as any economist would that wealth is ultimately created in part by the workers because as any economics 101 course will teach the production of goods is determined by two factors of production: capital and labor.
The workers obviously provide the labor, but the capital must also come from somewhere, and the rich provide it. in theory any of the workers can gather capital or use his own labor for his own ends to create wealth for himself instead of working for someone else (its called self employment) There is nothing middleman about the process. The capitalist takes a chance that people will not buy his product or that other problems arise that causes his business to fail. For example 99% of all restaurants fail within 2 years of opening. if they did not invest their capital and take the risk of opening a business, then who would? there is nothing middleman about taking a risk with your own money to make a business, nor is there anything middleman about investing in a business by buying stock or other instruments that may become worthless if the business invested in does not produce as expected.
And reinvestment is not a tax...im not sure where you even come up with this reasoning. Reinvestment is a natural product of any well functioning economic system. only the most primitive of economies that have no banks, paper money, etc can function without reinvestment, and thats mostly because they dont have any wealth to reinvest since they consume everything they produce. if we didnt reinvest our capital into the economy the economy would die, pretty much everyone would lose their jobs and we would be back in the dark ages. so I am a bit unsure what you mean by saying that reinvestment is some sort of tax. I doubt that a person who puts his paycheck into an interest bearing account thinks of his interest as a tax on anyone.
And what is this talk of "fairness"? there is nothing inherently fair about any economic system. Economic systems considered good are those that generate the greatest amount of growth and benefit to the people who live under that economy. Again, look at the Us where 1% of the population owns 36% of the capital, but also the country with the most educated workforce 9for the countries size), the highest income per capita, the highest home ownership, etc etc.
the system is not about fairness, fairness is a moral concept, if you want to talk fairness then you have to talk about Rawls theory of needs or marx and his concepts of socialism. All those ideas are great, but I have yet to see any of them work in the real world on a large scale.
(Scandanavian countries exempt, but you have to look to other economic factors that allow them to maintain their quasi socialist system)
Posted by: anton lakshin | Jan 31, 2007 12:46:31 AM
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