Below is part of an e-mail to a correspondent who wants to remain anonymous. This correspondent is very upset at the fact that I’m not upset in the least by income inequality. Note that the three assumptions that I identify in my correspondent’s argument are implicit assumptions; he or she doesn’t explicitly make any of these assumptions and, quite likely, doesn’t realize that he or she makes them.
You [my anonymous correspondent] assume three things about reality – each of which is a widespread assumption, yet each of which is also fantastically at odds with reality.
First, you assume that wealth is fixed in amount. You assume that if Smith becomes richer, her additional wealth necessarily means that other people have become correspondingly poorer.
Second, you assume that money is wealth and that wealth is money.
Third – and worst – you assume that wealth is what we might call “utility dough.”
Your first and second assumptions are easily shown not to describe reality. The world today supports at least 4 billion people at levels of material prosperity far higher than all but, at most, a few dozen people in pre-industrial times ever enjoyed at any one time. As for ‘money being wealth,’ how wealthy would you be if you had all of Bill Gates’s $72 billion in Federal Reserve notes – that is, in cash – but you were stranded with your bundles of dollars on a deserted island? You’d be as poor as – indeed, likely poorer than – the sand crabs and birds that are your only company on that island.
Your third assumption (likely rooted in the same fallacy that generates your misconception that money is wealth) is that wealth is like a glob of homogeneous cake dough that never looses its freshness or tastiness or nutritional value. Rich people, in your view, have lots of this dough stuffed into their bank accounts, in their wallets and purses, or under their mattresses. When a human being takes a bite of this dough-wealth, it gives him or her a rush of what economists call “utility” – what you might call “satisfaction” or “happiness” or “gratification.”
Rich people are those who have lots of this homogenous dough-wealth available to eat, or to hoard, as they please. Poor people are those who have relatively little of this dough-wealth to eat or to save. Wealth (or income) redistribution, for you, is simply the taking of some of this dough from people who currently have relatively lots of it and then giving what’s taken to people who have relatively little such dough.
This third mistaken assumption of yours is what leads you to make mistaken claims such as “with the rich hoarding so much wealth it’s not circulating in the economy and available to less fortunate people to acquire eventually.”
In fact, relatively rich people do not have their wealth stored as large globs of homogenous dough-wealth. Their wealth, instead, is invested mostly in the risky creation and maintenance of capital goods and services – that is, it is invested in specific capital goods and services – and it is, therefore, quite unable to be transferred from its current forms into consumer goods for poorer people without both reducing its value and reducing the economy’s prospects for growth.