The Economy in a Wealth Unequal World
So now we have explained what Wealth is, and how it is different from Wage Income. And we have described what a Wealth Unequal World looks like. Now let’s think about how the Wealth Inequality in that World will affect the economy.
The Wealth Unequal world is split into two groups of people. The Wealthless group is very large with zero or little Wealth. They desperately need to find work in order to live, because, without Wealth, they have no other way to access housing, or food, or other essentials. The Wealthy group is extremely small, but everyone within this group is extremely Wealthy – they own huge amounts of land, property and machinery or other resources. Although this group is extremely wealthy, they have far less desire for spending than the Wealthless group would have if they were able to own some of the wealth instead. This is because Wealthy people only use a tiny percentage of their Wealth for spending – they use almost all of it for saving.
We have also mentioned that we don’t live in a perfectly Wealth Unequal world right now. We still have, especially in the wealthier countries of Europe and North America (as well as some other countries like Australia and Japan), a sizeable middle class that has a decent amount of Wealth. Wealth Inequality has been increasing very quickly recently, and the number of people with a decent amount of Wealth is falling. If Wealth Inequality continues to concentrate we will move further and further towards a fully Wealth Unequal World, but we are not there yet.
Lots of people are desperate to work
So we have one group which is extremely large, and really desperate to find work. They have very little Wealth to sell for consumption, if they want to consume they will have to find work. If they manage this, they will most likely spend most if not all of the money they make on consumption within their lives.
The second group is extremely small but extremely wealthy, but their spending on consumption is very low.
Demand for consumption is Low
This immediately causes a problem. In order for the Wealthless group to find work, they need to locate some source of demand. What this means is, every time a company or government hires a person to do a job, they ultimately need a person to sell that product to. In order for a car factory to employ a worker, and be able to pay him, they need to find a group of people to sell their cars to. In order for a building company to employ somebody building houses, they need to find people to sell the houses to. In order for a school to employ a teacher, they need to find families willing to pay for their children to go to that school, or a government willing to pick up the bill. In order for any companies to employ people, they need to locate some source of end demand for their products. They need to find somebody who is willing and able to pay for the things that they produce.
But we know that, in this world, there is very low demand for consumption. Even though the Wealthy group is extremely wealthy, they don’t consume as much as a wide group of moderately wealthy people would. As an extreme example – Bill Gates has a wealth of approximately $81 billion. That’s around one to two million times more wealth than the average American adult. The average american adult will probably use one house between two or three adults, use about one bed per adult and use one car for about each two adults. Each adult will eat three meals a day. Doubtless the price of the houses, beds, cars and meals used and eaten by Bill Gates will be much, much higher than those used and eaten by the average American, but we can safely say that he doesn’t use over 300,000 houses, sleep in one million beds, own half a million cars, and eat three million meals each day. This illustrates well that the Wealthy consume much less in proportion to their Wealth. So if almost all Wealth is owned by the very Wealthy, overall demand for spending money and consumption will be low.
Need for Workers is Low
Additionally, and especially in recent times, a big part of Wealth, is amazing, productive technology. Amazing machinery which means that we can produce things extremely efficiently, without much labour. A great example is farming, where tracts of land which in the past would have needed thousands of workers to work, are now built almost entirely by machines. All sorts of factory production can now be done almost entirely by machines as well, and increasingly even jobs like teaching and answering phones are being done by machines. Technology means that enormous factories can be manned by very few people; it means that, by using technology, each individual worker can produce hugely more than they could in the past.
Lots of Desperate workers, Low Spending, High Technology
The combination of these three factors causes enormous problems. We have a huge group of people who need work, who are desperate to find work. We have a very small group of people who are capable of employing them, with only very small desire for spending, and, on top of this, those people have amazing technology which means that, for the few things that they do want to consume, they can easily and cheaply produce them without using many people.
We have a huge number of people, who need to work for a tiny number of people, who don’t really want to buy many things, and don’t really need people to make them.
This is a perfect recipe for low wages.
This is the key thing to understand about the nature of a Wealth Unequal Economy. Wealth Inequality causes very low wages.
This is the first crucial thing to understand about the Wealth Unequal Economy. When a huge number of people are desperate to work (because they have no other way to support themselves), and the people who are able to spend are very small in number and unwilling to spend a lot of money, then wages will inevitably be very low. This is then extremely compounded if the Wealthy have amazing technology that means that they don’t have to employ people. Because this is such an important point to understand, I would like to repeat it again. Wealth Inequality causes very low wages.
It is important to realise that new technologies, or better training and skills for workers will not fix this problem. The problem is ultimately that, in a Wealth Unequal economy, the people who own the Wealth are not very willing to spend their money, so there is not a lot of demand to buy goods and services. If technology becomes better, or people become more skilled, that will increase society’s ability to produce things, but if there is no demand to buy these goods and services, this will only make the problem worse. If the world does not demand goods and services, and people train harder to produce things more efficiently, this will increase competition for the few, low paid jobs already available, and push wages down even lower.
So, for one final time, I will emphasise this really important point to understand. Wealth Inequality leads to very low wages.
Demand for Saving is High
So, we now understand that, in a Wealth Unequal economy, there is not a lot of demand for spending money, and that this pushes wages down. The flip side of this is that the Wealthy like to save a lot of their money. So, in a Wealth Unequal economy, total saving is going to be very high. This saving could be used for investment in productive industries. But we already know that,total demand for spending is very low. This means that it is very difficult for companies to profitably invest. As Wealth becomes more and more unequal, total demand for consumption goes down and down. This means that factories and industries which already exist will probably find it harder and harder to sell their goods and services. In this situation, it doesn’t make sense to invest in increasing production.
High Demand for Saving + No productive investment
So we know that, in a Wealth Unequal economy, there is very high demand for saving, but very low opportunity for productive investment. If savings cannot be used to invest productively, they can only be used for one other thing – purchasing assets. Since total demand for saving is very high, but total opportunity for productive investment is very low, we also know that, in a Wealth Unequal Economy, demand for buying assets will be very high.
High House Prices
In some countries, land is the primary asset. In the UK, and in many other countries, the single most valuable group of assets is housing. In a Wealth Unequal economy, with huge demand for savings and not many opportunities for productive investments, the huge demand for assets will push house prices up. This brings us to our second key point about Wealth Inequality. Wealth Inequality leads to very high house prices.
The combination of these first two points is very important – if wages are very low, and house prices are very high, it becomes very difficult for people to save up enough money to buy a house. For many families, it becomes quite realistic that their family will never be able to afford a home ever again. This causes widespread financial insecurity for families. This is our third point, and it is a combination of the first two points – by bringing wages down, and the cost of vital assets like housing up, Wealth Inequality causes widespread financial insecurity.
Concentration into Finance and Luxury Industries
To understand the next point we have to think again about the Wealthless group and the Wealthy group. The Wealthless group, as we know, is very large, and has little or no Wealth. We have also learnt now that their wages are very low. This means that their spending, by necessity, is going to be very low, and it is going to be focussed on essentials. Total spending on non-essentials from this group will be small. The Wealthy group, despite being much smaller in number, is much, much richer than the Wealthless group. This means that the spending of the Wealthy group will be proportionally enormous, in comparison to the much bigger, much poorer Wealthless group. The higher Wealth Inequality is, and the higher the % of Wealth held by the tiny Wealthy group, the more concentrated spending will be amongst a small group of people. The Wealthy group, despite being small, will begin to account for a larger and larger percentage of spending in an economy. Spending will be focussed on the rich, so, increasingly, only businesses which sell mainly to the rich will be profitable. This leads us to our next point of the Wealth Unequal Economy – The Wealth Unequal Economy focusses on selling to the Wealthy.
The Wealthy, however, have very unusual spending patterns. As we know, they save an enormous proportion of their incomes, much higher than most people. This means that they spend a very high proportion of money on industries that focus on saving, such as banking, asset management and buying and managing properties and land. Although we know that these people don’t spend much money on goods and services, in proportion to their Wealth, what they do buy is also very different to what most people buy – they tend to buy extremely expensive luxxury products. So, if the Wealth Unequal economy focusses on selling to the Wealthy, and the Wealthy buy mainly investment services and luxury goods and services, then we can get to our next point – The Wealth Unequal economy focusses on investment services and luxury goods and services.
So we know that the Wealth Unequal economy is concentrated on a small number of industries. By focussing on selling to the Wealthy, the Wealth Unequal economy is also unusually concentrated in another way. The Wealthy group is extremely small, only a tiny fraction of the overall people in society, and they tend to be concentrated in just a small number of cities all over the world. In a world with little Wealth Inequality, the economy sells to a broad section of the people. This means that, wherever there is a large population of people, there is probably demand for spending. In the Wealth Unequal Economy, where the focus is selling to a very small subsection of the population, demand for spending becomes very concentrated in a small number of geographic areas – mainly big cities like London and New York. In other areas, where the Wealthy don’t live or spend their time, we see a lot of economic stagnation. Wealth Inequality causes economies to concentrate on a small number of areas. This causes economic stagnation in many parts of the world with wonderful and long-established histories. In parts of the world where there are not a lot of Wealthy people, it becomes very difficult for local people to find jobs in their home area.
The concentration of Economic activity in very small areas causes big problems in itself. Many people, especially young people, find that they need to relocate to certain areas in order to find jobs. People from all over a very large area may all have to move to one city in order to find decent work. This leads to that city becoming crowded, putting pressure on local public services, and raising rents in a city. Wealth Inequality leads to high rents in the reducing number of places where people can find work.
Wealth Inequality causes problems for Governments as well. As we know, in a Wealth Unequal economy, almost all wealth is held by a tiny group. Wages are also very low. This means it becomes difficult to raise taxes from the Wealthless, as, in many cases, with no Wealth and low wages, they have very little money to spare after taking care of the needs of themselves and their families. The only possible source of significant tax income is the Wealthy, as they own all of the Wealth. However, it is becoming increasingly apparent, in our increasingly Wealth Unequal World, that it can be difficult for Governments to tax the Wealthy group. It is often easy for the Wealthy to move themselves and their assets between countries, at least in a legal sense, if not in a physical sense. This means that countries find it difficult to tax the Wealthy. The Wealthy also have access to very good tax advice from tax accountants that makes them very difficult to tax. In many parts of the world, governments are actively competing to lower taxes on the Wealthy, to attract them into their country.
So, in a Wealth Unequal World, we have two groups. The Wealthless, who cannot afford to pay much in taxes, and the Wealthy, who are becoming extremely difficult to tax. This causes big problems for government finances, and governments are often forced to cut spending in response. This leads us to our final point – Wealth Inequality leads to Government Austerity.
This concludes the first course on How Wealth Inequality Kills The Economy. You should have learnt what Wealth is, and how it is different to Wage Income. You should have learnt that, when Wealth is unequal, the world increasingly splits into two groups, one large Wealthless group and one small Wealthy group. You should have learnt, crucially, how that leads to low demand for spending and low wages for workers. It causes a whole host of other economic problems as well – high prices for assets, including property, making economic security out of reach for most people. It leads to the economy becoming focussed on certain industries and cities, leading to high, unaffordable rents in a few big crowded cities, and a lack of jobs everywhere else. It leads to problems with government finances, and cuts to government services.
Perhaps the most crucial point to understand is that Wealth Inequality leads to low wages. This is crucial to people’s quality of life. If people have no wealth, and low wages, then they will always struggle to be able to afford the things that they need. Once you add in high rents and high house prices, it begins to seem impossible for most people to be able to save money to pull themselves up into a better situation.
This concludes the section on The Wealth Unequal Economy. If you want to know more about how we can fix the economy move on to my next course – How we can fix the economy!