Inequality and Wealth Creation

Inequality is not an appropriate measure of economic performance or wealth creation.

Inequality is a relative and comparative statistic. It shows how wealth is distributed, which is not that meaningful, and certainly should not be the basis of economic policy. Essentially, inequality is a comparative metric and not an absolute one. That is, if everyone does better but a few people do much better, inequality increases, and this is seen as something bad even though everyone is better off. It is used to create misleading policies that focus on redistributing wealth that is created versus policy that should be focused on enabling greater and more distributed wealth creation – not wealth capture. Policy should focus on how to best create wealth for more people. The absolute degree of wealth creation is beside the point relative to other people. Creating opportunity for the most people is what matters.

As an example, overall wealth has increased over the last 30 years for every population group, but for the highest group, it has increased more substantially. But, why is that a problem? Instead, it is a natural and unavoidable outcome of the free market.

Here’s the analogy: if you want to hold a lottery, the prize has to be disproportionately large to have the most participants to raise the most capital. The simple goal is that net outflows (prizes) are smaller than the net inflows (contributions or purchased tickets). This is very similar to business opportunities and wealth creation.

As an economy, we want as many contributors to wealth creation – entrepreneurs and new businesses driving economic growth – as possible. The only way to do this is to enable market participants to have the greatest possible reward without restrictions. Most businesses will fail (much like most lottery tickets lose). But, because we have increased the number of willing participants, we also increase the opportunity to create the most wealth – the most businesses, jobs, and economic growth, as well as increasing the tax base from both businesses and individuals. So wealth creation, even if it is concentrated mostly in a handful of people, benefits the overall economy and society much more effectively than any attempt to limit that upside or redistribute it through politically popular but inefficient and demotivating policy.

The superficial and the real

Our political system is binary, and both sides are more extreme than reasonable. There seems little patience for the “reasonable middle” where ideas can be nuanced, refined, and complexity of public policy understood. Instead, our leaders are superficial and guide policy with slogans, not thought. People like AOC and Sanders are caricatures, influential yet ignorant and superficial, forming policies while clueless about what it takes to realistically solve even their most critical issues.

They have great ideas on how to distribute wealth but no ideas on how wealth is actually created. Their perspective is to take existing wealth and distribute it to others instead of developing an engine to help more people create wealth. An example of this kind of dysfunctional policy can be found in resource rich African nations. Instead of building industries using the abundant natural resources present as inputs generating real businesses, those resources are simply gathered and distributed – either to efficient businesses in other countries or among governmental cronies to their Swiss bank accounts. Either way, this attitude is disastrous for an economy ultimately. Wealth is created, and policies should free up the ability to create wealth within appropriate legal restrictions.