Uncover the True Costs of Wealth Inequality

There is a pie fallacy for money where the proponent of this idea suggests that the amount of money in the world is fixed. We cannot make the pie bigger. Thus, if one person gets more, someone else has to get less. More money owned and saved in someone's bank account means less money owned by other population groups.

For individuals, money is used to store value and for exchange. Money also can be a measurement of wealth owned by individuals or households. 

Compared to money, wealth does not follow the above fallacy. More wealth owned by individuals or households does not necessarily mean less wealth owned by others.

We can see technology companies like Google, Facebook, and Twitter as an example. Their multi-billion value does not mean a lower value for other companies.

So although there may be a specific amount of money available in the world, there is not a fixed amount of wealth in the world. We can create more wealth which drives more value, measured by money.

Wealth is anything that can bring satisfaction for the owner, compared if the owner or others who do not have the same thing. It can be the ownership of properties, businesses, farms, vehicles, jewels, or antiques. Wealth can even be in the form of health, social contributions, or good family relationships. 

For the first type of wealth, they can be converted into money, hence making comparisons between individuals easily be done. In contrast, the second type of wealth cannot easily be converted into money, therefore making comparison harder to achieve. 

The Inequality

Inequality comes when too much income is received by only a small percentage of the population. Or too much wealth owned by few people. 

When only a few people receive too much income, a large share of the population is hardly able to earn enough money for their living making them difficult to increase their living standards. 

Similarly, wealth inequality means a large share of wealth accumulated by a few people but at the cost of a large proportion of the population.

When income inequality occurs, a large proportion of the population is unable to achieve higher living standards, leaving them in a subsistence condition. This low income pushes them to take high-risk jobs or even involved in illegal activities.  

While income inequality not only harms the poor but also the whole population, wealth inequality implies a direct cost that must be paid by anyone who does not have the wealth. 

The wealthier the individuals the more able they are to minimise the burden of inequality. In contrast, the poorer the individual the more they have to pay the costs.

An example is a private jet that is enjoyed by a few people but has high emission that is a burden for the population. The wealthy can travel anywhere around the world and still can get fresh air or more natural food sources. In contrast, the poorer population have limited travel or mobility, therefore, making them trapped in polluted cities, drink polluted water, or eat from polluted crops.  

Another example is the unequal land ownership in a village that makes the landowners can maintain their living standard or even experience a small shock during drought or crop failure. In contrast, landless farmers or peasants will rely on other generosity during crop failure and making them vulnerable to famine. 

The more income or wealth is concentrated in a few population groups, the harder a larger share of the population has an income or wealth ladder.  

As noted by R. H. Tawney in his 1920 book The Acquisitive Society, inequality “diverts energy from the creation of wealth to the multiplication of luxuries.”  

Reduce the Inequality

The reduction of inequality is sourced from the option of increasing the stream of income and the increasing speed of wealth creation. Both are strongly related. This is the intertwined effect of the reduction of wealth and income inequality.

Income is related to the present time but wealth should be the orientation for a longer period. Further, we need to consider the intergenerational effects, when previous generations can inherit something from the next generations.

The picture below shows the intergenerational transfers. Parents inherit either rich or poverty conditions to the next generations. Wealthy parents inherit better education, better health level, better knowledge, a wider network, or better financial planning for their children. The most important thing is wealthy parents inherit more assets compared to less wealthy parents. 

  

For the children or the next generation's population, income is a crucial component for them as it is not inherited from previous generations. 

Income cannot be inherited. High income from previous generations will not be passable to the next generations. But income can create wealth that later can be inherited. Therefore, increasing the stream of income is also important. 

However, increasing income that cannot be managed into wealth will not achieve significantly higher wealth levels. Hence, in the longer period, wealth creation should be the priority for populations.  This orientation will help to reduce the true costs of wealth inequality.  

Closing Remarks

Uncovering the true cost of wealth inequality is important to shape the perspective and orientation for wealth creation as due to wealth inheritance, the next generations can minimise the impact of wealth inequality.