Society and Wealth

Mar 2013

 

“The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.”

– Franklin D. Roosevelt

 

“In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of.”

– Confucius

 

The proposition is compounding wealth. It is the same notion as compound interest but for time. That is effectively the upside of starting your own company. Instead of being paid a market rate salary for time, you work on your own company and the effect of that time input compounds over the lifetime of the company.

Implicitly the longer the company is in business the more value is created, so as a rule of thumb the longer a company has been in business the bigger it is. That is why often family-run, multi-generational companies end up being huge. Because the new generation benefits from the time the previous generation put into it and the next generation does the same. It’s standing on the shoulders of giants taken to its literal market sense.

This is the ideal a country or academia is supposed to be based on because many benefit from the compounding growth of a country and knowledge. Einstein couldn’t have discovered relativity if Newton hadn’t first discovered calculus.

But wealth usually ends up in the same corner over time because of how compounding growth works. The key word is compounding. It means the new increase is an increasing proportion of the old. So after a certain threshold is exceeded it becomes unavoidable. Like how a snowball as it rolls down a hill becomes progressively larger.

But creating wealth is just a skill that can be learnt. Once someone has learnt that skill and applied it, in the preservation of that wealth, the snowball has effectively been pushed down the hill. When this occurs in a family or a handful of individuals is when the wealth becomes concentrated in the top percentile. Initially this is a very good thing as it is how a family progressively lifts itself out of poverty but accrued over generations becomes mercenary.

It’s not inherently evil, it’s just expected. It’s part of human nature to preserve wealth and protect and provide for the young but the unseen effect is it stacks up.

Theoretically it’s not supposed to stack up. It’s supposed to be reinvested. But it does. Why is that? It’s probably because of the human in the loop. Because the idea of investing in something long term where the results won’t come to fruition in the lifetime of the person investing is unintuitive to a person but isn’t to a system.

Like air, it needs to be in circulation to work properly. If a person is in a closed room then eventually all the air will run out if it is not recirculated. If we expand the analogy to an economy. When we live in a world with extreme wealth we will just as easily live with extreme poverty because that is it’s natural counterbalance until it is once again recirculated.

The reason is not because extreme wealth is taken from the poor as many believe but because it is created at a faster rate. It is not absolute return but rate of return. It is a vibrant middle class and the absence of abject relative poverty that is the sign of a flourishing society. This does not necessarily preclude one which also has a large number of very rich people.

The effect of an innovation spreads over a population. So absolute poverty is reduced but relative poverty is increased. It’s why in western countries poor people still own televisions and live to an old age whereas in the middle ages this would not have been the case. Wealth was nearly directly tied to life expectancy. So it is like chasing after a train as it is slowly speeding up. Even though you are moving closer to it, it is moving increasingly further away from you.

The creation of wealth and the process of appealing to market forces is the primary method by which people become very rich. It’s a very good system because their creations are to the benefit of everyone, and because no-one would do it if the reward was not proportional. Entrepreneurs would not work 100 hour weeks if they were rewarded the same as if they only worked 40 hours. So the marginal benefit of their creations is lost.

Choosing where wealth is allocated is a difficult task but one which markets have an affinity for. Because it is necessary for technological progress and for the benefit of everyone. The creation of the lightbulb both brought light to homes but also made Thomas Edison very wealthy.

If a system were to maximise the amount of value to be created then all value created would eventually be recirculated to create more value thus creating more of it. That is the basis of a taxation system. A government reallocates wealth to where it is most needed. The faster it recirculates, the faster more value is then created deepening the proverbial well from which everyone draws from.

To optimise wealth generation is when past wealth is used as a springboard from which new wealth is created. To direct the snowball in a way that it may provide peak utility. You could not create an antibiotic without immense capital expenditure to first get there.

Wealth and value are abstractions, short hand for what they represent. What they represent is utility or relative benefit. Naturally, a system leans towards a meritocracy. If a person is really talented and creates a lot of value then inevitably they will own more of the value they create.

The talent to create value is just a skill so it can be learnt – but it is a difficult skill to learn. It’s why stories about people coming from nothing and the rags-to-riches story is idolised. Precisely because they are anomalous.

What accidentally breaks the function is when those that have created huge amounts of value try to preserve their wealth. If you had to isolate how this occurs, historically it is usually through family and land. Kingdoms and dynasties are passed down through generations. The modern equivalent is probably a family run business or a monarchy.

The process of preserving wealth through lineage, usually by giving kids large inheritances, instead of raising kids in a way they could create it themselves is what breaks a meritocracy. A person raised in a rich family knowing they will always be rich develops a kind of warped, insular view of the world. They are born with influence without the wisdom to wield it which only comes from building it in the first place.

There are reasons nearly every country has laws to prevent companies from having a monopoly. Because otherwise market forces would not reduce prices and there would be no reason to invest in the future since there is no competition. It is when you get rich people who instead of investing in cancer research go and buy large car collections. They don’t understand the positive influence they could have with their wealth so it largely goes to waste.

And so that kind of wealth can be corrosive and manufactures people who are callous. I remember once I was with my mother and a homeless boy tried to sell us a toy aeroplane. She haggled for 20 minutes and brought the price down from 100 rupees to 30 rupees, less than the wholesale cost of the plane. You could see the desperation in the boys face as the price came down. For the sake of what was 20 cents to us coming from a western country, we haggled with a homeless person. I hated my family that day.

 

In Bombay, a city in India there is a house built by the Ambani business family which cost nearly 1 billion dollars to construct. It is a skyscraper housing a family of six, who largely inherited their wealth. Three generations ago they had nothing. Around the corner are people starving.

I read once that the amount of tax they pay is less than many of their employees because of the structure of the Indian tax system. You see similar happen in nearly all countries. You know something is wrong but you’re not entirely sure what.

I remember reading that kids born in wealthy families statistically end up becoming wealthy themselves. I used to wonder why that was. I think it’s because rich families raise their kids with a sense of entitlement which is beneficial. Whereas non-rich families raise their kids with a steel-cage optimization mentality that they should make do the best with what they have.

Like a kid born in wealth believes there is wealth in the world and all they have to do is find it. Whereas kids not born in wealth believe that these are the cards they have been given and should play the hand as best they can. But actually the deck can be reshuffled; but that’s a secret only the wealthy seem to teach because often they have experienced this effect first hand. Or perhaps they just inherit it.

The higher order bit is that a tax system must function correctly to complete the circuit. For such scenarios to come about means the circuit is being circumvented. This would mean either a) the system is not being implemented correctly, likely because of a flaw in the system or b) because the people implementing it are corrupt.

I think it’s largely just a data point that exists on a larger sine curve. If you had to hypothesize meaning from the curve, it probably depicts the aggregation of wealth and by extension the society which controls it. Wealth is supposed to be circulated because it doesn’t really exist when it isn’t.

 

I remember being explained how this cycle works in a lecture once, the boom and bust phases of civilization.

What happens is eventually that wealth has compounded to such a degree in such few hands it goes through a period of fratricide, stops being a meritocracy and becomes a monarchy. At some point the new generation fails to recognise or forgets the noble actions of its past, becomes corrupt and the monarchy becomes a dictatorship or empire. The many believing they have been wronged create a revolution, overthrow, usually violently, and they decide everything should be shared equally and it becomes the equivalent of socialism. This stops technological progress since there is no reward or incentive anymore and it collapses. Someone leads out of the confusion and it becomes an autocracy. That’s the bust phase.

Autocracy is unsustainable and people try to rebuild and reorganise so it becomes a republic. Being restructured everyone should have a say in who governs and the decisions made so it becomes a democracy. A democracy allows for each person to make their own decisions, live their own life and spend on whatever they choose so it becomes capitalist. Capitalism creates competition where the talented thrive and it becomes a meritocracy again. Meritocracies allow for the talented to thrive and create more wealth for themselves. That’s the boom phase.

And such is the cycle of civilization. If the society is not wiped out in a war with another one, that’s another common outcome. From rocks to bartering to trade to goods to services to money – The currency changes but the underlying principle doesn’t.

 

The preservation of wealth prevents it from being recycled and redistributed. Grasping this is when you develop a new respect for Silicon Valley. It is an ecosystem full of people who often come from nothing, build a fortune and then give it away, perpetuating the cycle.

Bill Gates the wealthiest person in the world is leaving only 10 million dollars for his children’s inheritance. As a ratio that is 0.00001% of his wealth and is case in point ab uno disce omnes.

What is it about wealth that brings influence? It isn’t necessarily the wealth it is the way others react to it. What is it about influence that makes people strive for it? I think it comes from the same part of human nature that wants to be loved and listened to. This itself comes from the same place that is afraid of its unimportance, like a form of existentialism. People are really afraid that they are irrelevant.

We’ve built this world where we kind of trick ourselves into believing that we are more than just us. Like we are really important. We build artificial points systems where we rank things based on the number of points they have and assign social value accordingly. But really in the scheme of things we’re all just nobody.

So it drives people to seek to become important and the short hand for importance is influence. Influence is just having a lot of people listen to you. A lot of people listen to you if you’re rich. People react to you a certain way if you say you graduated from Harvard or started a company or are famous. So thoughts can be underdeveloped and wrong but if you are rich you will always have an audience.

The influence comes in that other people will listen to you if they think you are wealthy, partially because wealth has a habit of fountaining — when someone becomes wealthy usually everyone in their surrounding company does too. So they listen because they think they too will become wealthy.

Implicit in this is if you are not wealthy then you won’t have an audience. No one will care. Because nobody listens to an influential person before they become influential. It’s the glorification of wealth that causes people not to listen to those without it.

So it’s common to hear people who have gone from no wealth to wealthy to feel like they had been slighted. To have the view that, “Nobody helped me so why should I help others?” They feel wronged and so inadvertently wrong others by preserving the wealth they have created. It is the cracks that start to appear in the system.

But what I think is frequently missed is to feel wronged is a form of misplaced entitlement to begin with. Or as the Greek philosopher Epictetus said, “Wealth consists not in having great possessions but in having few wants.”

And that influence is what becomes the motivation for those that do not have it to become wealthy in the first place, which is the trigger that begins the whole cycle. It’s why, in a study, the number one goal of teenagers and young adults isn’t happiness or fulfillment, it’s to be famous.

Rich people should, in a perfect world, recycle their wealth for the good of everyone, because they’re in the unique position in which they can. When they don’t, and instead buy sports cars, it is an inefficiency and is the cause of nearly all social unrest since the beginning of recorded history. We’re the first ever society that knows enough about our own history to prevent this.

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