How Misunderstanding Wealth Creates Political Dissonance

Wealth inequality is a sore subject in American politics, and a topic that the political right and left can’t seem to navigate in any compromising way. While part of this is due to a fractured and polarized political base, much of this is also attributable to fundamental misunderstandings about what wealth is, what it does for our society, and how it affects people on an individual level.

Resolving these misconceptions about wealth, or at least coming to a clearer understanding of different perspectives on wealth, can help us create economic policies that make logical sense -- rather than catering to popular, yet misinformed mobs.

Capital and Rent Seeking Economics

Rent seeking economic behavior is described as a strategy to gain wealth without any reciprocal contribution of productivity. A classic example here is taxi licensing; in some areas, taxi drivers must pay an exorbitant fee to operate a taxi, but the license itself provides no inherent productivity or value to this economic system. The taxi license doesn’t make the taxi service more valuable, nor does it allow taxi drivers any special capabilities, other than being allowed to operate.

Many people on the political left try to argue that investing is a form of rent seeking -- not in these words, but in principle. The argument is that if your wealth is “sitting” in the stock market, it isn’t doing good for anyone. And if it exists as equity in rental properties, you’re merely using it to extract income in the form of rent from other people -- hence, adding no value to the system.

But this viewpoint is misguided. Investing in stocks means making your capital available to a business that might otherwise lack it; this business can open up new storefronts, hire new people, innovate new products, and take bold risks. Each of these actions benefits the economy and would be impossible without the contribution of capital. In essence, the money is working on your behalf.

There’s a similar paradigm in the rental property market. Rental property investors often support the local economy by funding property management firms, beautifying neighborhoods in an effort to attract tenants, and giving residents access to housing they may not otherwise be able to afford. On top of that, they’re taking risks; there’s no guarantee that a rental property is an investment that will pay off.

Net Worth and Liquidity

People love to hate billionaires, mostly because of jealousy or resentment. But even this jealousy is founded on a misunderstanding of how wealth (typically) works. Let’s take a look at the classically cited example of Jeff Bezos. The founder of Amazon’s net worth is an estimated $148.4 billion. This man could make someone new a millionaire every day, and it would take 406 years to exhaust his wealth. He could donate it all to charity or distribute it to America’s poor. So why doesn’t he?

Shelving the arguments about wealth redistribution for the time being, you need to understand that Bezos doesn’t have $148.4 billion sitting in a checking account, nor is he making millions a year. Instead, his annual salary is a modest $81,840, and most of his net worth is tied up in his ownership of Amazon. If its stock price were to plunge, or if the company went bankrupt, his wealth would plummet.

Inequality and Wellbeing

Another common mistake often made by the political left is mistaking inequality for lower wellbeing. But just because someone has more than you doesn’t mean you’re inherently worse off.

Consider these scenarios. In scenario A, you make $100, Bill makes $200, and Ted makes $500. Ted is making 5 times what you make. In scenario B, you make $300, Bill makes $700, and Ted makes $3,000. Ted is now making 10 times what you make. So would you prefer scenario A or B? If inequality is your biggest concern, you’d choose scenario A, despite the total wealth being $800 instead of $4,000, and your personal wealth being $100 instead of $300. In other words, inequality is oftentimes a byproduct of literally everyone (including the poorest people) doing better in a given system.

This doesn’t even touch on the fact that inequality can actually be a good thing; functional hierarchies, assuming adequate mobility, serve as a motivator for self-improvement and excellence. Absolute equality means our best people can’t do their best work, or won’t want to.

Supply-Side Economics and More

This truncated article merely scratches the surface of how the nature of wealth is misconstrued and politically weaponized in this country. We haven’t even covered the egregious misinterpretations and reframing of supply-side economics and other right-leaning economic strategies. But suffice it to say, if we’re going to make collective economic progress as a nation, we need to get on the same page about these basic economic concepts.

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