Politics – a topic that seems to have a love-hate relationship with everyone.  It targets core belief systems, it creates powerful emotional reactions, and it matters.  Politics shape whether a country prospers or fails, it is the system by which societies manage each other, commerce, and relations.  My interest in politics has less to do with the daily media (which I avoid), but more to do with how politics is a big psychology experiment – where it changes how people behave, what people believe, what matters to people, and sways how people think.  It is behavior psychology at it’s finest, and it is fascinating.

There is a lot of negative sentiment towards the rich, especially towards the elite – the millionaires and the billionaires running the worlds biggest companies.  It is an interesting discussion for a number of reasons, but I think it represents some misunderstandings about the world, economics, capitalism, and the greater good.

I read Walton’s “Made in America” book a few months ago, which was him essentially advocating for free market enterprise – allowing companies to operate businesses and consumers to make their own choices about what to purchase, when to purchase, and for how much.  Bezos, currently the worlds richest human, gives the book to every executive he works with to get a grasp for how to build world changing companies.  Bezos, like Walton, very likely sees doing good in the world as creating more capital for the world.  And that is not to say just for himself.

Walton goes into detail about not only how and why he created Walmart, but how much wealth Walmart created for the world.  It not only made the Waltons fabulously wealthy, it made a lot of people wealthier – including all the associates who setup Walmarts, all the people who bought Walmart stock, all of the managers who have worked for Walmart, all of the employees who decided to make a career out of working at Walmart, and all the consumers who shop at Walmart that otherwise would be paying higher prices elsewhere.   You can make the exact case for Bezos – even though he has amassed a fortune of over $100 billion, Amazon currently has a market cap of almost $1 trillion, which means he’s created over $900 billion for other people, not counting all the wealth created that isn’t factored into the stock price (such as people who make money selling on Amazon, shipping companies, labeling companies, consumer savings, etc.).  Some of that wealth has taken market share from other companies (such as a mom and pop shop that used to sell the same product at twice the price), but it also includes a huge amount of new wealth that otherwise didn’t exist, including all the people that work for Amazon now that otherwise would be working elsewhere.  It is important to look at all these downstream effects when looking at company profits, taxes, wages, etc.  The reason Bezos, Gates, or Jobs became so rich is because they innovated, and built something that society valued.  But the takeaway isn’t that they became incredibly rich, it is that the result of those businesses, it made a lot of people wealthier, and created a massive amount of wealth for the world.

The point here is that while doing good in the world can be donating money, time, energy, or other resources to those in need, it can also be done by creating technology, business, or creating wealth for the world in which people work, create, and use the business to create further wealth.  Walton suggested in his book that the good that the Walmart business has done for the world is far superior than any of the billions of dollars that the Walton’s have given away in their lifetime as philanthropy.  As a society, we often look at the philanthropy that the rich do, but we miss the “good” that these people have done by simply creating business and commerce in the world.

This view of reality is interesting, and worth thinking about more.  In Tyler Cowen’s “Stubborn Attachments: A Vision for a Society of Free, Prosperous, and Responsible Individuals”, he makes a moral case for economic growth:

Growth is good. Through history, economic growth, in particular, has alleviated human misery, improved human happiness and opportunity, and lengthened human lives. Wealthier societies are more stable, offer better living standards, produce better medicines, and ensure greater autonomy, greater fulfillment, and more sources of fun. If we want to continue on our trends of growth, and the overwhelmingly positive outcomes for societies that come with it, every individual must become more concerned with the welfare of those around us and in the world at large and most of all our descendants in the future. So, how do we proceed?

So with this said and noticing how Walton and Bezos likely see doing good for humanity, are these characters as evil as they’re thought to be?  Should we hate these people, and praise them for their service?

One of the common arguments about these big companies is how much more the executives make to the employees.  While it is worth discussing, wages are determined by the market (or the government), not necessarily by the company.  If Amazon pays their average employee $15, they do it because people are willing to work for that wage.  The only caveat to this is if no other options or jobs exist, but that is rarely the case if we generalize society as a whole.  Why are wages for computer scientists higher in the US than in Thailand? Why does a Youtube engineer make more than a grocery cashier? The market.

There are more jobs available today in the world than anytime in history, and the US has record low unemployment rates.  Amazon did, however, set a $15 minimum wage themselves, doubling the average minimum wage in 2018.  An important note is that wages, more often than not, are created out of a market.  If there aren’t people willing to do the job for $15, wages will go up.  If there are a lot of people willing to do the work for $15, wages may drop or remain the same.  While not true in every case (such as a monopoly or lack of competition), it is generally true for the world at large.

It’s important to understand these dynamics, as well as the downstream effects of them.  A recommended read on the topic of minimum wage, taxes, and markets is “Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics“.  It’s short and discusses a lot of these topics in basic terms.  I tend to believe that much of the disagreement between conservatives and liberals, in America in particular, is caused by varying understanding in downstream economics, as well as what role governments play in society and how large they should be.

Hoarding Money

One of the things we often hear is the rich are hoarding money.  Part of this could be true, but lets step back and look at it a bit more.  Once you have money, it’s easier to make more – you can take more risks, have access to more opportunities, and have more time/resources to spend finding the best ways to invest it, not counting more time to simply learn and think.  As a result, the rich often get richer even if they aren’t “hoarding money”.  That doesn’t therefore mean the rich just want to get richer, it is simply the mechanics of how economics work, and perhaps a flaw with modern capitalism.  For example, an American can save up money, travel for 2 weeks on that money, while still saving for retirement.  Most of the world cannot do this (and one big argument for capitalism is to make more countries become developed so more people have the luxury to do this). I think many of the richest people in the world are all trying to figure out how to do good with their money, not simply trying to “hoard it”.  And trying to determine how to do the most good isn’t an easy answer, and one that should be diligently thought out.

If you were Jeff Bezos, what would you do? Or in other words, what do you suggest Jeff Bezos do? Or Bill Gates?  Stop and think about that.  Your intuition may be misguided. One may say they should give it all away.  If Bezos gave away $100B, he’d still have $14B, is he still a “hoarding” then? Bill Gates is giving away $10B each year, but is still making more than that, making him wealthier, is he still “hoarding”?  Instead of giving away the money, what if the money was used to create bigger businesses and drive more economic growth in the world? Is that better than giving it away? There is also the time horizon factor – giving away $100B now may alleviate a lot of suffering in the present moment, but would it simply kick the issues downstream to a later time rather than solve them fundamentally? These are all tough questions, and ones that everyone should think about, not just the richest.  But the point of these questions is to genuinely consider them.  If you were worth $10M, $100M, or $1B, what would you do? These questions are tricky and don’t necessarily have right answer, but the best answer probably isn’t to give it all away if we want to maximize the amount of good we’re doing in the world.

While capitalism has it’s flaws, what is a better system? We can criticize the broken systems in place, but we have to be careful as if we don’t have a better alternative, it’s hard to convince people to do otherwise.  We should be working to build the best society we possibly can, and that means understanding how the society came to be, why it is the way it is, and how the mechanics of society actually work, rather than simply assuming things.  We all need to better educate ourselves by reading, discussing with people from the other political spectrum, being more aware and open-minded, and thinking about the greater good rather than just about ourselves.  The world is complicated, but avoiding people from the other party only makes the problem worse, not better.

Because of the complexity in peoples desires, drives, motivation, knowledge, etc., we need a system for freedom of choice, enabling people to freely make choices based on their own desires and values.  Again, there isn’t a purely perfect system, but capitalism is perhaps the best system for this so far.  And it’s worked.  I’d highly recommend reading Steve Pinker’s “Enlightenment Now” book.  It is a much needed read for most of the people dreading modern society – people are stuck in mental prisons driven by the media, which plays on our negative emotions.

Conservative vs. Liberal

If you ask most people in the world what they wish for society to be, it is a society where everyone is happy, healthy, and wealthy, free to make their own choices and fulfill their own desires.  The vast majority of disagreements arise from how that is best done.  Is it best done by increasing taxes and making governments larger? Is it best done creating a more free market with more open trade? Is it best done by investing mostly into our education system where people can think for themselves?  These are all questions that don’t have clear answers, all we can do is openly discuss the pros and cons to each and try to better understand the downstream effects of all of these things.

While I tend to lean liberal on most issues, I believe that governments are incredibly inefficient with money, in large part due to no competition or accountability for spending or performance.  Politicians are rarely scored on their direct effects on society, but more on how they make people feel.   As a result, I think governments shouldn’t be larger, they should be smaller.

The fact that wealth is taxed in proportion to growth, by definition, means governments will grow in proportion to the economy growing.  This doesn’t make sense as governments don’t necessarily need to be larger as an economy gets larger, it may be better that people keep or spend more of their own money rather than it going to the government, which is known to be wasteful.  With this said, many governments perform well with high tax rates and have built in systems into their government which maintain accountability.  Though this is true, we don’t know how well the society would function if taxes were lowered compared to higher as we don’t have those controlled.  It is plausible that Norway may be wealthier, happier, and healthier with lower taxes than they are currently, but we don’t know the answer.  Therefore, it is a fallacy to think that simply because higher taxes have worked in one place that they will work in another.  The other major factor in “higher taxes” is that it isn’t just a function of higher taxes, it is how the tax revenue is spent.  The Scandinavian countries with higher tax rates tend to have far more efficient spending programs than the US, for example, where the US spends $800B/year on military while the Scandinavian countries spend little on military.  It is complicated, but high taxes aren’t necessarily good.

Income Inequality

One of the reasons many hate the rich, on top of what has been discussed, is income inequality.  People value fairness, but since the wealthy often have access to things that most people do not, it creates an unfair society.  It doesn’t necessarily mean all rich people got rich playing unfairly, most of the wealthy people in the world earned it either by luck, hard work, or a combination of the two.  Some people have no desire to become rich, so we can’t ensure an equal society, we can only ensure fair rules.  Freedom and equality aren’t compatible – we all excel at different rates.  A purely free society will end up un-even, and a purely equal society means taking away freedom from people.  All we can hope for is a system where people have the ability to pursue their own desires, or what people call equal opportunity.

Paul Graham wrote a great piece on income inequality here, which is worth reading:

The most common mistake people make about economic inequality is to treat it as a single phenomenon. The most naive version of which is the one based on the pie fallacy: that the rich get rich by taking money from the poor.

Usually this is an assumption people start from rather than a conclusion they arrive at by examining the evidence. Sometimes the pie fallacy is stated explicitly:

…those at the top are grabbing an increasing fraction of the nation’s income — so much of a larger share that what’s left over for the rest is diminished…. [1]

Other times it’s more unconscious. But the unconscious form is very widespread. I think because we grow up in a world where the pie fallacy is actually true. To kids, wealth is a fixed pie that’s shared out, and if one person gets more, it’s at the expense of another. It takes a conscious effort to remind oneself that the real world doesn’t work that way.

In the real world you can create wealth as well as taking it from others. A woodworker creates wealth. He makes a chair, and you willingly give him money in return for it. A high-frequency trader does not. He makes a dollar only when someone on the other end of a trade loses a dollar.

If the rich people in a society got that way by taking wealth from the poor, then you have the degenerate case of economic inequality, where the cause of poverty is the same as the cause of wealth. But instances of inequality don’t have to be instances of the degenerate case. If one woodworker makes 5 chairs and another makes none, the second woodworker will have less money, but not because anyone took anything from him.

Even people sophisticated enough to know about the pie fallacy are led toward it by the custom of describing economic inequality as a ratio of one quantile’s income or wealth to another’s. It’s so easy to slip from talking about income shifting from one quantile to another, as a figure of speech, into believing that is literally what’s happening.

Except in the degenerate case, economic inequality can’t be described by a ratio or even a curve. In the general case it consists of multiple ways people become poor, and multiple ways people become rich. Which means to understand economic inequality in a country, you have to go find individual people who are poor or rich and figure out why. [2]

While there is a lot of talk in the US about income inequality, an important note and one worth thinking about is that the vast majority of Americans are the wealthiest people in the world.  With that said, what are the things that the average American does with their resources to help the poorest people in the world? By analogy, it is somewhat similar to the wealthier people in America to a working class American.  Americans earn 10x more than most others in the world, after adjusting for living costs (PPP).  Even the poorest Americans live a standard of life better than most of the world.

It is worth thinking about when discussing income inequality.  If we look at it on a national level, or a global level, there are issues to be solved, and we should all inform ourselves about these issues and do our part.  I tend to look at most things at a global level sine we’re all on this planet together, and I think nation states should focus more on global decisions rather than just trying to make their own country “great”.  If America declines and people in America are making less money, that doesn’t mean the world is in decline.  Perhaps a lot of that wealth is being moved into poorer countries, making the rest of the world wealthier, it’s not easy to say if that is bad or good for the world.  We don’t want people to decline in wealth or well being, but considering how much wealthier America is to the rest of the world, it would make some sense to see the world become more even over the longer run as poorer countries become wealthier and growth is quicker compared to western countries.

The average American vastly underestimates how rich they are compared to the average human in the world.

“According to the Global Rich List, a $32,400 annual income will easily place American school teachers, registered nurses, and other modestly-salaried individuals, among the global 1% of earners.” (?)

How we fix income inequality, make everyone more free and wealthier,  more open minded and aware, how we improve education, and how we better work together are all difficult questions to answer.  All we can do is openly talk about them, put our perspectives out to be corrected and discussed, and in the process, keep our emotions in check and not become overly biased or emotionally attached to politics as we know.  All of these issues are solvable, and we will solve them.  But we have to criticize the bad ideas, not the people who perhaps have the same goal as us, but just see a different way of getting there.  It’s impossible for us all to understand everything in the complicated world we live in, all we can do is learn as much as we can about as much as we can, and stay open minded, knowing that what we believe and know may not be the entire picture.

After all, life is too important to be taken seriously.  Look at politics for fun, to learn, and engage with people, but don’t let it polarize your family, friends, and society.  We all share this planet together, lets work together to make it a better place, and that starts, with you.