The Economics of the Distribution of Wealth

For decades we’ve had a collective discussion about the distribution of wealth in society, with different camps taking hard, entrenched positions on the issue.

Socialists and Communists want a nearly flat distribution of wealth, libertarians, and the neoliberals/neoconservatives of the DNC and RNC are positive it doesn’t matter as a “rising tide lifts all boats.” Both groups make seemingly solid arguments. Those on the left argue that a more flat distribution means more money in consumers pockets, leading to better performance of small businesses and stronger consumer demand to drive market growth. Those on the right argue that more consolidation means more investment and more jobs.

Both miss the point. It is well accepted among economists and those with common sense that as people get more wealthy, they tend to spend less and invest more, there is only so much you can buy and the wealthy earn more from investments than from labor, as a general rule. This is important, because the amount of consumer demand and the amount of cash available for investment are both incredibly powerful figures that determine the future course of our economy.

As the distribution of wealth becomes more consolidated, more of the total cash in the economy is in the pockets of the rich, where more of it is put into investment than into spending. Conversely, as the distribution of wealth becomes more flat, consumers have more cash but less is available for investment.

Without sufficient investment capital, it is difficult to open factors, purchase supplies and equipment, and get products to consumers. This is where our image of communism of “plenty of cash in our pockets but the store shelves are empty with nothing to buy” and tells us that pure communism or close to it is not a healthy economic system as it must rely on external investment that gives foreign powers a stake in your economy. Without products to sell to consumers, growth and innovation slow and economic efficiency takes a big hit, to say nothing of the difficulty of getting supply to meet demand without market forces.

On the flip side, without sufficient cash in consumer demand and too much investment, companies have difficulty moving their products, and stores are full of products nobody can afford, resulting in high debt loads and widespread, growing poverty. Once consumer demand is satisfied, breaking into consumer markets is expensive, risky, and offers little reward, so investors shift to pouring their money into securing “economic rent privileges” where people have no choice but to pay, such as acquiring land for renting out, commodities speculation, and buying up their competition to reduce market forces that put a downward pressure on prices.

The result of this behavior is a feedback loop where competition for these limited economic rent privileges pushes their price up, raising rents and commodity prices, which further cuts into the disposable income available to consumers, worsening the problem.

As we can see in the US, as wealth has consolidated for the past 40 years, rents and food prices have risen dramatically as wages stagnate, just as this theory predicts.

Achieving Balance

Since there are drawbacks to having either too high or too low of a ratio of consumer demand to investment capital, it follows that there is a range or point where consumer demand to investment capital is optimal for economic growth and widespread prosperity. When we agree on a healthy distribution of wealth for optimizing prosperity, innovation, and growth, we can enact policies that help get us to that point.

I would personally suggest a capital gains tax, top marginal rate, inheritance tax (with first half million exempt), and Land Value Tax (that taxes the value of the location based on how much it costs up the community to give up rights to it, instead of taxing productive improvements on land), all pegged to the ratio of median income to median rent and 10th percentile wage to 10th percentile rent seeking a ratio of 8–10 for the former and 4–6 for the latter, based on the ratios of these values in the 1960s, during the golden age of the US that is widely considered the fastest growing and most prosperous period in global history. The rates of those taxes would rise as wealth consolidates and fall as the distribution grows to flat.

In this way, we can put a stop to poverty, stagnating wages, high unemployment, high rents, and bring about greater equality and prosperity for those at all levels of society.