Why Income Inequality Is A Good Thing

If you were to believe the news headlines or a crazy politician, you might be tempted to believe that income inequality is one of the greatest challenges facing Americans today. Well, this is capitalism.com and I'm Ryan Daniel Moran. And we're going to talk about why, not only is it not a problem, but it might actually be a good thing. Strap in. Prepare to be triggered. Let's have some fun. It takes one free person to create change. This is the show for them. We are the creators of the free world. This is capitalism.com and we are the 1%.

Whether it's an argument for minimum wage increases or it's an analysis of where we are in the economic cycle, income inequality comes up whenever we're talking about pretty much any public issue. Well, spoiler alert. It's always come up. It's always been a thing. It has always been the case that about 10% of the population controls more wealth than about the other 90% or so. If you're a capitalist, then you might have read Rich Dad, Poor dad back in the 1990s when he created a graph that showed how 10% of people control 90% of the wealth or something like that. And if you're a capitalist and you read that and said, hmm, then I want to join that group of people. But if you're not a capitalist, then you hear a whole lot about how it's unfair that some people earn more than other people or that income inequality is higher than it's ever been. Now, that's true. Income inequality is higher than it has ever been. And guess what? That's pretty much always true. Because as economies grow, the gap between the rich and the poor continues to go up. Even if rich people are getting richer and poor people are getting richer, that gap increases. So there's always going to be a marketing reason for some politicians to tell you why the rich are getting richer and the gap of income inequality is getting bigger. The question is, is that a problem? It's certainly the case when you don't have free markets, when you have a group of people who can force other people to do things. But if we still live in a free market, then income inequality is not only not a bad thing, it can be extremely helpful for the growth of a society. Going to talk about why now? First things first. In order to get a good grasp of this debate, we have to define two basic terms. There's relative wealth and there's absolute wealth. Relative wealth is your economic standing compared to somebody else. So if you make $100,000 a year and you're in a room of people that make a million dollars a year. Your relative wealth is poor. If you make $100,000 a year and you're in a room of people who make nothing, you are a very rich person. That's relative wealth. And then there's absolute wealth. Absolute wealth is simply where you stand, and we might call it the grand scheme of things. What your real access to goods and services is, what your income level or your wealth level allows you to purchase or control. So it's more of the idea of what you have access to right now. Now, if we look at global trends, we know, especially in the last hundred years, relative wealth, the gap between your relative wealth has become a much bigger swing. You have an easier time going from rich to poor or going from poor to rich, and the gap between the wealthy and the poor is higher than ever. But if you look at absolute wealth, it has only gone up and the gap has gotten much smaller. So wealth inequality on absolute terms has gone way down. Now, we know this because you basically have the same access to goods as somebody who makes a billion dollars a year. Technological advances have made it easy for you to basically have the same information, the same goods, the same services as people who are worth a hundred times what the average person is worth. And now you pretty much have access to an abundance of whatever it is that you want, even if the relative quality is different. So relative income inequality has gone up. Absolute inequality has gone way, way down. Now, that distinction is really, really important, and here's why. If you believe that there's a fixed amount, then you're going to be really upset over the fact that some people have more than other people. And also you're going feel bad about doing the things that allow you to increase your economic standing, like selling goods or investing in businesses. Because if you believe this idea that by you having a dollar, it prevents somebody else from having a dollar, that's going to be a problem. But if you recognize the fact that absolute wealth is increasing at a faster rate than it's ever been and the gap is closing, then you're free to increase your own economic standing. And might I even say that by you, your economic standing, you're doing a service to other people. This came up at one of our events. We do a yearly event called the Capitalism Conference. And I brought on Alicia Silverstone because apart from her acting career, she also has a business. And I was interviewing about her business, and she said that she feels entrepreneurial guilt taking money from people. And I said, well, that's absurd. You're doing a great service for people by you creating a product that has allowed you to be successful. Other people voluntarily bought it and they wanted it. That actually increased every single person's absolute wealth. Somebody bought a product that they didn't have before. Their absolute wealth has gone up now. The next day, I was sitting with the founder of Whole Foods, John Mackey, and we talked about this little mini debate that I did with Alicia. And here's what John had to say. So you mentioned the perception that when you earn a dollar, it takes from someone else. This actually came up in yesterday's keynote. Do you remember?

We talked with Alicia about it. And she said, at some level, I feel like I'm taking when someone buys my product. And I said, well, we can go into that if you'd like, but I want to hear your perspective of. I have my opinion. But if it is not a true transfer, where does the wealth go? Or how is it created? Or if it's not a true transfer, what is it? If it's not, the one person receives and the other loses, what's a more appropriate way to look at it?

It's because it's based on voluntary exchange. I mean, how's she taking? She's not taking anything. She's exchanging. She's got the wrong metaphor. It's not about taking. It's about creating value for another person and exchanging it. And the other person doesn't have to exchange if they don't want to. If the other person doesn't think they're getting a good deal, they don't make the trade. And so as entrepreneurs, we create value for people. If you can't create value for people, you're going to go out of business. But we're all value creators, and then we trade that value creation to other people. We make their lives better, or they wouldn't be trading with us. It's poor Alicia. It's just the opposite of what she thinks she's creating. Well, no, she's creating great value. She's making the world a better place. And she shouldn't feel guilty about that. She should be very proud of what she's doing because she's making a huge difference.

If you believe that there's a fixed amount, then of course it would be a bad thing for some people to have more than other people. But if you recognize that that's not the case, then all we're really doing is trading with one another. I do this debate sometimes with my buddy Billie Jean. We call it black man versus white man. And he said, okay, Mr. Econ, not everybody can be rich. And I was like, billy, no, everybody can be rich. It's why absolute wealth has continued to go up. By you being successful and creating new stuff and bringing new ideas to life, you actually make other people richer. So your relative income may be higher or lower than somebody else's, but by us trading with one another, we're actually increasing everyone's absolute wealth. It's why I believe in entrepreneurs. If there was a fixed amount, then what I'm doing and helping people make more money and be more successful would be a bad thing. But that's not the case. The fact that we trade with one another and money is just a measure of our trading that actually increases everyone's absolute, absolute wealth. So that's why capitalism is such a powerful force for change. Not only is it a powerful force for change for you to increase your economic standing and to get ahead in life, it's also the greatest force for change with whatever direction we want the world to take. I drive an electric car. I drive a Tesla. I was one of the early Tesla buyers. And the fact that I have means and have some success means that I was able to afford $100,000 car. Now, Elon was very public, Elon Musk was very public about the plan for Tesla being a car for rich people. And people said, it's a car for rich people. And he said, so that we can afford to bring a cheaper car to market. And now you have the Model 3 and you have Cybertruck and you have all these investors who made all this money by investing in Tesla. So the point here is that every new innovation, every new innovation starts off as being the most expensive it's ever going to be. And so only rich people can get it. And as they buy it and economies of scale kick in, the price comes down so that everybody can afford it. This is how we're going to solve global warming, by the way. It's not going to come from government. It's going to come from new innovations that only the rich can afford. And then it's going to become possible for the masses to buy them. There's a great video done by Prager University that shows how this process works in the everyday world. And here's how they explained it.

Forced equality means less opportunity to pursue what makes you individually great. But what about the growing gap between the rich, the 1%, and the rest of us, the 99% that one hears so much about? Isn't that a bad thing? Again, the answer is no. Here's why. In a free market economy, people become wealthy, making what the rich enjoy today into something almost everybody can enjoy tomorrow. The rich are the test buyers. Consider the cell phone. Now we all have them. But when Motorola manufactured the first one in 1983, it was the size of a brick, had a half hour of battery life, reception was terrible, and calls were very expensive. It cost $4,000. But if no one had bought that $4,000 brick, there wouldn't be a $40 cell phone today. In the 1960s, a computer cost over a million dollars. Nowadays, thanks to billionaires like Michael Dell, we have incredibly advanced computers that cost us a few hundred dollars. Remember what an out of reach luxury flat screen TVs once were? Only the rich could afford them. Today, your living room is essentially your own private cinema. The free market is about turning scarcity into abundance. What was once available to the few is now available to the many. Wealth inequality is an important corollary to that truth. So should I resent the people who became wealthy because they have more money than I do? Or should I be grateful for the economic system that allows them to enrich my life and the lives of millions of other people?

Now, it's not just that income inequality allows for new products and services to come into the world. Income inequality is actually a BS measurement of people's success. Because if you look deeper behind the numbers, income inequality is temporary. Where you exist on the economic ladder changes all the time. I've had years where I've made $5 million in a year and I've had years where I have lost money. It's changing all the time. In fact, Thomas Sowell is a pretty well known economist who dove into the numbers and found that there's way more movement at the top of the economic scale than any politician or any news pundit ever talks about. Watch this. So getting worked up about income inequality is pointless, ill informed.

Yes. And sometimes it's simply a propaganda trick, depending on who's doing it. I read Piketty's stuff.

Thomas Piketty, the French economist who published a book this year called Capitalism, Right.

And he's a star around the world for doing so. And he talks about how the top 10% are separate from the rest of us and they are able to do all sorts of nefarious things. And then since then, I've gone and done a little research and it turns out that 56% of all American households will be in the top 10% at some point or other in their lives. Usually when they're older. Wow. Over half.

Over half will be in the top. All right.

Yes. And actually, when you get down to the top 1%, it's even more incredible. Of all the people in the top 1% in the course of a decade, the majority, the great majority are there one year.

Only 13% are there two years. And so we're talking about people who have a spike in income in one year for some reason or other, they inherited something, they sell their company, they have assets accumulated over the years, and they sell them in that one year. I mean, the year I haven't checked, but I wouldn't be surprised if I hit my income peak when I sold my house on the Stanford campus.

And have never been near that since.

And of course, it was all absorbed in paying for another house.

Welcome to California.

Right.

You see, the reason why some people make more money than other people is because they are going into markets where there is higher demand. Should we be upset about this? Should we be upset that the market allocates money for where there is greatest demand? And if you go into where there is greatest demand, you make more money than other people. Income inequality is a sign of where there is the greatest need in society. So if you eliminate income inequality, you have no economic signals for where attention is needed. This is why the worst thing that you can do is to try and flatten inequality by raising taxes or by instituting a universal basic income. I'm looking at you, Yang Gang. Or even by increasing government programs. Those things all keep people at the bottom less mobile. So the very programs that are designed to get rid of income inequality actually make it worse. You have these wide open periods where there's opportunity and demand and the person who goes and solves that problem makes a lot of money. They make more money than everybody else because they solved a problem. That's how we progress as a society. If there's no income inequality, we have no progress. So the next time one of your friends decries the rich having more, you can know that they're sitting there judging the world as it is, staying stuck where they are, giving all their energy to somebody else. While you know that the way that you increase your standing and you solve that problem is by you taking responsibility for a problem and you creating the solution for other people. That's how you get rich, by owning, creating and serving. That's why I'm proud to run a community called the 1%. Because we talk about money and investing and cash flow and mindset, all the things that are designed to put you in the best position possible to become a 1%er for life. Because all it takes is you knowing the right people and you creating things of value for other people. If you want to join us, by the way, you can test drive us. You can come hang out with us for 30 days for a dollar@capitalism.com the number one, and send this video to your liberal friends who are voting for Bernie or Elizabeth Warren. Most people are reacting to this issue emotionally, not logically. And the reason for that is because they think that there must be some sort of injustice in the world for them not having the results that they want. Now, I am of no illusion that some people don't get dealt a bad hand. But you giving your energy to what other people have done or are doing is no way to solve those problems. You solve your problems by saying, no one is going to solve this but me. And so I'm going to take ownership for this and I'm going to create something that serves other people. That's how we increase absolute wealth and your relative wealth by you serving a group of people, by creating something. It's the only way we move forward and it's the only way you get ahead. That's what we're here to do@capitalism.com to empower you to do that. So if you enjoyed this or if you really hated it and you want to troll me, subscribe to the channel and I will rant more to you about building businesses, investing the profits, and creating change. Thanks for watching. We'll see you next time.