Absolute versus relative wealth in a capitalist society
I’ve been debating and discussing inequality with an economist friend over the past few months. We’ve covered a lot of ground in our discussions, including national versus global inequality, absolute purchasing power, and the need for incentives to innovate. This morning, I read the following Q&A in my Quora feed, and I thought it was a good topic for a blog post:
To quote the answer:
A thought experiment. Imagine taking a person from 1800, say at the 99th percentile of wealthy then, with their material conditions: no indoor plumbing, short life expectancy, primitive medical care, likely infested with parasites that today would be unacceptable for a house pet, etc. Now imagine exposing them to the accommodations of someone in 2015 America in welfare: color television, air conditioning, fresh vegetables in winter, cell phones, paved roads, etc. The 1%-er from 1800 would consider them wealthy beyond their wildest imaginations to be “poor” in 2015. It is in that sense that everyone can be wealthy under capitalism.
Now, of course, if you define wealth in a relative sense, then no, not everyone can be wealthy for the same reason that not everyone can be above average in something. This is not economics, but math.
I thought this was a great way of summing up modern US society. To be clear, I have a serious problem with the use of these concepts by the right wing to attack public assistance beneficiaries, and I think automation and machine learning technology is leading us to an economy where we will need more of a guaranteed income – and less of a cultural focus on paid labor in our society. However, this quote illustrates the true absolute well being of the typical American household in the early 21st century. By now, most of my close friends are probably sick of me exclaiming my awe and amazement at the advancement of our society – clean water, universal primary and secondary education, ubiquitous air conditioning and heating, car transportation, affordable air transport, micro computers (smart phones) in our pockets that can communicate (even video chat) with almost anyone in the world, advanced medicine, abundant/varied diets, etc. We live in a remarkable world.
In my discussions with my friend on income inequality, I now have a favorite graph that describes the past 20 years in income inequality:
This chart is from a WorldBank Paper available here – and it’s a great read.
The graph shows the increase or decrease in income over the past 20 years by percentile, and shows that while the poorest in the world (generally sub-Saharahan Africa) have experienced no increases in income in the past 20 years, the global poor (China, India, Southeast Asia) have experienced massive gains in income – lifting billions out of poverty. This trend declines around the global 75th percentile of income earnings – and those at the 75th percentile to the 85th percentile of global income experienced moderate declines or stagnation in income in the past twenty years. These, generally speaking, are the developed world working class – and this is the cost of the massive gains in income across most of the world. Moving further up the curve, we see that the global 1% have experienced income gains approximating 60%. The paper describes the global 1% as including the US 12%:
Who are the people in the global top 1%? Despite its name, it is a less “exclusive” club than the US top 1 percent: the global top 1% consists of more than 60 million people, the US top 1% of only 3 million. Thus, among the global top percent, we find the richest 12 percent of Americans (more than 30 million people) and between 3 and 6 percent of the richest Britons, Japanese, Germans, and French.