Capitalism And Inequality
They go hand in hand
Capitalism is inherently unequal. It’s a great system for economic growth, but an innate problem with capitalism is that the spoils of that growth are distributed very unequally. And thanks to compounding, over several generations these discrepancies become massive.
I do think (though I am open to changing my mind) that there’s no way to split the positives of capitalism from the negatives (a.k.a. inequality). The capitalists who take risks and win get very rich because the returns to capital, especially leveraged capital, are high optionality (i.e. a dollar invested can return 10 dollars). On the other hand, the returns to labor, even those who work at a winning company, are much lower with little optionality because they are set by a competitive market. And sadly not everyone can be a rich capitalist as it requires a lot of money (connections help too), talent coupled with determination, plus a big dose of luck.
This is made worse by the tendency of those with influence (a.k.a. politicians) to gravitate towards those with money and vice versa, forming a class of elites with not just money but the ability to set the rules for society as a whole. What do you think rich people with influence use their influence to do? If you said get even richer and pay less taxes then you are correct!
When capital gets concentrated in the hands of the few, that’s not a good thing. The richest people in the U.S. each have billions of dollars in wealth — but that wealth sits in art, gold, real estate, fine wine, jewelry, vintage autos, and private equity. Most of their money sits in unproductive assets, which causes asset prices to further appreciate, worsening affordability and the inequality gap. These transactions for Picassos and Central Park penthouses all occur exclusively at the highest echelons of society — money is being paid from one super rich person to another. There is no opportunity for a trickle down effect.
Take NBA teams for example. When some oligarch buys a team from his fellow billionaire for $3 billion, all the NBA team owners pat each other on the back as their net worths (on paper) rocket up. But those billions in paper wealth are not being funneled back into the economy in any meaningful way (though some of the billionaires may use their team as collateral for a loan to buy a private island or a mega yacht).
This represents a drain on the economy. Consumer spending creates sales, which creates profits, which inflate share prices (e.g. share buybacks), which makes the rich richer. So if the rich then remove a portion of this new wealth (that was created by consumer spending) from the productive part of the economy by investing in unproductive assets like art or gold, that creates a drag. Same with real estate — our salaries fund rent payments to billionaire landlords who use that money to buy more real estate. This increases real estate prices, which increases rents, which makes landlords richer and renters poorer — also a drag on the economy.
Given the power and connections granted by wealth in a capitalist society, it’s very hard to address this inequality in any meaningful way. Probably the situation that makes the most sense is a wealth tax. Tax fortunes in excess of $50 million or $100 million some annual percentage amount. Sure the government will end up squandering some of it, but it’s still a better and more productive use of the money versus how it’s currently hoarded.