3 Reasons Wealth Inequality is Actually Good

If you haven’t been buried in the sand for the last few years, chances are you’ve heard a lot of talk about wealth inequality and income inequality and how it’s destroying our economy and society.

Thing is, that’s all pretty true. Deep wealth and income inequality is a destructive force on many of the people of the world’s economy. For this story, I’m focusing on the United States, but this is a worldwide issue.

Let’s get into the guts of wealth inequality for a minute and maybe, just maybe, I might shift your perspective a little (let me know in the comments).

The Benefits of Inequality

For all the issues that inequality brings, there are some benefits too that are rarely discussed (or at least rarely framed well).

Wealth gets sh*t done.

There’s a reason that most of the biggest inventions and innovations of human history have come from places with lots of money: the radio and the internet were first developed by the US military, most of the largest technology firms that shape our world today were funded by venture capital in the effort to get off the ground, and, of course, there are major infrastructure projects like the highway system, all funded by the government.

The first workable prototype of the Internet came in the late 1960s with the creation of ARPANET, or the Advanced Research Projects Agency Network. Originally funded by the U.S. Department of Defense, ARPANET used packet switching to allow multiple computers to communicate on a single network. — History.com

Large concentrations of wealth are a necessity when developing new technology and/or the largest projects in human history, as these developments require a lot of time and resources in order to prove themselves and become self-sustaining. And while governments have historically been the main source of funding for these projects, there are a lot of reasons why we might want the private sector to be able to fund some of these big projects too (just look at how grid-locked our government is in the US and how it struggles to make significant headways due to said gridlock).

In the startup world, for example, there’s a reason that the venture capital model is so popular: it works. There are obviously downsides too (and I’m a big fan of skipping VC funding where possible), but it can’t be disputed that this model has produced some huge pioneers.

A great, somewhat lesser-known, example is Stripe. Stripe revolutionized the payments industry by building simple, easy-to-use payment APIs, making integrating payments and accepting payments online *so much easier* than it used to be. Not only are they one of the highest-valued private companies of all time (close to $100B valuation), their growth has been fueled by at least 10 rounds of venture investing. Clearly, a concentration of capital was necessary to produce this world-changing technology company.

Wealth is a motivator.

The pursuit of wealth is undoubtedly a strong motivator. We all want to make more money, and the promise of being able to make more money leads many to make different career choices and life choices to pursue that.

When utilized well, this motivation can be harnessed to encourage certain kinds of economic development that are beneficial to all. The promise of wealth can also spur invention and innovation (see all those VC-backed tech startups I was just talking about).

And there’s the qualitative side too: it feels good to us, as humans, to see good people — people who make incredible things or impact the world positively — win. We want to see them be rewarded so that they can live a fulfilling life and continue to focus their efforts solely on the things they can do to improve the world instead of focusing on the corporate rat race or trying to survive each month.

Wealth creates a hierarchy.

This one is a little controversial, but I would argue that we humans actually crave a little bit of hierarchy. Of course, we generally don’t want to be at the bottom of that hierarchy (and arguably we don’t really want to be on top either cause it can be quite lonely), but I think there’s something to be said about the fact that humans have created hierarchies for our entire written history and likely before then too. All the way back to the hunter-gatherer days, we had chiefs/leaders that everyone looked up to.

I would argue that this is because not everyone wants to take on the responsibility of leadership. Being a leader is a big responsibility to take care of everyone else in your “tribe” (be that a government/society, corporation, or social club). Your decisions affect everyone else, and therefore you have to be careful about how you make decisions and take responsibility when those decisions don’t pan out.

I think this is largely why wealth disparity has pretty much always existed. Even in our simpler days as a species, the tribe leader would get to eat first and eat the best food: a reward for their responsibility to everyone else.

In my personal experience, I’ve noticed that most people don’t really want to bother with that level of responsibility. Taking on that responsibility for others can be overwhelming and extremely challenging and just simply isn’t for everyone. I personally crave that responsibility, but I’ve met very few others who share that sentiment.

This same notion can be applied when a leader is no longer serving their people. That’s when a leadership struggle emerges (and a wealth struggle) as a new player believes they are more capable of providing than the incumbent.

For example, Tesla came in and disrupted the automotive industry and became the largest car company in the world (edit: by market cap at least) in the process. They saw that legacy car companies were failing to take responsibility and lead us towards an electric car future, so they stepped up and took on that responsibility — and risk — and ended up becoming fabulously wealthy in the process (not without a lot of ups and downs of course).

A commenter pointed out that Tesla is the largest by market cap, but in terms of vehicles sold and revenue fails to crack the top 10 of all auto manufacturers. Clearly, this situation is a bit more nuanced than I originally presented. That said, it’s undeniable that Tesla did push the auto industry to start building electric vehicles and without them, we wouldn’t see the movement in the industry that we see today. I may no longer be a fan of Musk, but I do respect this fact.

The Downsides of Wealth Inequality

Of course, as I mentioned at the top of this story, inequality has problems too. It would be irresponsible of me to only talk about the benefits, so let’s dive into it.

Lack of wealth stifles progress

Just as wealth is needed to get the biggest, most ambitious stuff done, a perennial lack of wealth (poverty) does the exact opposite.

This guy might be the next Bill Gates, but his poverty will never let him (or the rest of us) figure that out.

Extreme wealth concentration means that a diminishingly small number of people have the means to tackle the world’s biggest issues. That’s not good, because those problems will take longer to solve if fewer people can work on them.

Further, poverty reduces individuals’ ability to build something for themselves in their own lives. So once again, the more people who are below a certain minimum threshold of wealth/income (more-so income than wealth), the more people who will struggle to meaningfully engage with the broader economy and struggle to find their true potential.

Just ask yourself: how many brilliant scientists, artists, engineers, and policymakers have we lost out on due to poverty sapping their opportunities to become something better? I’d argue quite a few.

Lack of wealth is a de-motivator.

At this point, I’m sure you’re seeing the pattern. Just as the promise of wealth can be a strong and effective motivator, poverty can be a de-motivator. Why should someone attempt to push themselves to pursue something greater when the only thing they’ve ever been exposed to is poverty? They don’t even think they’re capable of achieving wealth, so they stay stuck.

This is of course exacerbated by the fact that, at least in the US, the standard of living for those in (working) poverty is just comfortable enough to not be completely desperate but not comfortable enough for you to actually build something for yourself without significant outside help (education loans, SBA loans, grant programs, etc., if you can even get them). And the general lack of support from social programs in the US (or those same programs being designed in such a way that you’re actually penalized for growing out of them) means that for those in poverty, the options to escape are truly few and far between.

Inequality can create an unfair hierarchy.

Particularly when wealth inequality gets sufficiently bad, there’s a diminishing number of people who have the means to truly challenge the goliaths of the world, no matter how hated or terrible they are.

Just take the residential internet industry in the US for example. Time Warner Cable/Spectrum/Verizon/AT&T are all huge companies that are generally hated by their customers, but due to their size, they’ve managed to squeeze out a favorable regulatory environment where they have no competition. Because competing with these companies is ludicrously expensive, the only viable competitors are other huge companies (like Google Fiber) or the government itself.

This is how you get an environment where the sheer accumulation of wealth can prolong incumbency far longer than it should be able to.

The Takeaway

So what’s the takeaway? A moderate amount of wealth inequality is good for us, but excessive inequality distorts the benefits of inequality into issues.

That makes a lot of intuitive sense. The saying, “everything in moderation,” comes to mind. From our earliest days as small roaming clans to our current multi-trillion-dollar corporate “hellscape,” wealth inequality has been a facet of human life all along, and there are a lot of reasons for that. I hope this story has gotten you to think about wealth and inequality differently.

Till next time,