What Is the “Ideal” Distribution of Wealth?

I’ve seen this video at least four times on facebook. I’d say it has achieved a critical mass of re-posts to warrant some sort of comment. The topic is America’s calamitous distribution of wealth, and the fear and loathing it should allegedly strike in the hearts of poor and middle-class Americans. Here is the video:

My attempts to find an organizational source with further information for this video have failed. Politizane‘s YouTube account appears to be the video’s origin, although others have re-posted it. As of this writing, no other videos appear under that name. 

I’ll get this out of the way first: For a laugh, skip to 2:09, when the video’s author pictorially divides the total wealth of the United States, $54 trillion, evenly among a representative sample of all Americans. This leaves everyone in the sample equally and comfortably wealthy. The author labels this distribution of wealth,

The “Dreaded” SOCIALISM

We all know that won't work.

We all know that won’t work.

Note that the word dreaded is in the finger quotes of sarcasm. During this portion of the video, the narrator explains,

Well, here’s socialism: all the wealth in the country distributed equally. We all know that won’t work. We need to encourage people to work, and work hard, to achieve that good old American dream and keep the country moving forward.

I can’t quite tell what the narrator really thinks because the tone of his voice intimates insincerity. Allow me to alleviate any possible confusion: Yes, we all know that won’t work. Under the dreaded socialism, there would not be $54 trillion dollars to distribute. The line would be flat, alright. Flat at the bottom.

The only source cited for the remainder of the content is “a chart” from “a Harvard University business professor”. It doesn’t take a whole lot of Googling to find the original report and chart, Building a Better America, One Wealth Quintile at a Time, by Michael I. Norton and Dan Ariely, published in the January 2011 issue of Perspectives on Psychological Science. One of the report’s main themes is that people generally have in their minds an ideal national wealth distribution, and that this ideal should somehow inform our national conversation about the distribution of wealth in America.

The report seems to be a mere five pages long, which makes me feel like I’m missing something, but I read through these five pages in search of the answer to a specific question: On what basis did respondents decide what the ideal distribution of wealth should be? Did they, for example, perform some set of calculations expected to optimize prosperity? Did they simply doodle a line that they estimated to be “fair”? What’s the basis? Why did they draw the distribution lines the way they did? Sadly and predictably, the report is silent on that issue.

Had I been asked what I thought the ideal distribution of wealth was, I would have said simply that I didn’t know. I believe that people should be free to buy, sell, trade, and keep the products of their effort. Whatever distribution of wealth follows from that is the ideal distribution. I suspect that this distribution would optimize prosperity and not leave the poor to languish.

I first saw this video as a facebook post under, I believe, the Progressive Libertarianism facebook page. The poster there suggested that the distribution of wealth is skewed unacceptably because those at the top often get there not by adding value to society, but rather by receiving political favors from the government in the form of market intervention. Similarly, as I’ve alluded in my post entitled Who, Exactly, “needs” to reward the wealthy for their “risks”?, those at the bottom often stay there because government barriers to market entry keep them there. I imagine that removing government favors to some and barriers to others would probably flatten the wealth distribution graph somewhat, but I can’t guarantee it would approach the ideal with which Norton, Ariely, and the maker’s of politizane’s video are so enamored. On the free market, some people will always end up filthy rich.

At about 5:28 in the video, the narrator nods to the long-discredited Labor Theory of Value.

I’m sure many of these wealthy people worked very hard for their money, but do you really believe that the CEO is working 380 times harder than his average employee? Not his lowest paid employee. Not the janitor, but the average earner in his company? The average worker needs to work more than a month to make what the CEO makes in one hour. We certainly don’t have to go all the way to socialism to find something that is fair for hard-working Americans.

How many people one's work reaches determines how wealthy one becomes.

How many people one’s work reaches determines how wealthy one becomes.

Many people’s innate sense of fairness evidently prescribes that the amount of money one earns should correlate directly with how hard one works. Unfortunately that is not economic reality. In fact, the opposite is often true. Often one’s deftness at avoiding work, i.e. one’s success at working smarter rather than harder, i. e. one’s ability to innovate, is what garners one a higher salary than those who merely work hard. But even that is not the proper correlation. Income is better correlated, I’ve discovered, not only with how hard one works, but also with how many people one’s work reaches.

Reconsider the timeless paradox of the entertainer and the teacher. Movie stars who add arguably little value to society by way of their play-acting earn millions of dollars while teachers, whose value to society is obvious and undisputed, earn very modest living. The reason is that, whereas a school teacher’s work might reach a hundred or so children in a nine-month period, a movie star’s work might reach millions. The actor’s contribution to society may be marginal, but thanks to the magic of media, the effects of his work spread around the entire world. Millions of people pay to see movies. That’s why movie stars get paid millions of dollars to make movies.

Analogize this to a CEO. If a Walmart store manager decides to change some security policy at the Rio Grande Walmart, this decision might effect the several hundred employees and customers of the Rio Grande Walmart. If, however, Walmart’s CEO, Mike Duke, decides to change one of Walmart’s policies across it’s 3,000 stores, that decision, which is comprised of an arguably comparable amount of work, effects some 3,000 times as many people. It makes sense to me that the CEOs comparable work, if it turned out to add value to society, would earn a paycheck orders of magnitude larger.

The hardness of the work induces the size of the paycheck only indirectly, and to the extent that it, along with other factors such as chance (being born into wealth) and choice of business model (non-profits), has put the worker a position to affect as many customers as he possibly can. This is how wages generally rise on the free market. As managers invest in machinery for their factories, workers become more productive. Their work reaches more people. As the workers produce more units to sell, and as customers purchase more units, the workers’ labor becomes more highly valued, and managers spend more on it. The reach matters most.

So if I had to draw a line representing the ideal distribution of wealth, it would be fully informed by the reality the work of certain people, such as movie stars and CEOs, reach multitudes more people than the work of the average day laborer. It would not be informed by false notions of fairness that correlate the hardness with which one works to the amount of money one should earn.

Much of America's wealth is not in the form of cash, but businesses.

Much of America’s wealth is not in the form of cash, but businesses.

My final criticism of poitzane’s video how the maker chose to represent wealth: green stacks of cash.  This is not a realistic representation of wealth in America. Michael I. Norton and Dan Ariely, the authors of the report upon which this video was based, made clear to respondents of their study that wealth takes on many forms:

We ensured that all respondents had the same working definition of wealth by requiring them to read the following before beginning the survey: “Wealth, also known as net worth, is defined as the total value of everything someone owns minus any debt that he or she owes. A person’s net worth includes his or her bank account savings plus the value of other things such as property, stocks, bonds, art, collections, etc., minus the value of things like loans and mortgages.”

Of course, in addition to their larger bank accounts, the wealthy enjoy mansions, fancy cars, fancy jets, private tennis courts and the like. But much of their wealth is not, and can not be, in the form of cash and luxury. Much of their wealth is in the form of ownership of businesses and investments, not all of which is convertible into cash. If all business owners at once tried to sell all of their businesses to claim their cash value, those businesses would all become worthless. That value would vanish. For that wealth to remain wealth at all, it must be valued in its current form: productive businesses.

Of course, to depict any of the net worth of the wealthy as being in the form of the productive businesses that make life bearable for the rest of us would belie the narrative that the wealthiest Americans are parasites who haven’t earned their money, and whose riches are of no use to the rest of us. Milton Friedman described the function of wealth in a free economy very eloquently.

No, the rich are not hoarding most of their wealth under their pillows. Most of that wealth is out in the economy, helping to make the things that make life bearable for the rest of us.

For a delightfully scathing critique of the Wealth Inequality in America video that discusses the function of wealth in the economy, see Max Borders‘ article for the Foundation for Economic Education, entitled Wealth Inequality: Predictably Irrational.

For Lee Doren‘s take on the video, including the consequences of conflating wealth and income, see his response video at HowTheWorldWorks.

For a full debate about between Prof. Steven Horwitz of LearnLiberty.org and Prof. Jeffrey Reiman of American University in Washington D.C. See the video posted at LearnLiberty.org. Prof. Horwitz discusses the effect of income mobility on the economy:

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