It’s a question that economists have been asking for a long time: Why do some people seem to get much wealthier than others? And why is it that the country’s richest 1% of households own more than half of all the nation’s wealth, while the bottom 50% have barely any wealth at all?
This phenomenon — called “the great income divide” — has become so divisive and heated in recent years that many people simply assume it just can’t be true. But what if it is? What if the rich are really getting richer, while the poor are staying flat?
So let’s take a look at this divide and see what we can learn about how our economy really works. Will it surprise us that our system is actually working pretty well to help the rich get richer while leaving most of us behind?
The simple reason is that we’re a market economy, and markets work best when they are competitive. And the way to make sure we have competitive markets is to have competition among buyers and sellers.
So, one of the ways our economy is working well, in fact, one of the reasons it’s improving so much since 1980, is that these days we have a lot more competition among buyers and sellers than we used to:
In 1948, you could buy anything from an electric razor to a car or a house at Frank’s Auto Sales. But today you can’t buy a car or a house from Frank.
In 1948 many people were guaranteed their job by their employer, and they had little choice but to stay at that company for life. In 2010 though, more than half of all jobs are freelance or part-time positions, meaning that the individual has much more room to move around and try out different opportunities:
Since 1978 the number of small businesses in the US has grown steadily.
This is great for most people — it means they can work whenever and wherever they want while still being able to make a living. But it also means that more and more people can start competing with each other for a limited number of jobs, so the pressure is on employers to keep wages down.
So far, this has played out well for most people in this country, but what if you’re one of those people who has suffered from the great income divide? Well, there’s help out there — or at least there will be as long as you are willing to take action:
Now, you’re probably wondering: Why should I care if the rich are getting richer?
Well, for one thing it’s often good to have a lot of competition among buyers and sellers. But there’s more than that — the rich also tend to be better educated, healthier and more productive than most people. So it’s not just that the rich are getting richer; they’re also helping to improve our society.
OK, so what about income inequality? Isn’t that a problem?
Well, yes it is. And there will always be as long as the economy still operates in a market economy.
But what if we had a different kind of economy? What if we had an economy where the government took money from everyone, and gave it to those who were most in need? Wouldn’t that eliminate all income inequality?
Well, not quite. There’s just too much money to go around for the government to give it out like that. The problem with such a system — which is called socialism or communism — is that it doesn’t work very well at all:
The problem with socialism or communism is that there are too many people who are not well-off, and the government can’t just give them anything they want. If it did, it would have to take money from those who were well off and give it to those who weren’t — which means everyone would end up worse off than we already are. Isn’t that what we’re trying to avoid?
So what about a system where the government doesn’t control all our money? What if it just regulates the economy?
Well, there’s a problem with that too. Even under the best circumstances, when interest rates are low and the economy is expanding, our government simply can’t do everything by itself. There has to be someone who is willing to invest money in businesses or residences or whatever else will make people better off — and that means we still need a market system to provide competition among buyers and sellers.
In addition, there is also a huge problem with corruption: The rich can usually pay for the services of politicians, and they will then be able to get whatever laws they want. That’s not a good thing. The politicians can be tempted by taking easy money through their influence and political powers from people who are willing to pay to get what they want.
So it’s important that our system — which is a market economy — works well so that small businesses and individuals are free to compete with each other. Otherwise, we’ll end up in some kind of socialist nightmare where everyone is trying to get ahead by cheating everyone else.
And even though it may seem that the rich are getting richer because they are better-educated, healthier and more productive than everyone else, the truth is that it’s really the market economy that has made us all more prosperous in the last few decades. So we should be grateful to it for doing such a good job.
About the Author
I am the Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students learn better. I am also a mentor and angel investor in other Startups of my other interests (Proptech, Fintech, HRtech, Ride-hailing, C2C marketplaces, and SaaS). You can also find me on Cudy for early-stage Startup Founder mentorship and advice.
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