Politics with Pavlinec: Why Do Billionaires Exist?

Inequality is a main focus of our politics today. It undergirds arguments on taxes, healthcare, economics and wages. In congress, Democratic-Socialist Alexandria Ocasio-Cortez claims it is immoral to have a system with billionaires. On its face, this is a brilliant appeal to emotion, but it instead displays deep misunderstandings of inequality and economics. Every economy fundamentally operates the same, they allocate scarce resources with alternative uses. Our capitalist system, with all of its flaws, has undoubtedly been the most successful in allocating those scarce resources and maximizing individual freedom.

The scarcity of resources such as labor, capital and money are inescapable. In capitalist systems, individual transactions dictate the flow of resources. They determine what businesses get created and what products are sold. The customers, the people, ultimately decide through millions of individual decisions on what is best for them. A simple example is the television. Each succeeding generation of technology, whether the vacuum tube or flat screen, is initially expensive. However, those high prices draw more competition for businesses looking to earn higher profits and investors looking to make higher rates of return compared to other industries. This subsequently drives down prices. Low quality televisions are quickly surpassed by technological innovations such as the flat-screen television, innovations which only emerge because of competition for market share. These incentives are what government planned industries destroy.

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Vilfedo Pareto, Photo Courtesy of Google Images

Inequality

Inequality is major a criticism of capitalist societies. Not only do all societies have inequality, but any creative system of production has inequality. This includes everything from music and sports to distribution of wealth. Italian economist Vilfedo Pareto has a famous principle describing this phenomenon, where the few have most and the many have little. This applies universally. If you have 10,000 players in professional basketball, 100 of the players successfully make half of all free throws, and of those 100, most free throws are made by even more minute few. Inequality is also painted as the bottom 20% compared to the top. These brackets reflect money, not people. If they tracked individuals over their lifetimes, it would demonstrate that  these brackets are very transient for most with only about 3% perpetually at the bottom.

Inequality is a much deeper problem than capitalism, not an exclusive feature of it.

 

The Free Market

The free market prioritizes the individual interests of people, whether they are benevolent or selfish, and harnesses them to benefit everyone else. We take advantage of the the Pareto Distribution because, while money is zero-sum, the benefits of market innovations are not. Billionaires invest heavily into the economy, allowing for capital to mix with labor to create products. They want to make investments to make more money. They create the capital, the factories, the buildings and machines, but their investment decisions are dictated by the demand of the people.

If we instead redistribute the wealth equally, there would be no one to fund billion dollar research in biotech industries looking for the next cancer cure. We could tax heavily, but what incentive is there to invest into businesses? If you invest 100 dollars and gain 120 dollars, but are then taxed at 70%, then you only gain 6 dollars for 100 dollars of risk. Who would do that?

Now, can the government invest it better? It is an economic axiom that no one spends anyone else’s money as carefully they do their own. If the government is wrong, there are no consequences. We, the taxpayers take the monetary punishment through taxes or inflation. Conversely, a billionaire making a 100 million dollar mistake makes them very judicious in their decision making, and any that are not prudent will lose their money in the long run.

In the soviet union, a planned economy, price creators had to manage over 11 million products, all with competing requirements in raw materials such as water, wood, gas etc. Would you trust a handful of bureaucrats to make the decisions of what is optimally allocated by millions of individuals each focusing on a few prices? Anyone who believes they themselves can manage an economy is narcissistic and dangerous.

Ultimately, if anyone proclaims a society with billionaires is immoral, ask:

Compared to what?

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Chris Pavlinec is a junior studying Political Science with a Concentration in Politics, Philosophy and Law. He hails from New Jersey and spends his time reading economics, playing guitar and prepping for law school.


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