Is wealth inequality actually a problem

Question

I have been searching around online, but cannot really find an answer to my question.

I can find a lot of material covering wealth inequality and how it has developed over time, but haven’t found any material to support my theory (or the opposite).

My question is: Is wealth inequality actually a problem? With this I mean the super wealthy vs the rest (if that makes a difference).

I will try to explain my thinking as good as possible. My theory is, that super wealthy people tend to not spend all of their money, they may invest it or set it aside.

Consider a scenario where an individual owns 99% of all the wealth (i.e. money, disregard stocks, bonds etc in this scenario) in an economy, but spends roughly the same as everyone else in the same economy, effectively “disabling” a huge portion of the wealth. Would the “poor” actually be affected by this negatively? Would prices on goods reflect that “effective” wealth, or the total wealth in said economy?

Another scenario could be where one person owns most or all shares in all companies in the economy, and everyone else living of of salary. Would this actually be a problem? I imagine that it is same as above scenario.

Obviously these are silly extreme scenarios, I was just trying to paint a bit clearer picture of where I am coming from.

If the super rich (or perhaps top 1%) have an average spending similar to everyone else in an economy, with the only difference that they own more wealth, would that actually be a problem; or perhaps in reality a smaller problem than how it is depicted in the media?

I am not looking for political standpoints, but a more fact based answer.

Answer 1

I think that you are more or less than correct in thinking that cash that is never spent (nor expected to be) may as well not exist. Thought experiment: suppose that, unbeknownst to you and everyone else, £1 million suddenly appears under your mattress. If you never discover the money, it is hard to see how it could change anything in a meaningful way.

There are some caveats, however. First, a game theoretic point: even if rich people never spend their money, threats to spend their money might influence outcomes. For example, they could pledge to donate lots of money to the political opposition unless the government does what they say. If this threat works, they will never need to pay out.

Second, a ‘non-economic’ point: money gives you options, and people might enjoy having options in itself (even if they don’t spend the money). One might object to the kind of ‘options inequality’ brought about by an unequal wealth distribution even if rich people never spend their cash.

Third, to bring us back to the real world, we should stress that, usually, rich people do consume more than poorer people. So while it might be interesting to discuss wealth inequality without consumption inequality, this is not a phenomenon which we are actually facing today.

Answer 2

Scrooge McDuck likes swimming in money, which is why he accumulates a lot of it without any intention of ever spending it. If you think bringing in Scrooge McDuck is far-fetched and irrelevant, you are right. People do not generally accumulate wealth with no intention of ever spending it.

But suppose there were such people and, to make things concrete, their wealth is in terms of houses. They don't live in these houses or use them in any way- otherwise, they would have consumption patterns very different from the rest of us. So there are a lot of unused houses standing around. You may consider such unused resources a problem.

Answer 3

Too much inequality is probably still bad even in a simple model. Too much equality is probably not good either. A balance has to be found.

Let's say every enterprise consisting of production of goods/services, middlemen, etc. distributes 99% of its profits to that one individual. Then the consumer is paying a price that reflects that and its effectively like a tax on that good/service. If that individual wasn't there, there's two ways the market could correct: prices could fall, facilitating more economic transactions, or they stay the same and the wealth gets redistributed. (Or most likely, somewhere in between). I have a hard time believing in the latter case that both the spending rate and prices would remain unchanged, but lets assume it does in this model. You'd still have negative effects in the unequal case, primarily relating to monopolistic business practices and some amount of stifling of innovation. Ultimately a great deal of economic success can be attributed to intellectual innovation that relies on that capital. Competition is good as well because it drives innovation. If the control of capital is too consolidated, it can stagnate things: there is little incentive for an indentured servant to try and better themselves if there is no way to do so, and there's little reason for the feudal lord to educate and facilitate those serfs into competitors. There's likely a bit of a balance though. As income inequality goes down, you're likely to see a more educated workforce. There's a limit to how far that can go though, since we need unskilled labor to function. Again, there also might be limited incentive to innovate if any extra income you make is likely to be appropriated.

Answer 4

Wealth inequality, if earned through merit and productivity have no economic problems.

https://www.hedweb.com/bgcharlton/evolpsych.html

However it have certain biological problems.

Humans instinctively want to be "richer" than the rest. Your girlfriend, pick the richer guys.

In other word, if your girlfriend want to choose between you and Bob, all the money that Bob earns reduce your happiness.

Hence, a lot of what happens in politic, is people complaining about inequality without even bother pointing out how they are made worse off.

They are not made worse off in anyway economically. However, instinctively, their ancestors have a hard time getting laid because someone else' are even richer.

Wealth inequality may lead to power inequality. Here, the rich don't just stay idle with money. They use their money to sponsor politicians that give them favor makes it even richer.

Samples:

US founding fathers say that people shouldn't inherit wealth (I think there is a question about it in politic stackexchange) Ming emperor preventing merchants from sailing overseas because he fears merchants can end up being richer than him. Again, the emperor is not made worse off by those merchants. However, he prohibits anyway.

I strongly suspected that income taxes are made to create poverty instead of to pay for anything.

Some answers point out that many rich people don't spend their cash.

That is wrong. Rich people invest their cash. That cash is then lent to another people that use their cash. So all cash is always used.