Pitting the rich against the poor is no new development. It periodically rears its ugly head and it has been responsible for revolutions, wars, and the fall of nations. At the core, there is a fundamental assumption underneath all the propaganda and political talking points. It is that people must succeed at the expense of one another. It is the belief that, at least as things currently are structured, one person can only get ahead economically by grabbing an ever larger share of a fixed pie.

These assumptions come into full force when concerns are raised about the growing wealth gap. The fact that the top 1% in the U.S. own 40% of the nation’s $54 trillion in wealth and earn 19% of the income is causing great concern. On the surface, it indeed does seem like a select few are getting richer while everyone else is treading water. The fallacy, deliberately ignored by those who wish to push an agenda, is that the top 1% is a fixed group of people. According to IRS data, over half the people who were in the top 1% of income earners in 1996 were no longer there in 2005. Of the top .01%, 75% were no longer in the income bracket. This is because there are a great many reasons for income spikes and troughs, such as inheritance, a gamble that pays off, or cashing in stock options.

Additionally, the gap can almost entirely be explained by differences between the young and old. Indeed, the economic gap between youth and old age has grown substantially. In 1984, households age 65 and up were 10 times wealthier than those headed by 35 and younger, compared to 47 times wealthier today. Poverty for younger households is at a record high of 22%, while older households have seen poverty rates decline to a record low of 11%. Households headed by adults age 65 and up have seen their wealth increase 42% compared to a quarter century ago, compared to a 68% decline in wealth for younger households.

This isn’t necessarily a bad thing. Young people inevitably become older people, and it is no surprise that someone with 50 years of experience makes more than someone first starting out. In some ways the young person might be able to afford more luxuries, because the older person has more responsibilities such as planning for retirement, putting children through college, and relying more heavily on expensive healthcare. The real measure of the health of a dynamic economy, and its fundamental fairness, is not the income gap but economic mobility. This distinction is vital, because the mechanisms that will reduce the income gap tend to have the side effect of reducing economic mobility.

Simply put, economic prosperity is not a zero sum game. The fundamental principle of all economic trade is that the division of labor benefits all parties involved. It is more effective to have people specialize in tasks and then working together. For example, it is better to have a doctor and a baker than two quazi-doctor/bakers. By working together, the two individuals are able to get a better quality of life than either one would have alone.

Additionally, all goods and services have a subjective and not absolute value. If one is hungry, but otherwise healthy, the baker’s services will be more highly valued than a doctor’s. Thus, the price system is born. If no one will buy an iPhone for $200, it isn’t worth $200 even if that is the sell price. The consumer determines the value of a good, not the person selling the good. From this, the fundamental principles of free market economics are derived. One must gain by serving another person. The seller must cater to the needs of the consumer, and in doing so the seller is rewarded. Businesses compete for the privilege to serve customers.

The only alternative, also seen throughout history, is the economics of compulsion. The only way a monopoly has ever managed to survive for a long period is by governmental sanction. In a free market, an attempt to raise prices to increase profit margin will always be broken by newcomers and breaks within the company/cartel structure. Simply put, someone will come along who will take 10% profits instead of 20%, and they will grab up market share to become a permanent competitor. Utility companies, the U.S. banking system through the Federal Reserve, Fannie Mae and the housing market, these are all examples of government enforced monopolies. The only way a company can become too big to fail is if the force of government says it is.

At this point it should be apparent that privileged classes (aristocracy, oligarchy, and bourgeois) can only be made permanent by the physical (or implied) compulsory force of government. So if a point in history comes where the rich are pitted against the poor, it is because the government has created the situation. Any other explanation is illusory because in the natural state of free economics, all people, both rich and poor, work together for mutual benefit. A rich person breaking this trust will lose their wealth, and a poor person exemplifying this trust will become wealthy.

 

Podcast – Rich and Poor at War – The Adam Goldfein Show – Hour 1

Podcast – Rich and Poor at War – The Adam Goldfein Show – Hour 2

 

 

Additional Resources

The Wall Street Journal, Fed Stays the Course on Easy Money: http://online.wsj.com/article/SB10001424127887324492604579083243936441418.html?mod=WSJ_WSJ_US_News_4

The Wall Street Journal, House GOP Ties Government Funding to Health Law: http://online.wsj.com/article/SB10001424127887324492604579083103349897332.html?mod=WSJ_hps_MIDDLENexttoWhatsNewsThird

The Daily Caller, Obama Says He Wants to ‘Partner’ with American Business: http://dailycaller.com/2013/09/18/obama-says-he-wants-to-partner-with-american-business/

Forbes, Could America’s Wealth Gap Lead to a Revolt? http://www.forbes.com/sites/dalearcher/2013/09/04/could-americas-wealth-gap-lead-to-a-revolt/

Forbes, Wealth Inequality between Young and Old Generations Reaches Record High: http://www.forbes.com/sites/evapereira/2011/11/08/wealth-inequality-between-young-and-old-generations-reaches-record-high/

Huffington Post, U.S. Wealth Gap between Young, Old is Widest Ever: http://www.huffingtonpost.com/2011/11/07/us-wealth-gap-young-old_n_1079372.html

The Telegraph, Young Desire Wealth ‘But Don’t Want to Earn It’: http://www.telegraph.co.uk/finance/personalfinance/consumertips/10032665/Young-desire-wealth-but-dont-want-to-earn-it.html

Forbes, The Wealthiest 20% own 72%; The Poorest 20% Only 3%: http://www.forbes.com/sites/robertlenzner/2013/04/19/the-growing-disparity-in-wealth-made-the-great-recession-worse-and-the-recovery-weaker-than-ever-before/

The Economic Collapse, Class Warfare is Being Used to Divide America—and It Is Working: http://theeconomiccollapseblog.com/archives/class-warfare-is-being-used-to-divide-america-and-it-is-working

The New York Times, The Self-Destruction of the 1 Percent: http://www.nytimes.com/2012/10/14/opinion/sunday/the-self-destruction-of-the-1-percent.html?pagewanted=all&_r=1&

The Daily Caller, Does The Free Market Cause Wealth Inequality? http://dailycaller.com/2013/05/01/does-the-free-market-cause-wealth-inequality/

Who Rules America, Wealth, Income, and Power: http://www2.ucsc.edu/whorulesamerica/power/wealth.html

Salon, Economic Prosperity Isn’t a Zero-Sum Game: http://www.salon.com/2013/01/29/economic_prosperity_isnt_a_zero_sum_game_partner/

Capitalism Institute, Economics is Not a Zero-Sum Game: http://www.capitalisminstitute.org/economics-is-not-a-zero-sum-game/

Psych Central, For Many Young Adults, ‘Fantasy Gap’ Between Materialism, Work Ethic: http://psychcentral.com/news/2013/05/02/for-many-young-adults-fantasy-gap-between-materialism-work-ethic/54379.html

Thomas Sowell, Who Are the Poor? http://www.youtube.com/watch?v=0S-O6WDalug

Thomas Sowell: The Wealth Gap Myth: http://www.youtube.com/watch?v=ti5oDnk__1M

Thomas Sowell, That Top 1%: http://www.youtube.com/watch?v=Qi8clPrg7kc

Friedrich Hayek: Why Intellectuals Drift Towards Socialism: http://www.youtube.com/watch?v=gPJWwiKnYGs

Thomas Sowell, Class Warfare Fallacies: https://www.youtube.com/watch?v=2hPIIlzlRYU