What Can the Rich Do that the Poor Can’t?

There is currently quite a lot of consternation over the ever widening income gap between the richest and poorest citizens in first-world countries like the US. Consternation that I think entirely misses the point of what it means to be rich and to be poor. In short, green pieces of paper do not themselves do much for the people who own them. It is the consumption of resources that make one rich and others poorer. Consumption is of course only one half of the story, most produce more than they consume, especially the rich, and thus add to net societal wealth. It is easy to see why most people produce a net surplus (even without accounting for externalities) in a world where the marginal value of extra green pieces of paper basically falls off a cliff at what, in the first world, is a relatively modest level. Consumption naturally gets less substantive and becomes more expressive as income rises. In such a world the term ‘poor’ has lost much of its traditional meaning and the rich have a natural incentive to consume less themselves.

I’d like consider whether it really pays dividends to earn great wealth, considering all the work it entails. As far as I can tell, the difference between what the rich can have and what the poor can have has gotten so small as to be almost gone. And I think most will agree that this is, broadly speaking, a good thing.

I am not here to refute arguments that the rich-poor income gap is growing or take issue with the evidence in support of them. My contention is that the effect of such income differences is more than mitigated by the diminishing returns to income. After a consumer has earned a very low middle class income of say $40,000 he is able to acquire virtually every modern commodity available to the wealthiest consumers.

I began investigating this claim in an earlier post by claiming that a majority of the lowest quintile own a whole host of staple consumer products such as washing machines, TVs, and cellphones. But, I want to press that claim further. There is a very high floor in the first world and it is very close to the point on the utility graph where returns to extra cash start dropping precipitously.

Alarmists about the rich-poor income gap can often be found pointing out that the rich are usually just engaging in conspicuous consumption. For example, owning a luxury car, a mansion, or most egregiously a private jet. They see this as competition amongst the upper class and mostly a wasteful use of resources. Such consumption is often used as a justification for taxing high incomes or at least luxury purchases. However, the flipside of this astute observation is that the rich are not so distinct from the middle class in terms of what they consume. Rather today it is how they consume that distinguishes rich from middle class from poor. So much so that the wealthiest must resort, almost entirely, to consumption as expression.

So what can the rich do that you and I can’t? If you are in the middle-class, ask yourself what you would buy with a significant raise in your income. And be honest. If you would engage in what could be deemed expressive or conspicuous consumption, that is you wouldn’t begin consuming any truly new product, then you are already at the point where extra income doesn’t get you a substantive improvement in your standard of living. Let’s examine the ways you might spend your newly-earned income:

Ownership: You might go from lessor to owner of some of your products. When it comes to the highest priced consumables like, a house or car, the rich are more likely to own and the poor more likely to rent or lease. But, both typically enjoy homes and cars that include luxuries-of-the-past such as solid construction, climate control, and relative safety. For the most part all classes enjoy the same commodities.

Quality: You might buy a nicer car or move to a nicer house, but you probably currently already have the use of both. The rich consume higher quality “fancier” versions of the same things the poor consume. Fancy refrigerators are decked out with more features but still basically do the same job: they keep your food cold. In modern America most features and new technologies trickle down into lower priced versions and become standard at a remarkable speed.

Travel: The rich are able to travel more and to farther more exotic places than the poor. The difference between rich and poor travel might be considered a quality difference, after all a weekend vacation upstate to the national park is travel just not as high-quality as a week in Fiji. But, this seems a bit uncharitable and the two can reasonably be considered fundamentally unique commodities. So let’s say the rich can afford to travel to some places that the poor cannot. The middle class on the other hand are probably capable of going everywhere in the world if they so desire.

When you compare the modern gap between the richest and poorest to the gap a century ago the difference is stark. Being rich around the turn of the 20th century meant having only one working household member, having indoor plumbing and electricity, domestic servants, a college education, being able to travel beyond one’s city limits and often internationally, and possibly owning a carriage or automobile. Whereas the poor or even middle class had NO access to any of that before 1910.

The difference between rich and poor used to be fundamental. Two completely different lives. Today the difference has shrunk. There are almost no fundamental experiences or products that the rich can have but the poor cannot. The thanks for this does not belong to progressive policies of equalizing opportunity by force but rather to the ever equilibrating effect of capitalism. Luxury consumers help bring innovations to market by consuming new products at high prices. Those innovations, however, quickly become widely dispersed as producers streamline their mass manufacture and competitors force prices to shrink. If you want to know what being middle class will look like in the future, look at what the rich enjoy today. Thanks to technology and an ever growing consumer population the lapse between initial availability of a product and its almost universal availability continues to shorten.

Some might complain that the poor still find some basic necessities beyond their reach, things like education and health care. Robin Hanson would tell you that there is actually quite alot of expressive consumption going on in both these areas. And some resources really are zero-sum (e.g. real estate) in that there is a fixed amount. When competing for property, relative wealth matters more since we can’t make new land. Prices must go up when supply cannot, and the poor end up on the same property at a higher price. They can never move up to the “rich property” because if they did where would the rich be? Educational quality is, of course, tied to real estate (both for political and practical reasons) which only compounds the unfairness. I’m not claiming that ALL of the substantive difference between rich and poor have evaporated, although I do find it curious that the industries under the most government control (education and health care) also reflect the most class inequality (somehow, in order to provide access to education and health care to the poor we have paradoxically spiked the price of both). I am claiming that the differences have shrunk and that money really doesn’t matter if you can bring yourself to stop caring what other people think, stop trying to signal your values to the world, and just enjoy the ride.

The larger point is that it is somewhat irrational to put forth the enormous amount of effort it takes to rise into the ranks of the rich just for the money. Money loses its utility fast. After a point it is basically just a way to express yourself. This point is especially near in the modern world where the average salary is around $45,000 and where even the lowest quintile own virtually every modern product from cellphones to TVs.

My prescription is not just that you shouldn’t try to become Warren Buffet but that the $10,000/yr. promotion you’ve been working for will also do alot less for you than you think. How much do you really value a newer nicer car? Or a bigger TV? Or an Iphone? If you said alot, then let me counsel you to wait 3 or 4 years when these things drop into your price range. A few years later they’ll be in everyone’s, and soon after that it will be either illegal or unheard of to not provide them. If waiting for prices to fall removes all the value then you might question whether your consumption is purely an act of expression. And from there you’re only one step to realizing that your new phone, car, or house is just a very expensive statement that you may easily be able to do without making.

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