Income Inequality: Are the Wealthy Superior People or Is the System Unfair?

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I’ve often wondered philosophically about discrepancies in human ability. Human beings are inherently different in many ways. We differ first and most obviously in our physical strength, stamina, height, and weight—our physicality. We are also different in our ability to think, reason, and judge—our mental prowess. Finally, we differ in our outlook, work ethic, and humor—our attitude.

It’s an uncomfortable realization, then, to understand that if the above are true, that some human beings are as a matter of fact ”better” or “worse” than others in each of these areas—perhaps we can even acknowledge that some individuals are “far better” than us in some or even all of those areas.

An Example of a “Better” Person Physically

I’d imagine that in a broad test of our athletic abilities, Calvin Johnson and I would differ dramatically. I’d expect to lose in everything from a sprint, to the high jump, to long distance running, to the balance beam—and any other competition I can imagine.

Calvin Johnson would probably run a 100-yard sprint in just about 10 seconds. I ran one the other day and clocked in at 13.2 seconds That’s a huge difference, insurmountable in a lot of ways. But if we were to measure that mathematically, Calvin Johnson is probably about 30% faster than me.

Along the same lines, I can just barely reach the rim of a basketball hoop 10 feet off the ground. Calvin Johnson can reach a point that’s over 12 feet, 5 inches off the ground. Mathematically speaking, he might jump 25% higher.

What I’d like to point out here is that against Calvin Johnson, I (an average athlete) would lose in every athletic competition that I can dream up at present.

I’d also like to point out that in spite of the fact that I’d lose in every competition, the differences physically between an average guy like myself and one of the great athletes of all time are not that large. He’s only perhaps 30% better.

But his income is 20,000% higher.

Is that unfair?

Small Ability Differences Result in Massive Income Differences

At the time of this writing, Calvin Johnson’s athletic prowess is worth $64 million—guaranteed. In contrast, my skill set out of college was worth about $50K per year, with no guarantees. In this case, the 30% variation in our physical ability amounts to a HUGE income discrepancy–he will probably make 200 times what I make in the first six years out of college.

When it comes to income, folks who produce better work can and should get better pay. Calvin Johnson produces far more yards, catches, and touchdowns than the other receiver options in the NFL. He is a better producer and is paid better than the rest of us as a result.

This discrepancy might be considered unfair if income really made a linear difference in quality of life. It is unlikely that any set of circumstances could arise in which I would be able to compete with Calvin Johnson physically. Thus, it would be frustratingly unfair that his relatively small physical advantages (~30% superior to an average guy like me) equates to immense earnings differences and a lifestyle 200 times better than my own.

But this leads to another question: Just how much does income matter when it comes to quality of life? Quality of life is, after all, what we really care about here, right?

How Impactful Is Income Inequality on Lifestyle?

In spite of earning more income, I’d be surprised if life is actually that much different or better for a person who earns 100 or 200 times more than me.

A person with high earnings might drive a Lamborghini to work, whereas I own a Toyota Corolla. I actually prefer to bike to work—yes, even in the rain—and probably still would if I had access to a Lamborghini. Sure, the difference in cost between our vehicles is 50 fold, but the quality of life difference is probably not that large.

On a daily basis, it might come back to that 30% better mark. Feel free to disagree—maybe a Lambo is two times better for you, maybe it’s 10 times better, but would your life be 100x better if you drove a Lambo? That initial “This is so cool, I’m driving a $1M car!” wouldn’t wear off after a month? Really?

The high earner might live in a huge house with fancy furniture and a huge TV. I live in a space that’s less than 700 square feet with a roommate. But is watching Game of Thrones really way better for the guy with the fancy stuff? How much more comfortable is his couch, bed, hot tub, or the other luxuries that big spenders tend to accumulate?

The high earner probably eats at fancy restaurants or might even have a personal chef preparing his meals. I cook my own food and eat out at cheaper fast food joints like Chipotle. I would be very surprised if anyone making a median salary could not eat food nearly as healthy and delicious as the wealthiest folks on the planet do. No, I don’t eat lobster or caviar, but vegetables, fruits, and quality meats are well within the realm of reason for most.
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In my opinion, income inequality doesn’t really make much of a difference at the end of the day. Slightly better items and luxuries don’t change the day-to-day freedoms and passions that we pursue. I bet that most of us don’t think that life is 100 times better for a high earner versus a low one.

I prefer to take that assumption a step further, as I think that earnings have almost nothing to do with happiness or quality of my life. Think about two different people: the guy who earns $25,000 per year but works 10 hours per week and surfs all day in Mexico on the beach, and the $1M per year executive who works 100 hour weeks. Who is happier?

The answer is that they’re probably both happy in equal and opposite ways. One may love freedom; the other may love productivity. They might also be unhappy—one might yearn for money and luxuries, while the other may yearn for freedom and peace. Honestly, I don’t know which I’d rather choose!

Wealth Inequality vs. Income Inequality

The really big problem is NOT that Calvin Johnson earns 200 times more than me; that’s income inequality. The problem is in wealth inequality.

Income inequality might best be evidenced by the immensely impactful Taylor Swift earning $64 Million in 2014. Wealth inequality might best be evidenced by this average guy who became a billionaire. One person inarguably produces a benefit to millions of people in our society. The other “did nothing for decades.”

Jay Z and Dr. Dre, are examples of famous people that have wealth. While they earned high incomes during their musical careers, it’s important to distinguish their financial position from that of Mike Tyson or 50 Cent.

Mike Tyson and 50 Cent are perfect examples of high-income earners with low wealth. They both went bankrupt, and it’s important to remember that’s the exact same amount of assets as the person begging on the street corner. While they will probably go out and earn more down the line, their ability to control their environment will always be limited to what others pay them. Jay Z will be wealthy forever, even if he never produces another piece of musical content.

Where income inequality becomes a real problem is when it is combined with wealth inequality. Income is usually (not always) based on merit and natural ability. Income can be taken away and can come and go. Wealth, on the other hand, is a function of knowledge and time. Wealth in the right hands is much harder to lose and, in many cases, accelerates forever.

50 Cent earning and losing tens or hundreds of millions of dollars is not a sign of systemic unfairness in society today. His power is limited to what he can collect during the most physically capable and appealing years of his life.

It’s actually the folks like Warren Buffet and Carlos Slim, folks that have 1.5 million times more wealth than your regular Joe, that are the real problem. Their wealth and power are virtually unlimited and perpetually growing. It can be passed to the next generation and allowed to continue accelerating infinitely.

Buffet has $66,900,000,000 in wealth vs. $45,000 for Mr. Average Joe. And Buffet’s not slowing down.

That’s a problem.

Is Massive Wealth Inequality Unfair?

Individuals like Calvin Johnson earn good money early in their careers due to inarguable natural abilities—mentally, physically, or with respect to their attitudes and their work ethic.

That part makes sense to most of us.

What’s incomprehensible to many folks is that while the mega rich billionaires of the world earn way more than Average Joe, they also understand how to make their money work for them. This is a manipulation of a money system that harnesses mathematical principles to snowball wealth over long periods of time into staggering sums.

Now, neither Buffet, Slim, nor any other billionaire necessarily did anything wrong, and they have all provided a lot of value to the world. In fact, many billionaires have pledged to give away all or materially all of their massive fortunes. That’s fantastic and wonderful—but totally optional.

Where our society fails is when the masses neglect to become aware of the fundamentals of wealth creation. This knowledge and the skill of patience and long-term thinking are learned and must be taught early. When that fails to happen, the wealthy continue to snowball into evermore powerful, almost mythical beings, while much of the society doesn’t even know where to begin.

It’s this disparity in wealth and the corresponding differences in power and control over others that are the societal problem. It’s not a problem that skilled, athletic, or hardworking people are paid more. The problem is that average Joes that possess a certain type of knowledge are worth more than their peers.

That problem compounds exponentially when skilled, athletic and hardworking folks with high incomes harness the system of wealth creation. It results in a situation where a select few wield the same economic power as millions.

Conclusion

Wealth doesn’t care if you are smart, stupid, fat, skinny, tall, short, white, black, male, or female—though some evidence certainly indicates that income is perhaps unfairly impacted by these characteristics. But for wealth, it doesn’t matter if you are “better” or “worse” than someone else.

Wealth is simply a function of knowledge, action and time. Wealth is a system. The principles of wealth are well within the grasp of every human that has the capacity to learn.

Thirty years from now, it won’t matter what your income level was at 25. If you understand and apply fundamental financial concepts (earn, save, invest), then mathematically you’ll automatically become a millionaire without making noticeable changes to your lifestyle and happiness.

Imagine what happens if you go even just a little above and beyond in the pursuit of financial gain. You’ll wield almost complete economic power over those who either aren’t exposed to or don’t bother to learn about building wealth—and those who learn too late. It’s not a bad system, but the results can be unequal or (in my opinion) unfair when only a tiny portion possesses sufficient knowledge early enough in their lives.
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In our system, knowledge is key. I want to make a clear distinction between knowledge and intelligence, as finance doesn’t necessitate intelligence, but a simple ability to manage basic financial math, to speak the language of money, and to develop a long-term outlook.

Educate yourself and learn about the incredible power of long-term wealth creation and the principles of investing and value creation. Make your money work for you. If you don’t, you’ll be stuck in a rut, complaining about rising income inequality and not discuss the real issue: incomprehensible inequity of wealth.

Fail to learn about finance, and you’ll be like those sad folks who tried to “Occupy Wall Street.” They knew that something was wrong—they knew that the guys on Wall Street had something they didn’t and that the unfairness was represented in terms of dollars. But the Occupy Wall Street folks didn’t even know how to begin solving the problem. They didn’t understand that there are entire financial concepts that aren’t a part of their world.

This topic is immensely important to our society. I’m definitely of the opinion that early possession of this knowledge is an unfair advantage and believe that the only way to level the playing field (short of moving away from capitalism to a far worse system like communism or socialism) is to educate folks, early in their lives, on how to be successful given the current framework.

For the record, I’m personally making sure that I do everything I possibly can to take (unfair?) advantage of the knowledge I’ve gained and my youth to build wealth for myself by earning, saving, and investing systematically for the long-term.

I’d be a fool not to.

What are your thoughts on this subject? What do you think is the best solution for better educating the population on finance?

Be sure to weigh in with a comment.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.