One of the reasons that I am perhaps less concerned about wealth inequality than some of my fellow economics bloggers is that this type of thing tends to happen:
A little over a year after Bill Gates and Warren Buffett began hatching a plan over dinner to persuade America’s wealthiest people to give most of their fortunes to charity, more than three-dozen individuals and families have agreed to take part, campaign organizers announced Wednesday.
In addition to Buffett and Gates — America’s two wealthiest individuals, with a combined net worth of $90 billion, according to Forbes — 38 other billionaires have signed The Giving Pledge. They include New York Mayor Michael Bloomberg, entertainment executive Barry Diller, Oracle co-founder Larry Ellison, energy tycoon T. Boone Pickens, media mogul Ted Turner, David Rockefeller, film director George Lucas and investor Ronald Perelman.
This isn’t an isolated case. Academics of all stripes should be well aware that these fine offices and laboratories we are working from were often funded by philanthropic individuals.
The reason this type of thing happens is that the desire to accumulate wealth and the desire for large quantities of consumption are not the same. Though, it is unfortunate that most of our economic models assume that the later is the only driver of the former.
Generally speaking creating enormous fortunes is a simply a side effect of what people really want to do, which is create enormous organizations. Most of these individuals had a vision about the way some activity ought to be done. In order, to make that vision a reality they created an organization to do it.
However, changing the way business is done requires an organization vastly larger than what is necessary to provide you with all the consumption that you and your heirs could desire. Hence wealth as a side effect.
Now this is not true of all, nor would I even expect most, entrepreneurs. I am guessing that the average car dealer isn’t in it to change the way people buy cars. He wants to get rich, marry a beautiful wife and leave a good sized inheritance to his kids.
But, most car dealers don’t change the way we buy cars. And, that’s precisely why their organizations stay small. The few who do, like Autobytel founder Peter Ellis, keep fighting to build their organization, often to the bitter end.
This is why its important that we keep our eye on consumption, not income. There is no inherent social harm in someone amassing a large fortune. Nor, does it necessarily contrast with our Rawlsian sense of justice. It matters crucially what they do with that fortune.
If they spend it all on gold rims and mansions in the Hills, then by all means tax that. However, it they keep putting the profits back into the business to create bigger and better organizations, then we should let that process feed on itself, rather than slowly bleeding it. Nor is there any particular reason why we should want to tax away income that was going to go to charity in the end.
Yes, many of the wealthy spend their money on lives of luxury while poor children attend classes in broken down schools. But, then go after the life of luxury, not the wealth.
Update: So what is to be done