Why Are There Rich and Poor People?

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You’ve probably already heard that the wealthiest 1% owns 50% of the world’s wealth. More precisely, in that 1%, the 85 wealthiest individuals in the world have a combined wealth equal to that of the bottom 3.5 billion people.

A lot of the global poverty, particularly in developing countries is attributable to war, corruption, failure of the State or lack of resources. But even in developed nations, there’s a disparity between rich and poor people.

If you’re reading this, chances are you’re part of the middle class. Some of you are probably trying to move up the economic ladder by embracing the idea of being rich one day, or maybe such wealth disparity around the world makes you uncomfortable. After all, does one man really need $77 Billion (Bill Gates!!) to live when others are starving?

So intuitively, a natural question arises: Why are there rich and poor people? Well, in ancient civilizations like the Roman Empire, social stratification and slavery made wealth disparity self-explanatory. In those days if you belonged to a certain class, you were destined to be either rich or poor. But in modern society, provided there’s no social oppression and given the right opportunities, the economic system allows most people to improve their standard of living.

WHERE DO RICH PEOPLE COME FROM?

More specifically, in capitalist economies, wealth starts with individual property. So, if you own an asset, the idea is that you can use that asset to produce something, and make money by selling that thing. The asset can be a piece of land, equipment or even your skills. Once you’ve been able to make your first buck, then that money will multiply with time and interest. So people become rich when they are able to accumulate capital much faster than the rate at which they spend. Plus, in a capitalist economy, the prices at which we buy and sell goods and services are driven by their level of scarcity, and those prices fluctuate with market demand. So becoming rich has a lot to do with producing a good at the lowest cost possible, that a lot of people want and that is hard to find. And because money accumulates indefinitely once you have enough of it, wealth becomes a self-fulfilling cycle. So if you’re born into a rich family, you’re likely to be rich yourself.

WHERE DO POOR PEOPLE COME FROM?

On the other hand, poverty is the inability to accumulate capital faster than your consumption rate. In a capitalist economy, this inability is due to the fact that the assets you own are not highly priced on the market. For example, the skills of a factory worker may be worth less than the skills of an accountant. Low income, little access to basic needs like education, food and proper housing, are all factors that reduce the capacity of someone to accumulate wealth. And since it’s a self-fulfilling cycle, poor people’s children are more likely to be poor themselves.

IS THERE A BETTER WAY?

Because not everyone is given an equal amount of assets and opportunity to start off in life, there will always be wealth disparity under a capitalist system. Socialist economic systems tried to tackle this issue by establishing common ownership of the means of production, and an equal distribution of opportunities, goods and services. However a society completely transforms when individuals are given things rather than having to work for the prospect of earning more for themselves. In general, the lack of personal gain disincentivizes people, and contracts economic growth; plus the absence of competition makes things pricier and less innovative. Therefore this system generally has to involve heavy government intervention in regulating production levels, prices, wages, trade, food supply and pretty much everything that touches a citizen’s life. In the worst cases this model has even turned into dictatorship.

SO HOW DO WE REDUCE THE GAP?

At the end of the day it all comes down to a philosophical way of viewing society. There’s no fundamentally good or bad way to tackle this issue. As a matter of fact, today most of the policy making in the world includes a mix of both systems. For example, minimum wage, taxation, market regulation, social enterprise, unionization and welfare are all social measures applied to counter the drawbacks of capitalist economies. But is it enough? Is there a permanent solution to eliminate poverty? Or do you think the notions of rich and poor are inherent to our society or the way we behave as human beings?

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