Personal Finance

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

Expertise: Real Estate News & Commentary, Real Estate Investing Basics, Mortgages & Creative Financing, Personal Finance, Personal Development
72 Articles Written
Conceptual shooting of shoes. Old shabby shoes in comparison with new and expensive ones.

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.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

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.

wealthy-recession

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.
Related: The 5 Steps Necessary to Master Your Personal Finances
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!

income

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.

tenant-renter

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.
Related: 3 Negatively Cashflowing “Assets” That Devastate 20-Somethings’ Finances
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.

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the ...
Read more
    David Dell
    Replied over 4 years ago
    So few people take personal responsibility for where they are at in life. They are quick to rationalize and blame circumstances for their present condition. Life was unfair to me. I didn’t have opportunities that others were given. I didn’t have a rich daddy to give me a proper start in life. I decided to raise a family so I didn’t have the money to do other things. I had a controlling spouse. I had a nagging wife. I grew up in a poor area. On and on and on people make excuses. When you are ready to take full responsibility for your decisions in life, your life will begin to change in positive directions. I can admit, I am not where I wanted or hoped to be financially at this point in my life. It is my fault. It is the result of decisions that I have made. Here is a quote, I keep over my desk, that has become my mantra in life: You don’t decide your future. You decide your habits and your habits decide your future. I have chosen to change my circumstances and my future. So maybe I’ve learned these lessons later in life. So what? It’s never too late to change. I am not stuck with who I am. Hand in hand with the principle of habits is that “you become what you think about. “What does your self-talk sound like? Is it uplifting and positive or is if filled with negative self-deprecating talk? The difference between the wealthy and the poor is rarely about opportunity, gifts or birthright. It is about how you think! I have spent much of my life in sales. In every case 10% of the sales force account for 90% of the production. Why? It’s the bell curve of life. You saw it grade school. You see it daily in real life. But you are not stuck with where you are at on the bell curve. You have free agency. You can choose to change your position in life. That begins with how you think and the habits you choose to develop. Human nature, by default is to take the path of least resistance. This is the path of weak character and poor habits. It takes effort to resist the path of least resistance. Body builders don’t develop great bodies lying around just thinking positive thoughts about how great it would be to have a great physique. You have to want it bad enough, your “reason why” has to be big enough, to get off the couch, into the gym and get it done. Most people will never do this. There are reasons why, there are excuses and there are results… and the first two don’t count. Be proactive with your life. How will you choose?
    David
    Replied about 4 years ago
    Buffet and Slim are not a problem. They worked hard and made correct decisions most of the time. That is the system. No matter what endeavor you examine you will always find a few that rise to the top. It is natural order. You will then have a certain number that will identify themselves as being comparatively weaker by crying about how “unfair” it is. The only way to make this unfair is for all to have the exact same and that is dangerous nonsense.
    Susan Maneck Investor from Jackson, Mississippi
    Replied about 4 years ago
    Let me suggest the following as measure as to whether our wealth is coming from our own efforts or whether it comes from exploiting others. Are the people working for you earning a living wage? If not, it might be coming from exploitation.
    David
    Replied about 4 years ago
    Buffet and Slim are not a problem. They worked hard and made correct decisions most of the time. That is the system. No matter what endeavor you examine you will always find a few that rise to the top. It is natural order. You will then have a certain number that will identify themselves as being comparatively weaker by crying about how “unfair” it is. The only way to make this unfair is for all to have the exact same and that is dangerous nonsense.
    Greg Hall Real Estate Broker from Sunnyvale, California
    Replied about 3 years ago
    Yes, there are different aptitude/talent/skill that contribute to inequality. However, some barriers to entry are posed by things like local land and business monopolies (some inter-generational) and these lend to wealth inequality. Most pro athletes, performers, actors, etc. are invested in large hedge funds that dominate sectors of markets. Vast concentrations of capital create the inequality and we should do more to break these up to spread more opportunities.
    Greg Hall Real Estate Broker from Sunnyvale, California
    Replied about 3 years ago
    Access to seed capital is also a critical aspect of wealth creation. Joining pools and/or access to low interest micro-loans could help young investor-entrepreneurs get their start much easier.
    John Murray from Portland, Oregon
    Replied about 3 years ago
    I’m a millionaire twice over. I own 8 SFH rentals worth about $3M in leverage. Every single rental is really nice with Air conditioning and other great amenities. The house I LIVE IN DOES NOT. I drive a 2007 Ford F-150 and my wife a 2010 For Escape. I served in the US Army and did well to mature very quickly from a knucklehead teen and the son of a mail carrier into a over drive machine. . My Dad was good man, God bless his soul. Does not take a genius to figure out why I’m a millionaire and most Americans are not. If you are smart and pragmatic you will do well. Even if you are not so smart and pragmatic you will do OK. The great divide is because most people could not find their ass with a flashlight.
    Dave Nace
    Replied about 3 years ago
    One of the contributing factors to income inequity that is often ignored is the prevelance of two income families in America and the fact that people tend to marry others with the same educational backgrounds. Combine this with the fact that most of the families below the poverty level are single parent families and there is certain to be income inequity. In addition divorce is far more prevalent in those with lower levels of education and earnings. It is surprising that the “war on poverty” and the rise of the welfare state has not produced even greater income inequity.
    Vaughn K. from Seattle, WA
    Replied 11 months ago
    The fact of the matter is that people aren't equal/the same, as you say. Yet we live in a world where people say out loud that we are, and even worse, base policy decisions off the idea that we are. We waste billions of dollars a year under the premise that all people are equally capable of doing things, when it just ain't so.

    Science has always shown, and is simply piling on the evidence, that people are simply born with a tooooooon of "who they are" hard wired. It's genetic. And it's a lottery, just like buying a ticket down at the corner store. From the reading I have done, it seems that scientific studies are now quantifying the fact that 50-80% (at a minimum, although it varies by what trait is being studied) of basically every trait you can think of is genetic. Everything from IQ, to height, weight, and even more abstract personality traits, like being outgoing/a people person, being introverted, liking sports, being a thrill seeker... Even the type of music we like! Twin studies showed that twins separated at birth and adopted out to totally different types of households often times ended up having the same favorite color, favorite band, wore similar hair styles, etc. All of this was at rates FAR beyond random chance could allow. It was genetic.

    Did I forget to mention that when I said it's a lottery, it's only KIND OF a lottery? Almost all of this stuff is actually inherited from your parents... You're basically 70%+ an averaging of your parents traits, with a little randomness thrown in just to confuse people! Nobody has yet analyzed this stuff back to saaay great grandparents to see if perhaps almost ALL of it is 100% genetic when one factors in the randomization of genes across a few generations, which is highly possible. Even with the single generation heritability of traits being from 50-80%, that's a BIG DEAL. In short there may be VERY little about what makes YOU "you" that wasn't determined from the moment that sperm fertilized the egg.

    So what does all this mean? Well, it certainly takes away from the feeling of control some people have over their life... Which kind of sucks. It is rather deterministic. BUT there's still a lot of room in there for life circumstances, making good decisions vs bad, doing the right things etc.

    However, at the macro level it does mean we will never be rid of inequality... Because people are essentially limited by their genetic potential. Just as I don't have what it takes to be an NBA player, so too many people just don't have the brains to be a rocket scientist. Unless we go Gattaca style and everybody genetically engineers their children to all be at the very high end of all traits. Even then there will be winners and losers to some degree, the gap between best and worst will just be smaller. The fact is that the "small" differences in some traits DO NOT end up creating small differences in outcome. The 30% figure you use is frequently FAR higher. Especially if you compare saaay the top 10% to the bottom 10%, vs the mean/median. Most people cluster towards the mean for all traits, but those in the upper/lower 10% or 20% are starting to get to somewhat decent extremes, and are still a sizeable chunk of the population too.

    For instance even in a physical labor job, a top 10% man may be able to literally lift 4x as much weight as a bottom 10% man... In some jobs that could translate to him immediately being worth 4x as much money. Let's not even start on comparing top 1% to bottom 1%, or across sexes for physical attributes! It just gets nasty!

    And in intellectual endeavors the same holds true. Somebody with a 160 IQ might be able to do 5x as many math equations of a given type in the same amount of time as somebody with a normal 100 IQ. That 160 IQ, or even the 100 IQ person, might be able to do types of math that somebody with a 70 or 80 IQ literally can't comprehend no matter how much time they're given. Somebody with a 160 IQ can also comprehend concepts that a regular 100 IQ can't even begin to wrap their heads around too. The difference between being capable of being a literal rocket scientist, or your highest intellectual capacity being a janitor is a VERY LARGE gap in reality. One person cannot move society forward at all in any respect, whereas the other can completely change the entire world with their ideas. Both these types of people exist in not insignificant numbers in the world.

    Does it suck to be "inferior?" I would suppose so. I'm below average height, thankfully not by a huge amount... But it totally sucks! I would LOVE to be 6'3". If I was I would darn near be the perfect person! But I'm not. So I have to deal with it. Thankfully I am fairly intelligent, reasonably good looking, and have mostly good personality traits. Some people don't have any of that. Some people are very short, not attractive, not intelligent, bad personality traits, etc. In short... They are screwed. And it's a tough thing to think about, because it's so sad. I can deal with my few shortcomings because I have outright strengths to be proud of, and am in the middle on other things. If I had NOTHING going for me, that would be brutal. Yet that is reality. As much as it sucks, I think we need to accept reality for what it is, and stop pretending, so that we can make rational decisions on how to handle the "gaps" that nature has built into our species.

    The thing about the modern world is we're shifting towards needing more things that can only be done by extra high IQ people, and losing jobs that low/average intelligence people can do. If anything this will only become more and more of an issue with increased automation. It's mean to say it, but low intelligence people will potentially be completely useless to society at large in another couple decades, if not sooner. Then it will keep working its way up the intelligence ladder, potentially until even pretty smart people may be practically useless. Yet we refuse to even accept the idea that all people aren't JUST as capable as anybody else... It's a lie. One we need to dispense with sooner rather than later. I don't think capitalism will completely fall apart in the near term future... But I do wonder if a Universal Basic Income might not be 100% required to avoid mob riots within the next 50-75 years.

    It's a very uncomfortable subject for people to discuss... But we're going to have to have the discussion in the coming years, because if we don't THAT will be a REAL problem. I'm a total capitalist, but truly intelligent AI combined with better robotics may well finally topple the functionality of capitalism. Any which way, it's going to be a crazy ride!