Why there will always be inequalities in the world

The “let’s give 1 million dollars to everybody” thought experiment

A lot of people, intellectuals or “everyday people”, have amazing ideas to solve the insane amount of inequality in society. We should abolish private property (communism), or let the free market solve all problems by raising the living standards of everybody (capitalism), or let a powerful ruler choose the best path (most monarchies, dictatorships…), or get rid of any form of governments (anarchy)…

But, unfortunately, experience as shown that no human society, anywhere, under any ideology, since the beginning of history, has ever been equal. You can argue all you want about the various “levels of inequalities” (there is disparity between systems, it’s true), but the reality is that a few percentile of the population always ends up with the majority of the resources and power.

I should stress out that I’m not happy about that fact. But there is an economic reason for that, impossible to escape in the real world. A reason that cannot be ignored without running into false utopian dreams, which often lead to nightmares. Economy is complex, difficult, and often seems mysterious. That’s why it’s easy to lure people with false and dangerous promises. I thought it could be helpful to explain some basics, with some telling and more intuitive examples.

To explain it, I’m going to start with a thought experiment. Let’s imagine that your government suddenly decides to give every citizen 1 million dollars. In pure economic theory, it is possible, since the government can “produce” money. You probably already know that huge creation of money leads to inflation, but it’s important to really understand why, to really get to the deep reasons of inequalities.

The “let’s give 1 million dollars to everybody” thought experiment

A new president is elected on a simple promise to solve all problems: he or she will award 1 million dollars to every citizen. It’s a promise impossible to resist. So the president is elected with a huge margin.

Through debt, printing of money and issuing of treasury bonds, the government manages to raise 340 trillion dollars (340 million of American citizens, by 1 million, equals 340 trillion). The actual debt of the US government is roughly 30 trillion. So that’s a huge increase (more than 11 times).

Many things will likely happen to the economy after that. The most important being inflation, or devaluation of the dollar as a money. Let’s start with an example of how it could impact the price of a single item, to understand why exactly inflation would appear. Then we will take an example of a salary impacted by inflation.

The Ferrari example

We are going to take a Ferrari F 458 as an example of a good that would be impacted by the new measure, to explain how inflation works.

The Ferrari F 458 costs roughly 200 000 dollars today. Let’s imagine that 10% of US citizen are fans of Ferrari, and dreamed of buying one since a long time. There are roughly 2.500 to 3.000 Ferrari F 458 sold every year. Now, 34 million of people want and can afford a Ferrari F 458. That’s twice the total number of cars sold in the USA every year (roughly 17 million).

To meet the demand, Ferrari would need to increase its production of F 458 from 2500 to 34 million units. That means an increase by 13.600. That would probably be physically impossible to do. That would mean producing as much Ferrari as twice the total of cars sold on the US market last year. They would never manage to get enough raw material (steel, plastic, man power…) to create enough cars. They could not simply buy all the other car factories, because other cars companies would probably face the same increase in demand (probably other people would prefer to buy a Porsche, a Ford, a Lamborghini etc…). There would be too much competition on the market to buy all the materials needed to increase the production of Ferrari on our finite planet. Moreover, the price of raw material would probably increase due to the high manufacturers demand.

So what would happen is that, as the demand would exponentially exceed the offer, the price of a F 458 Ferrari would rise exponentially. The Ferrari would not cost 200 000 dollars anymore, but 13.600x200.000=2.720.000.000 dollars (13600 is the increase in demand we calculated roughly earlier). Or more than 2 billion dollars if you want. It’s a very loose calculus, just to give an idea of the scales we are talking about.

But wait a minute you may say. Who could buy a 2 billion car? Simply the same people who can buy a 200.000 dollars Ferrari today. But how and why? We need now to get into the impact of inflation on salaries to understand further, but it’s all linked:

The cleaning person example

Let’s take the example of a cleaning lady or man. Being a cleaner is a very difficult, exhausting, little valued job, with a poor salary. When cleaning ladies and men will be awarded 1 million dollars, most of them will probably want to stop working. Either to find a better and more interesting job, or simply to go on vacation for an extended period of time.

But the cleaning still has to be done by someone. So companies will have to buy extremely expensive robots to clean. And if they can’t find one (because of price and/or too much demand), they inevitably will have to increase exponentially the salary of cleaning persons, to keep hiring ones.

But how do you convince someone who has 1 million on their bank account to come clean your company floor? By offering them extremely more money as salary, to convince them to come back to work. The same will probably happen for most jobs. How could a company afford to pay people 1 million or more a month? Simply by charging customers exponentially more for their services. They won’t have the choice, or nobody will be working anymore (at least in difficult jobs). They either increase the salaries and costs exponentially, or they shut down entirely.

But how could people still afford the services or products of companies which pay their employees hundreds of thousand, or millions of dollars a month, and then ask them hundreds of thousand, or millions of dollars for their services? It’s simple, everybody now has more buying power (1 million dollar), so people can afford to pay way more for basic necessities.

Then, higher paying jobs will naturally increase too. So, if the cleaning person is now paid 100.000.000 a year (10.000 times the actual real salary or something like that, very rough just to explain), then a lawyer will be paid 10.000x100.000 dollars a year (if they currently earn one hundred thousand a year for instance). That means a lawyer will earn 1.000.000.000 a year. That means the Ferrari will cost the lawyer two years of salary, roughly the same amount as of today.

Now let’s dive into the core of the problem: the finite ressources problem. Let’s take another example to explain it, that will be even more intuitive to understand than cars:

The trip to a luxury destination example

Let’s imagine that most Americans want to go on holidays, in an exotic and foreign place. They all want to buy first class plane tickets to Hawai, or Paris, for instance. Unfortunately, there is not enough available place on the airlines for everybody. And not enough hotels to accommodate everybody. You can’t simply build million more planes and hotels. There is not enough place and material to build that. You can’t expand a city like Paris, or an island like Hawai, indefinitely. You can’t increase exponentially and suddenly the number of planes in circulation. I think it’s very intuitive to understand.

Millions of people now are trying to buy a few thousand plane tickets. Millions of people are trying to get to the presidential suite in the Ritz or other luxury hotels around the world. So what are airlines companies going to do? What are hotels going to do? You guessed it, they will dramatically increase the cost of their services. Who will be able to buy those plane tickets and those luxury hotel rooms? The same people who can afford it now.

So why most people can’t be “rich”, economically speaking?

To understand it further, we have to define what that really means to be “rich”. It’s not just having a lot of money, because money is an abstract and relative concept. Being rich simply means being able to buy a lot of resources, or assets. But where do those assets come from? They come from material, and man/woman power. And there is simply not enough of those things in the world for everybody to be “rich”.

In other words, not everybody can have an expensive sport car, or go to the Ritz in Paris, simply because there is a small finite amount of expensive sport cars made every year, and only 71 rooms in the Ritz in Paris. You can’t fit 7 billion people in 71 rooms. So not everybody can come to the Ritz in Paris. They simply can’t, no matter how much money you create out of thin air, and no matter what politicians can promise.

Moreover, even if there was an infinite quantity of material in the world (which is not the case), you would still need people to build the Ferrari in the factories, and people to build hotels, and to serve you and work in the Ritz for instance. Otherwise, a Ferrari not built is just steel and plastic (you even need people to make plastic). And an hotel without staff is not really an hotel. Just walls and furnitures who take dust. You can’t build a Ferrari by yourself. You can’t enjoy a palace without employees.

But who would be those workers serving you? If everybody is rich, why would some people decide to build you a Ferrari, or serve you the breakfast and clean your room in the Ritz?

To make an even more obvious point, there is 4.571 employees working for Ferrari today. There is probably even more subcontractors for a varity of their pieces. You also need outside contractors to build the factories, to run electric plant to provide you with electricity, I can’t even imagine how many workers to build the roads, convey the cars around the world, thousand of people extracting and refining the oil to make it work, etc…

There are probably millions of people necessary to build and allow a system to work properly to build around 2500 Ferrai F458 a year. You simply need way more people to build Ferrari than the number of Ferrari you can produce, sell or give each year. You simply can’t give a Ferrari to all the people who helped build one.

The same is true for the Ritz in Paris. There are 524 employees for the Ritz in Paris. Twice the number of the clients the hotel host (71 rooms, so if every room has a family of 4 that’s 284 people total). Even if we counted only the employees, you could not create a functioning turnover to allow every employee to enjoy the hotel fully, even taking turns like in a Kibbutz communist society. And I’m not even counting the workers necessary to build the place, to make electricity, water etc…

A “lavish” lifestyle, which means with abundant means and man power, is simply not possible to expand to the majority of people. It is by definition the accumulation of resources and man power into the hands of a few persons. This accumulation is possible only if many are working, and a few enjoying. The other alternative? Nobody is working, and everybody is poor. As soon as there is creation, there is accumulation by some. Yes, even in communist countries. Why? Because not everybody can do the same job. You need a lot of people doing difficult jobs, and just a few doing the lead, the “elite”. You can’t technically have a lot in the elite, and nobody doing the difficult jobs. Otherwise there is simply nothing made, and nothing to enjoy.

Last note about the “value” of money

Before concluding, I just wanted to add some precision about how money and the economy works (yeah just that haha). Very briefly I promise, to help clarify.

You probably already know that money is an abstract human concept, that has no inherent value. But something that people often miss, is also how much money is bound by the limits of the “real”, material world. You see, the way money value works is (very roughly), by comparing the amount of money in circulation in a country (producing that money), to the amount of value of its economy. That’s why the dollar has more value than the CFA Franc from Gabon (600 times more value). Because the country creating the dollar, the USA, has more material and “people” resources to “offer” in exchange of its dollar, than the Gabon against its CFA Franc. That simply means with dollars you can buy more “stuff” (everything produced in the USA to make it simple), than with the Franc CFA (everything produced in Gabon). Money is not backed by gold (gold has no inherent value either by the way), but it is backed by the value of a country economic power, and also the trust that people have in that economic power.

It’s more complicated in real life, but it’s the general idea. To explain it in another way, let’s try this: no matter how much money you have, you will not be able to buy even an ounce of Vibranium. Why? Because it is a fictitious metal, that only exists in the superhero universe of Marvel company. You can only buy what exist, what is produced. You can create how much money you want out of thin air, but you can’t create “stuff” out of thin air. That’s how money lose its value when a government produce too much of it.

Conclusion

I want to stress out that I am absolutely not happy by the fact that there are inequalities. I also hope they will decrease. Too much inequalities are bad for the stability of societies, and destroy lives. I was just trying to explain to the best of my understanding of economy, why there will probably never be an utopian society without inequalities. Even if we were to remove organized societies entirely, and go back to the state of nature, there will always be stronger people who will organize to steal and use weaker people.

The goal should be to try to help the poor and the weak, and to limit the indecency of extreme inequalities. But I wrote this article to warn against the false utopian promises of some fool, who tell you that the solution is to get rid entirely of the system, or of society values. Because there is simply no societies without inequalities, and there will never be. The goal is simply to help the ones at the bottom, and to make the game as fair as humanly possible.

Have a good day.