Trade Increases Inequality

If we don’t share, then we trade. And trade increases inequality, as I will explain below. My explanation doesn’t depend on violence, coercion, theft, or deception — those are indeed present, but even without them trade would increase inequality. I don’t know why this principle isn’t mentioned more often. It’s similar to Piketty’s r>g argument, except Piketty has lots of data backing up his argument. I don’t really need any because my argument is simpler than Piketty’s; it is so simple that, once you’ve seen it, it’s obvious.

plutocracy-croppedSince trade increases inequality (explained below), in the long run it leads to great inequality. The richest six people now have as much wealth as the poorest half of our species.

And wealth is influence and power, so the small wealthy class becomes plutocracy: The 2014 statistical analysis of Gilens and Page made it clear that the public policies enacted into law are the ones the rich want, regardless of elections.

And power corrupts, as the Stanford Prison Experiment proved, so noblesse oblige is rare; plutocracy becomes brutal and cruel. Each of the wealthy and powerful is concerned only with increasing his own wealth and power. If the side effects of his efforts happen to be poisoning dead duckthe world, well, cleaning that up is someone else’s problem. Consequently the ecosystem is growing fragile and nearing collapse.

In addition, our separate property separates us from each other, so that I don’t need to care about you. Indeed, your loss may be my gain, as we are competing against each other. Wars, poverty, and ecocide will continue as long as someone profits from them. To accept the “legitimacy” of private property and trade is to accept these outcomes.

Some people claim that the whole problem is in common banking practices — fractional reserve lending, the federal reserve’s charging the government interest, etc. I’ll admit that that is also a problem. But in the board game Monopoly, even though the bank does not charge interest, the game still ends with all the players but one totally impoverished. In real life, even if all banks were owned in common by the people (like the Bank of North Dakota), separate property would still cause problems (like the land theft at Standing Rock, North Dakota).

By trade I mean every kind of economic transaction. Shopping is a trade of money for goods and services; rent is a trade of money for the use of space or equipment; employment is a trade of money for labor; a loan is a trade of money now for more money later. Bribery, also known as lobbying, is a trade of influence for almost anything. Even slavery could be viewed as a trade of labor for the privilege of not being beaten or killed, but perhaps I’m stretching things a bit there. Our basic description of trade would be simpler if we viewed everything in terms of barter, but some parts of the theory — e.g., pricing — are more easily explained in terms of money.

Let’s look at how pricing works. For an example, imagine I’m buying chairs from you. Say you run a factory (perhaps a very tiny factory, perhaps a great big factory) that manufactures various things, including chairs. Imagine I run a store (perhaps a tiny little store, perhaps a big chain of big stores) that sells various things, including chairs. So you’re going to sell me some chairs wholesale, and then I’m going to resell them at a retail price.

Let’s imagine that you’re manufacturing one particular type of chair at $8 per chair. That includes your raw material costs, your labor costs, amortization of the equipment in the factory, etc. Then you’d come out ahead if you sell them to me at any price greater than $8. If you sell them to me at a price of x per chair, then x-8 is your profit.

And suppose that I’m able to sell the chairs to my customers at $12 per chair, because of the clientele I’ve developed, the advertising system I’ve developed, and so on. So I’ll come out ahead if I buy them from you at any price lower than $12. If I buy them from you at price x, then 12-x per chair is my profit.

Evidently, we will agree to some price x between 8 and 12, and we both will make a profit, and so we both come out ahead. That’s why we make the trade. That’s emphasized by calling it a voluntary trade.

Note that your profit and my profit add up to (x-8)+(12-x) = 4, which is the total profit. That’s a constant, in the sense that it doesn’t depend on what price x we choose, as long as x is somewhere between 8 and 12. In setting the price, we’re determining how that total profit of $4 per chair gets divided up between the two of us. But how does it get divided up between us?

The simplest answer is that it should be divided equally, so we each get $2 profit. Or, divide the profit equally among all the people working in your factory and all the people working in my retail chain. But things rarely work out that way.

better bargaining positionGenerally, one of us is in a better bargaining position. One of us can say “my operation is bigger than yours, I have more options, I can find someone else to trade with, I don’t really need you, and moreover you want this deal really badly because your rent is due and your child is sick and you don’t have time to look for someone else to trade with.” Generally the person who can say that gets a larger portion of the profit. If it’s me, then x might be $9. If it’s you, then x might be $11.

Generally, the one of us who is wealthier is the one in the better bargaining position. That trader therefore walks away with more of the profit, and is helped more by the trade, and experiences a greater increase in wealth. Thus the inequality increases. Wealth trickles up, not down.

Thomas Piketty, author of Capital in the Twenty-First Century, studied mountains of data covering centuries, and reached a similar conclusion: Capitalism increases inequality. He summed it up with the formula r > g, which says that the rate of return on investments (made by the investor class, the wealthy) is greater than the rate of growth of the general economy. That’s understandable: The wealthy can choose to invest their money where growth is fastest, while the rest of us are just stuck with how things are in general.

Lennon Ono

In place of trade, I advocate sharing. I’ll readily admit that I have never lived in a sharing society, and so I don’t know how the details would work. Most of us find it difficult to imagine such an arrangement; some can’t imagine it at all. John Lennon sang, “imagine no possessions — I wonder if you can.”

But I believe the details can be worked out, by people who have good intentions. Indeed, what is in the heart — the intention of caring and sharing — is more important than any mechanical rules. I believe that most people want to be kind to their neighbor — just look inside yourself; what you see there is what is inside all seven billion of your brothers and sisters.  Ironically, the response that most people give to this is, “Sure, personally I’d go along with that, but most people will never agree to that.”

And I also believe — by the arguments I’ve given earlier — that if we don’t learn to share soon, then the unmeasured side effects of trade will destroy the ecosystem and kill us all.

Karl_MarxThe “distribution system” that makes the most sense to me is the one Marx advocated: From each according to ability, to each according to need. That is the only distribution system that makes any sense, for a society in which people care about other people. There is no correlation between a person’s needs and that person’s ability to produce; thus there should be no “proportionality” or other connection between what you give and what you receive.

Admittedly, in our present culture, people do not care about other people; I hope we can change that. If baboons can change accidentally, then surely humans can change intentionally. The first step is to get more people talking about these things.


2017 July 4, version 1.05.