Perhaps continuing on this morning’s discussion about the decline of the super-rich, the Power Lunchers on CNBC just finished up a discussion on income inequality, middle class stagnation and the benefits of the super-rich to society.
Not surprisingly, Cuban-American Michelle Caruso Cabrera argued that poor immigrants have it better here than anyone else. Then Sue Herrera meekly pointed out that the rich engage in a lot of philanthropy — an argument which we suspect will convince very few folks.
At they very least, many would probably say that if we had a more equitable distribution of wealth then we wouldn’t need all that philanthropy.
But we think there’s actually something to Herrera’s point. It’s not merely that the rich have all this extra money, and that they have plenty to spare on things like big education grants, museums and nature preserves.
The real story is that wealth concentration solves otherwise difficult coordination problems. If I have $1 billion, I’ll just go endow a new museum, and voila, a new museum sprouts up. It’s that simple. If 10 of us have to donate $100 million each it gets harder, and if 1000 of us have to donate $1 million each to get things off the ground, then the creation of that museum will be harder still.
In a world in which we were all financially equal — a world, of course, that would never exist — getting anything philanthropic, and non-common denominator would be extremely difficult. Varying degrees of wealth (inequality) is crucial to solving otherwise paralyzing coordination challenges.
And this isn’t just true for philanthropy — it’s also true for things like venture capital and other examples of business formation. The exact same principles apply. It’s not just that the rich have lots of savings and the ability to invest without little risk (though all that’s true), it’s that those savings represent the ability to cut against inertia and make things happen in a way that groups of people with similar amounts of money can’t match.
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