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I did my bachelors in economics, and one of our textbooks taught that all other things being equal (ceteris paribus), more equality means less wealth creation. Why? Wealth will naturally concentrate in the hands of those more capable of creating it: if Jo is making 2% per annum return and Jane is making 4% per annum return, and they both start with the same amount, then Jane's share of the total wealth pool will continuously increase relative to Jo. The key thing to note is that as Jane's making better use of resources, producing twice as much from them as Jo, if we take resources from Jane to give to Jo then they'll be used less effectively, slowing overall growth. To illustrate, imagine they both start with $1000 each. The total wealth pool is hence $2000, and they both have 50% each, perfect equality. Now, let's look 50 years in the future, assuming the previously mentioned interest rates per annum compounding annually. According to http://www.moneychimp.com/calculator/compound_interest_calcu..., Jo will have $2,691.59 and Jane will have $7,106.68. The total wealth pool is $9,798.27. Jo hence now has 27.47%, and Jane has 72.53%. They're both less equal, but they're also both wealthier, and the overall wealth pool has increased. Now, let's look ahead another 50 years. If no wealth transfer occurs, Jane will have $69,633.20 and Jo will have $19,128.28, with the total wealth pool being $88,761.48. If we equalise wealth, however, such that both have $4,899.13, then in 50 years they'll each have $34,816.57, for a total
wealth pool of $69,633.14. This is 78.45% of the total wealth pool that there would be if no wealth transfer took place. In this sense there is hence a direct tradeoff between growth and financial equality. |