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The lessons of history on wealth inequality

I have recently read “The Lessons of History” and it sent me down a rabbit hole of thoughts about the wealth inequality in today’s world.

The book claims that inequality and the concentration of wealth is natural and it has been observed repeatedly throughout history. This gap has been periodically alleviated by wars, revolutions or natural disasters. However, during the times of peace and economic growth, we should expect inequality to grow.

The simplest but most powerful explanation for this is the economies of scale argument. Everything is more efficient when you do it at scale, therefore “money begets money” and you end up with an ever increasing wealth concentration. Once some capital concentration happens, the people who have access to the concentrated capital can monitor the flow of the capital and put their money to work much better than anyone else. This results in the ever increasing wealth inequality.

Another idea is that human society is essentially a giant “problem solving machine” 1. The complexity of this machine has been increasing proportional to the complexity of the problems. Inequality seems to be a natural consequence of this complexity since the system is trying to collect enough energy (i.e. capital) to come up with solutions to the increasingly more difficult problems it is facing. The implications of this requirement is heavy capital concentration as we make our society more technological and complex.

Regardless of the reasons, history shows that extreme wealth concentration not only happens but also always ends up with a revolution and wealth redistribution. The French Revolution was a very violent attempt at wealth redistribution which resulted in transfer of wealth from the aristocracy to the bourgeoisie. In Athens of 594 B.C. Solon devalued the currency so that debtors are free of their burdens and don’t revolt against the rich. One of the most interesting stories I have read about wealth redistribution is the Hebrew Jubilee where all the debtors are freed from their debts every 50 years so that wealth inequality doesn’t get out of hand. Interestingly, the inscription on the liberty bell is a reference to this biblical tradition. It reads “Proclaim Liberty Throughout All the Land Unto All the Inhabitants thereof”, where liberty meant getting freed from the previous debts of those people who moved to the U.S.

Proclaim Liberty Throughout All the Land Unto All the Inhabitants thereofđź”—Proclaim Liberty Throughout All the Land Unto All the Inhabitants thereof

Looking at more recent history, the U.S. got very close to freeing debts of the debtors in the 2008 mortgage crisis. However, instead of freeing the debts of mortgage owners, the government decided to bail out the banks and adopted a series of economic policies since then which resulted in even more wealth inequality.

Trying to predict how the next “revolution” and wealth redistribution will play out is very difficult. However, I like speculating on it since any wealth redistribution has a direct effect on our lives. Fortunately, I expect all possible wealth redistribution scenarios will most likely be peaceful, since our society’s tolerance for violence has been going down significantly for centuries 2. 

Among the new wealth redistribution ideas, “Universal Basic Income” seems to have gained the most traction recently. UBI simply means that the government provides a minimum amount of salary to every citizen. We are seeing large scale experiments of UBI especially since COVID started, but we are yet to see the outcomes. The initial experiments mostly suffered from technical challenges, but I believe this can be implemented substantially better in the future using better technology.

This time, we also have new wealth redistribution technologies which never existed in the past. Cryptocurrencies are already poised to become the biggest wealth redistribution from older generations to younger generations just because of the technological nature of the asset. I am also excited about cryptocurrencies implementing different monetary policies and wealth redistribution mechanisms into their core protocol, allowing a free market competition between different systems for adoption.

An interesting idea is that cryptocurrencies like Bitcoin don’t need wealth redistribution at all. The idea is that since all the money flows are visible to all the participants, we have a more level playing field between a large hedge fund and the individual investor. There is no central mechanism to redistribute wealth in an unnatural way, so the only wealth concentration is happening through natural ways. I am skeptical but excited to see how this will play out.

To conclude, wealth concentration seems to be natural and inevitable. However, I am excited that we have lots of ideas and technologies to make things more fair this time.