Wealth Fallacy

Wealth in reality correlates with rent-seeking in most countries

Wealth Fallacy

In a theoretical free market economy where all exchanges are fully unfettered and symmetrically informed – as posited by the first welfare theorem of mathematical economics – we can assert that wealth would correlate strongly with the ability to produce goods and services valued by others. Here’s why:

Unfettered Exchange: If exchanges are truly unfettered, there are no artificial barriers such as regulations, monopolies, or external interventions that could distort the market. This means that the prices and availability of goods and services would purely reflect supply and demand.

Symmetrical Information: Symmetrical information implies that all market participants have access to the same information, reducing the risk of asymmetric information problems such as moral hazard and adverse selection. This ensures that the value of goods and services is accurately reflected and that consumers make informed choices. When buyers and sellers are equally informed about the goods and services being exchanged, the type of fraud in unfettered, free trade described by George Akerlof in “The Market for ‘Lemons’” is absolutely impossible.

Wealth Creation: In such a market, individuals and firms would be rewarded based on their ability to produce goods and services that others find valuable. Wealth would accrue to those who are most efficient, innovative, and responsive to consumer needs because their products and services would be in higher demand.

Market Efficiency: The assumption of unfettered exchange and symmetrical information leads to a highly efficient market where resources are allocated optimally. Producers would be incentivized to improve their products and services continually, driving economic growth and wealth creation.

However, it is important to note that this is only true in theory and provably false in reality. In reality, markets are never perfectly free or symmetrically informed. Various factors such as market power, externalities, information asymmetries, and institutional frameworks can affect the distribution of wealth. Thus, while the correlation between wealth and the ability to produce valued goods and services would be strong in such an idealized economy, in reality, there are two ways to become rich: be really productive, or cheat. And do people in a free market cheat each other? Absolutely.

Public Choice Theory: Public choice theory, as recognized by the 1986 Nobel Prize, explains how rent-seekers can obtain wealth without making a reciprocal contribution to productivity. Agency costs, as described by Jensen and Meckling, and various forms of fraud, such as those described by Akerlof and exemplified by the Bernie Madoff scandal, insider trading, and business crime in general, further illustrate how wealth can be accumulated through deceit and manipulation rather than productivity.

Real-World Market Dynamics: This phenomenon is particularly evident in stock trading, where “smart” hedge funds purchase “dumb” retail order flow from brokers like Robin Hood. This aligns with Akerlof's description of how better-informed parties can extract unearned wealth from less-informed counterparts. Retail trading offered for free by platforms like Robin Hood is as “free” as free cheese in a mousetrap.

Wealth and Productivity: In reality, the correlation between wealth and productivity is not straightforward. Given the sluggish productivity growth of most real-world economies and the amount of unearned wealth extracted by CEOs and other elites, wealth often correlates more with the ability to cheat, steal, rob, and defraud than with the ability to produce anything of value. Throughout recorded human history, wealth has frequently measured how much unearned wealth one can extract from others rather than one's productive capabilities.

This analysis highlights the complexities of real-world markets and challenges the simplistic view that wealth correlates with productivity. A rich person is only worthy of admiration if they are not a crook. Unfortunately, most rich people are crooks, including those who start businesses and then lobby the government for favorable regulations. A Russian oligarch manipulating the political system through bribes and payoffs to obtain ownership of a factory or oil refinery does not equate to productivity or a positive contribution to society. Such individuals are best referred to as economic parasites, obtaining wealth without making a reciprocal contribution to productivity.

Equitable and Efficient Economic Systems: To achieve a more equitable and efficient economic system, addressing information asymmetries and rent-seeking behaviors is crucial. In reality, the probability of a rich person being productive is much lower than that of a poor person being productive. However, the rich are far more likely to lie and defraud others. This is particularly evident in corrupt economies like China, and Haiti.

In this sense, the only rich people worthy of admiration are non-criminals who do not take money from governments. Someone like Steve Jobs, who created his own business, is worthy of admiration. Conversely, Al Gore's wealth, earned by manipulating the political system rather than producing real value, highlights the disparity between theoretical and real-world markets. In a rational, efficient market, those enforcing regulations or manipulating systems should not earn billions. Sadly, someone like Khodorkovsky or any of the other rent-seekers who stole government assets during privatization – well, one can’t blame Putin for imprisoning them, though too many are still walking free. Barring rare exceptions (i.e. Durov brothers), nearly all wealthy Russians earned their money during privatization – the very definition of rent-seeking in public choice theory.