Wealth and Scale

Posted on 2012 September 3


Let’s face it: we’re all Commies.

We can’t help it; it’s genetic. We evolved in small tribal villages where everyone pooled resources. The best hunters shared their kill with the rest of the group. (They did receive the nicest hunk of meat — and, for dessert, the best cheesecake the village ladies could provide, which reflected well in the hunters’ offspring.)

Then things changed. We built cities, and some people got fabulously wealthy. And that pissed off the rest of us.

We resent it when others have too much. Again, it’s genetic, a push-back against individuals who make too many waves in the Gene Pool. Your DNA doesn’t like it when somebody else’s DNA starts acquiring too many advantages. And that’s understandable.

Yet we do tolerate (even when we envy) others’ good looks and talent and smarts and niceness. Why do we let those things slide but get cranky about billionaires?

It’s simple. You can be twice as pretty as me; you can be twice as talented; you can be much nicer, stronger, smarter. But you can’t be a thousand times stronger; you can’t be a thousand times smarter; you can’t be a thousand times more beautiful than someone else. Yet you can be a thousand times richer.

How can someone be merely twice as talented but a thousand times richer than the next person? It’s called “scale”. A map is drawn “to scale”, i.e., one inch equals sixteen miles. In the same way, one garage business can “scale up” thousands of times in size. This works because the modern, global economy contains, not a few dozen or a few hundred, but a few billion possible customers.

Today, if you develop a product that goes viral and everybody demands a copy, you ramp up production, hire more workers and rent more warehouse space and add marketing channels until you’re producing ten, a hundred, a thousand times as many units as before. You’ve “scaled up” the business until your marketing voice and your sales increase by orders of magnitude.

You get rich! Sometimes you earn tens of millions of dollars. You then invest your gains, which — through the magic of compound interest — begin to double and redouble. Soon you’re a thousand, maybe ten thousand, times more wealthy than any of the rest of us schmoes. And that’s the wonder of “scale”.

It just ain’t a village anymore, folks.

Now, if you’re that much richer, you also get a lot more votes in the game of life. Your moolah buys access, prestige, and influence that the rest of us can’t hope to attain. All that wealth gives political clout far beyond a single ballot at the polling booth. It’s like sports doping: rich people are cheating!

Well, who wouldn’t, if they had that kind of dough? But that’s the problem: people with immense wealth are tempted to use it to give themselves advantages over the rest of us. And our DNA starts to howl in protest.

(We don’t howl if someone becomes a thousand times more famous than us. Fame is indirect: you might parlay it into wads of cash, but a lot of famous people are broke. So we’re not as suspicious of fame as we are of wealth itself.)

In a democracy, “taxing the rich” serves as a kind of political push-back — a “brush-back pitch” — against the extreme influence that wealth can afford. It’s intended to limit the accumulation of power in the hands of a few. And today the top five percent of American earners pay about seventy percent of all Federal taxes. Sounds sensible, right?

Except it tends to backfire. First, the rich can afford the best accountants, who find them the steepest deductions, so their tax rate can fall as low as yours. But even a mere thirteen precent of, say, Mitt Romney’s 2010 take of $20 million will net the Feds a whopping $2.6 million, which is more money than you or I will likely make in a lifetime. So it’s doubtful the rich feel properly punished and humbled. More likely, they’re just mildly annoyed.

Second, if we raise the rates too high, the wealthy begin to move their money out of the country, as happened in Great Britain in the 1960s, when 90% tax rates caused a flight of wealth which blighted that nation when money and jobs evaporated. It was “scale” in reverse: the drain on capital caused investment to falter, which reversed the advantages of compound interest, which in turn helped cause the economy to contract. We should be wary, then, of waving our regulatory guns around too much and shoot ourselves in the foot. We’d be hopping up and down on the dock, holding the wounded appendage, while the wealthy sailed away on their yachts. Bon voyage! Ouch.

The world simply no longer works the way it used to. Money behaves differently. “Scale” can make zillionaires out of nobodies while the rest of us work the nine-to-five slog. It feels unfair, and that’s because our minds are designed to resist mass accumulation in few hands.

But our DNA also builds our amazing forebrains that can reconfigure the default settings on our behaviors. We can reset our expectations. We no longer need to presume that some rich cad, who lives thousands of miles away and shares little in common with us, should nonetheless sacrifice his booty for our benefit on the specious grounds that he’s somehow part of our same village tribe. We can, instead, modify our attitudes to make room for the occasional rich person, while at the same time keeping a weather eye out for any tidal waves they may be tempted to unleash with their wealth. “Sure, okay, go ahead, sail around, but no speeding in the harbor!”

Put another way, the general rule would be: “You may earn all you like, but don’t use your wealth to steal more.” This concept is, admittedly, an awkward fit with our tribal minds. But it’s doable, and it allows freedom along with the responsibility to behave ethically. If our attitude is to punish people simply because they’re rich, then we’ll get blowback, suffering much more than they will. But if our attitude is one of broad-mindedness toward the wealthy combined with a certain scepticism, we’re more likely to strike the right balance.

Yes, by nature we’re communistic villagers. But we live in mega-cities now, and changing times call for changing attitudes. It’s worth thinking about. Bring it up at the next pow-wow.