Calling All Economists: How Many Steaks Can a Rich Man Eat?

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If income inequality is the class warrior's casus belli, the Gini coefficient, a measure of statistical wealth or income dispersion, is his battle cry. "Unfair!" barks the champion of equal outcomes, advocating equality neglectful of its impact on prosperity.

For those who understand that wealth can only be redistributed after it is created, and that ham-handed attempts at the former impoverish us all, I suggest the following rejoinder to your neighborhood class warrior. Call it the Gimme coefficient.

The Gimme coefficient compares how much a person consumes and produces in a given period. A cradle-to-grave welfare recipient has a lifetime Gimme coefficient of one - all take and no make. A person who consumes everything he produces, leaving nothing for future consumption or sharing with others, has a Gimme coefficient of one half. Bill Gates has the lowest Gimme coefficient yet achieved by mortal man, unable to spend what he has earned in 1,000 lifetimes. For you quants out there, the correct equation for the Gimme coefficient is G=C/(P+C); C represents consumption and P production.

A perfectly egalitarian community of primitive hunter gatherers has a Gini coefficient near zero and a distribution of Gimme coefficients tightly clustered around one half-babies and the elderly excepted. This may be paradise for the class warrior, but you wouldn't want to live there - especially if you are a baby or an oldster, given the high infant mortality rate and low life expectancy.

Progress occurs when innovators strive for a better life. In a market economy, the best way to improve their personal situation is by figuring out new ways to satisfy the needs of others through voluntary exchange. When innovators succeed, everybody's standard of living rises, including non-innovators who come along for the ride.

In healthy, growing economies, the Gimme coefficient of successful innovators continually drops, creating a pool of capital that gets invested into productive uses. While this creates job opportunities for the average Joe, the rewards of success also drive the Gini coefficient up. That creates job opportunities for class warriors who chase after the additional wealth; trying to redistribute it to people that have high Gimme coefficients.

Yes, the rich accumulate more stuff than the rest of us. But they only have one stomach to feed, one body to clothe, and they can only sleep in one bed each night, no matter how many mansions they build. They have access to the best medical care money can buy, but if they get pancreatic cancer they still die. Oddly enough, the richer they get the harder it is to consume as much as they produce, which is why luxury goods makers try their best to confer status on shiny baubles. After all, a Timex tells time just as well as a Rolex.

Neither the Gini nor the Gimme coefficient says a word about a society's absolute standard of living. If the poor's absolute standard of living goes up, but that of the rich increases faster, the Gini coefficient rises; lifting the class warrior's ire along with it. Never mind that by any conceivable measure the poor in America today are objectively better off than at any other place and time in history. If they are less equal, this is a cause for war.

As recently reported in The Wall Street Journal, the percentage of low-income households with a computer will soon surpass 50 percent, up from less than 20 percent a decade ago. The percentage of low-income homes with six or more rooms (not counting bathrooms) rose to 30 percent from 22 percent over the same period. Air-conditioning (something I only experienced in movie theaters as a child) is up to 83 percent. Dishwasher ownership is up to 30 percent. washing machines 62 percent, clothes dryers 56 percent, microwave ovens 92 percent - you get the picture. Every one of these necessities we once considered luxuries was produced by an innovator that raised the Gini coefficient.

Poor people throughout history, living hand to mouth with Gimme coefficients near one half, starved on a regular basis. Poor people in America with Gimme coefficients approaching one seem to get fatter every year. And while those with high Gimme coefficients usually get the newest goodies last, the miracle of capitalism is that they get them at all.

So get with it, you economists. Let's start seeing some Gimme coefficient studies comparing different countries, different people, different periods in history, and different economic systems. The average Gimme coefficient in Greece skyrocketed after the creation of the euro. How's that working out? What were the Gimme coefficients of the so-called robber barons of the Gilded Age and how do they compare to the Gimme coefficients of today's Forbes 400? What happens when people with low Gimme coefficients flee a state like California, leaving those with high Gimme coefficients behind? What becomes of democracy when a majority of voters have Gimme coefficients above one half?

There is one hoary counter-argument to the logic presented above, and that is Karl Marx's labor theory of value. This theory holds that labor is the sole source, and rightful owner, of value and that profits retained by those who employ labor represent theft. Call it the theory of muscle over brains, ascribing neither value nor reward to the risk-taking innovator, the efficient organizer, the discerning investor, or the frugal saver.

Raise your hand if you still believe this discredited theory. Now, tell us where and how the labor theory of value has created a workers' paradise when put into practice? In many places where class warriors bask in a sea of equality, rulers have to build walls to keep people in. Except for one and only one place where the Gini coefficient is a perfect zero, a place where absolute equality reins and there is no cause for envy, a place we will all one day call home: The graveyard.

 

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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