Can Anyone Un-confuse Me?

I’m unhappy that I have to comment on the video below, but I don’t see that anyone else making the point.

I am not at all “surprised” by the video, but let me lay out how I’m getting tripped up; wealth and income have two very distinct technical definitions that are very often confused to mean the same thing by the layperson. Wealth is net assets owned by a specific economic unit, income represents the ability to save or consume, usually denominated in money. Being rich and being wealthy are not the same thing.

Ceterus paribus, a higher income certainly enables the accumulation of wealth over time. It is also true that being rich and being wealthy are certainly correlated. But that need not be the case. The determinants of income and wealth at the margin are very different. In traditional models, income is determined by marginal productivity. Wealth is a function of income and time preference.

However, it is almost certain that when asked the questions in the survey that introduces the video, the respondents were confusing wealth to be income, and what they were actually desired was not a certain distribution of assets within an economy, but rather a certain distribution of income — these are completely different things that cannot be interchanged in the way that the video refers to them. Either the preceding theory is correct, or the fans of this video have a complex theory of the determinants of wealth that I don’t know about…or maybe they just advocate a eye-popping level of redistribution and paternalism? Also, do the makers of the video understand this (quite obviously not, as they confuse income and wealth in the video itself)?

While there are certainly other conceptual problems with the video (i.e. “middle class” is not a range of income), my confusion is stemming from the popularity of the video among people that I know that should know better. It’s really taking even intellectuals by storm. Can anyone un-confuse me?

Also, Cullen Roche discusses the Pareto principle.

P.S. If my theory above is not correct, then why doesn’t the video include assets owned by various levels of government as wealth “owned by the people”?


5 thoughts on “Can Anyone Un-confuse Me?

  1. I agree the video uses wealth and income interchangibly, causing much confusion. Most people don’t particularly care about wealth inequality, nor should it particularly matter for utility. If I make a million dollars a year and spend it all on consumption, people would be quite jealous of that lifestyle. If I save that income and live a modest life, there would be far less jealousy. Furthermore, given a large income, saving generates positive externalities, so discouraging it through wealth redistribution can have pretty profound negative impact. I think most of the people they interview probably don’t get the distinction.

    It doesn’t appear as if the graph counts liabilities either. It’s been awhile since I’ve looked at the data, but last I checked about half of Americans actually have negative net wealth. Even if you have a sizable bank account and no credit card debt, you might have an underwater house and student loans, and boom, that’s -$100k wealth.

    Life cycle effects are huge for wealth. A young doctor might have high expected lifetime wealth, but they’re going to be in a huge amount of debt from med school until they are 40, so their wealth will be negative despite a high income. On the other hand, a blue collar worker who is about to retire could easily have half a million in net wealth. Let’s say a $300,000 house, a pension worth $100,000, and $100,000 in other investments.

    Government assets don’t matter for jealousy. Maybe Yosemite is worth 100 billion, but I can’t use that to compare myself with Bill Gates. That’s one theory of why public transportation is so utilitarian. No one can signal with it, so you might as well make it functional. Everyone drinks the same Coca Cola, has the same iphone, and looks at the same internet, but no one counts that when they compare themselves to others. People worry about differences, not levels.

    1. Thanks for the thoughtful reply. I agree with everything you said.

      When I was initially writing the post, I was toying with putting in a simple example of the difference between income and wealth using two people and peanuts…but I decided against it.

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