Updated: May 21
If there is one fundamental trait that defines a market economy, it is the fact that it produces economic inequality. And most people see economic inequality as unfair because those who are wealthy live a great life of material opulence while others do not have the privilege to enjoy these same riches. Thus, the wealthy are generally accused of rigging the system to make it work in their favor. These accusations are what makes ordinary people resentful toward the rich and capitalism in general, and politicians such as Bernie Sanders and Elizabeth Warren have been exploiting these popular resentments to enhance their own political gain. Is a market-based economy an unfair system? A market-based economy is an unfair system to those who do not understand how it works. Those who do know how it works, however, take advantage of it. What’s interesting about a market-based economy is that it can work for anyone and everyone. But for it to work, one must be financially literate. There are two ways for a person to get paid in a market economy. The first way is through labor and the second way is through capital.
Being paid from your labor
Ordinary people; 99% of the population; get paid through their labor. This means that one is paid for the work he/she puts in. White-collar workers and blue-collar workers are all paid through their labor because they exchange their time and effort for monetary compensation. While white-collar workers may be earning more money than blue-collar workers in general, both pay taxes on what they earn. The fundamental problem with being paid through labor is that one is constantly compelled to work in order to get paid and the day this person is unable to work, he/she cannot get remunerated.
The other issue is that most people who are paid from their labor only rely on their wages to live off. A doctor or a lawyer is among the high-income earners in society. But if that doctor or lawyer only relies on his salary to make a living, then that person is one step away from absolute poverty because the day that person loses his or her job, it will be extremely hard for that person to make ends meet. Thus, it is extremely difficult for someone to build wealth and live a good life in a market economy if that person only lives off his salary.
Being paid from your capital
Those who reside at the top of the social hierarchy are not paid from their labor but from their capital. This is because these people own assets. An asset is anything that gains future economic value and this economic value could be converted into liquidity (cash). The main characteristic of an asset is that its value appreciates independently of one’s involvement. Thus, one gets remunerated for merely being an asset owner whether it is through rental income, dividend income, royalty income…etc.
European aristocrats, for example, never had to work because they were asset owners, and their assets generated income on their own without these aristocrats having to put in effort. Many European aristocrats were essentially landowners and real-estate owners. Thus, they would rent out their assets (land or physical property) to tenants and live off the rental income that these tenants would pay them. Someone who owns land would see his wealth soar if that land was located in an area where there are a lot of commercial activities.
Today, the wealthiest people in a market-based economy are business owners, entrepreneurs, and investors because businesses are assets that appreciate in value. As businesses appreciate in value, those who have equity in these businesses see their wealth increasing as well. This is why we end up seeing people like John D. Rockefeller or Bill Gates becoming billionaires. Because they are business owners; they have equity in their businesses, and the value of their equity increases as the business itself appreciates. Jeff Bezos, for example, has a net worth of over $134 billion according to Forbes. Why a man like Jeff Bezos has such an astronomical net worth while a mere lawyer or a doctor may have a $250,000 net worth (which is not a bad net worth to have, by the way)? This is because Jeff Bezos has equity in his company, Amazon. Amazon is today a trillion-dollar corporation, and Jeff Bezos has about an 11% stake in the company. As a result, Bezos is incredibly wealthy thanks to the shares he owns in the company. If that lawyer or doctor had their own practice, then their wealth would be much higher since they would have equity in their practice (assuming that their practice would appreciate in value as it would generate hundreds of thousands of dollars if not millions of dollars). This is because a business is scalable and there is no limit to how far it could be scaled. The more a business scales, the more valuable its stock becomes, and the more valuable its stock becomes, the more valuable becomes the equity that each shareholder owns in the company.
Owning assets is the chief element to living a financially-secured life. Moreover, owning assets encompasses two major advantages. The first advantage is the ability to secure loans. Indeed, wealthy people use loans to make purchases because loans are tax-free. Wealthy individuals use their assets as collateral to secure loans. That’s why they rarely sell their assets. The reason why Elon Musk was able to acquire Twitter was because he used his Tesla shares as collateral to secure a $44 billion loan to complete the acquisition. The second major advantage is that asset owners are only taxed on what they sell. Having one’s money tied to assets means having one’s money tied to investments. Investments are not taxed unless they are realized (sold for a profit). As a result, wealthy people rarely pay taxes unless they sell their investments for a profit. Since wealthy people use their assets as collateral to secure loans and live off these loans since they are tax-free rather than selling them, they end up not paying taxes while those who are getting paid from their labor pay the most taxes. The tax system favors asset owners as it allows them to reduce their tax liability by deducting all their expenses considered “business expenses.”
Can we then claim that the system is really unfair? No! Again, it is only unfair to those who do not understand how it works. For ordinary people to no longer remain on the losing side of the system, they must become asset owners, and the way to become asset owners is to have one’s money tied to investments.