Economics: Rich Making Major Error?

Imagine a small village with a local “Big Man”. Big Man gets to profit off everyone else. It may or may not be clear to anyone what, exactly, Big Man does, but it is widely agreed that Big Man is Too Big to Fail, so he gets to keep on doing it.

Every year the villagers grow crops. They eat some, they save some for seed in the following spring, and the Big Man takes a cut. Suppose that they eat 80% of the crops, save 15% of the crops, and the Big Man takes 5%. If it only takes 10%, however, to plant the same amount of crops as the current year then the total number of crops produced each year is getting larger. In other words, the villagers are getting richer and (without doing anything more) the Big Man is also getting richer.

Let’s suppose, however, that the Big Man gets greedy: he wants to get richer faster. If he is patient and smart he’ll take a smaller cut, people will plant more and he’ll get richer as everyone does. It’ll be slower at first, but grows exponentially.

If he’s dumb and greedy, he’ll raise the amount of his take from 5% to 10%. Now the Big Man is getting richer much faster than before, but the total number of crops never gets bigger. In other words, no one but the Big Man is getting richer. His wealth grows faster (at first) than in the first case, but it’s linear growth: he’ll never get as rich as he would have in the first case AND he’s now keeping everyone else from getting richer.

What if Too Big to Fail Big Man is really, *really*, greedy. Every year he takes a little more until he is taking 11%. Maybe his take crept up very, very slowly. However, notice what happens when his take hits 11%: there is no longer enough seed to yield the same size harvest next year. So Big Man gets richer faster the FIRST year he does this. After that, however, the entire wealth of the village starts going down — including his take. At that point, any additional percentage taken by the Big Man just makes the wheels fall off even faster.

If that made sense to you, go read this great post on wages in the U.S. over at The Big Picture.  Now draw your own conclusions as to whether or not our Big Men are eating our crop seeds or just skimming.   Personally, I think that by wearing down the middle class economically, the rich are reaching a dangerous tipping point.  If no one can afford your products and services, how do get richer?  How do you even stay rich?

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