Sunday, October 23, 2011

The Relative Value of Money

Here is an excellent bit by Charles Stross on what $100 means to you from the eyes of somebody living at the bottom and from somebody living at the top of the economic heap:
A valuable conceptual tool for reasoning about wealth from the outside (I assume that you, like me, are part of the 99%) is the law of diminishing marginal utility.

Loosely put: if you are homeless and destitute in the USA and somebody hands you a $100 bill, that money can change your life. It's enough to feed you for a couple of weeks to a month, to get you a new set of clothes, to buy time in a net cafe to search for a job online, to find shelter for a handful of nights during terrible weather.

But if you're Warren Buffett and you spot a $100 bill lying on the ground while you're out for your constitutional, it's barely worth the time it takes to stoop to pick it up; the annual income of the fund Mr Buffett administers can be approximated to $1Bn, which works out at $31.70 per second. Of course, being Warren Buffett, I'd expect him to pick up the banknote; he didn't get to be where he is today by ignoring free money. But it's hardly going to change his life.

The diminishing marginal utility law dictates that the more money we have, the less utility we get from any additional incremental gain. And this bites the top 1% very hard indeed.

Examine the world around us from the point of view of someone with a net income of $5M/year ...

Food is essentially free; you can afford to spend $1000 per meal, three meals a day, in the most expensive restaurants in London or Tokyo or Manhattan, and not make a dent in your income. (Oddly, even the hyper-rich don't typically spend $1000 on lunch every day: a more realistic expectation might be to dine out expensively twice a week, for $100K/year, and have the best of everything in-house the rest of the time, with a live-in chef, for another $100K/year.)

Clothing is essentially free; want a different $5000 suit for every day of the week? That's going to set you back only $35K! Spouse wants a dozen designer evening gowns a year? That's still going to be on the low side of $200K.

Housing is essentially free; $1000/day will rent you a penthouse suite in a five star hotel in Manhattan, while your mortgageable income will let you buy a palace in the $5-20M range. (There are places where you may need to spend more than $20M to buy a house; but not many of them.)

You don't have to do housework, interior decorating, cooking, driving, DIY home improvements, flight booking, or shopping (unless you want to). People can be hired to do any of the above for rates ranging from $15K to $100K per year, depending on the complexity of the job. And you earn $100K per week.

Travel: you have a car, or cars. Any cars you like. And a driver and a mechanic, either full-time employees or time-shared via an agency or a very exclusive garage. When you fly, you either go first class via the express security lane, or (airports are tedious) your driver takes you straight to the steps of the biz jet you hired. You are probably not rich enough to own a jet of your own, without making sacrifices elsewhere, but you can certainly afford to hire one once or twice a week.

Education: you, and/or your children, can afford any education you like, without having to go into debt to fund it. Even if the kids aren't that bright, you can afford to hire tutors to push them in just the right direction. And the high end universities where the children of the rich go to learn how their social class networks usually look kindly on a donation in six digits to their trust.

Law: you can afford the best defense lawyers, period, and meet any reasonable bail conditions. There's no guarantee that you can't be prosecuted and imprisoned if you break the law — especially if you commit high crimes against the 0.5% (Bernie Madoff springs to mind) — but the system can be bent, if not broken, on your behalf.

(Do you notice a pattern developing here? We're climbing Maslow's hierarchy of needs.)
And this:
Finally, there's the point (unpleasant to contemplate for some) that income inequality can't increase beyond the level it has already reached today without massive and unpleasant social consequences, some of which may be non-obvious side-effects of the drive towards a security state strong enough to protect the elite. By some estimates, 20-25% of the labour employed in the USA today is guard labour, work devoted to preventing the poor from expropriating the rich. Widespread application of anti-terrorism statutes to criminal enforcement suggests to me that the War on Terror has proven its utility as a useful pretext for expansion of the guard labour state; in light of which, reversal of Griswold v. Connecticut would pave the way for the deployment of ubiquitous surveillance techniques. (Which suggests a possible reason why the moneyed-elite faction of the Republican party are willing to tolerate the demands of the abortion-and-contraception-hating religious wing of the party.)
Go read the full original post to get the embedded links and/or to look at the broader issues that Charles Stross addresses in his post.

The poor have only one consolation: money can buy power & goodies, but it can't buy the one thing we all have in short supply... life. In the end we all die. The rich can buy some doctors and medicine to delay it a bit, but Michael Jackson's millions and private physician actually helped shorten his life, not lengthen it. And Gadaffi's $200 billion in fact shortened his life because his greed and cruelty provoked his people to revoke his membership in Libyan society.

What I don't understand is the greed of the rich. Money isn't a "possession". Since life is transitory, we "own" stuff for a while then die. There is no reason to impoverish those around you so you can have "more"... because in the end you can't have more. We only have this one world to share. The rich need to realize that the secret to a better life for themselves is to join in and make a better society. Nobody wants to deny those who have created wealth from getting a nice pile of the stuff to enjoy. But when your wealth leads you to corrupting politics to let you squeeze everybody around you to "contribute" to your pile of lucre at the expense of their lives, then you have gone too far. And like Gadaffi, the society around you may just "cancel" your membership in the broader society. That's what Marie Antoinette and her king Louis discovered.

Here is an alternate view of "citizenship". I find this story uplifting and powerful. It is the story of Luma Mufleh:

When some billionaires started founding charities and competing to give away their wealth, I started to become hopeful. But that hasn't stopped the slide into a Gilded Age "us versus them" world where the ultra-rich sucede from the rest of society and wall themselves away while hoarding more and causing the rest of society to crash as they suck all of the money out of the hands of the bottom 99%. Maybe with the Occupy Wall Street movement the rich will get the message (or more likely, political power will be wrested from them and tax laws can be returned to a progressive tax system that keeps the rich from sucking society dry of cash). I just wish more of the elites could see Luma Mufleh as a role model.

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