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Work and prosperity
17 August 2012

All aboard the libertarian Titanic!

When people complain about the rich getting richer, they’re usually thinking about the interests of those who aren’t rich. But why would the rich want to get richer? Surely, after a certain level of wealth, there’s not much point – there are only so many caviar sandwiches one can eat in a lifetime.

An intriguing thought-experiment on the Interfluidity blog helps answer this question:

  • "Consider a libertarian Titanic, whose insufficient number of lifeboat seats will be auctioned to the highest bidder in the event of a catastrophe. On such a boat, a passenger’s material needs might easily be satisfied — how many fancy meals and full-body spa massages can one endure in a day? But despite that, one could never be ‘rich enough’. Even if one’s wealth is millions of times more than would be required to satisfy every material whim for a lifetime of cruising, when the iceberg cometh, you must either be in a top wealth quantile or die a cold, salty death."

In the language of economics, the moral of the story is this:

  • "The marginal consumption value of passenger wealth declines rapidly, but the marginal insurance value of an extra dollar remains high, because it represents a material advantage in a fierce zero-sum competition."

Or, in other words, the demand for consumer goods and services is limited, but that for insurance is unlimited.

Obviously, the real world doesn’t usually work like the ‘libertarian Titanic’ – so, what sort of "insurance" are we talking about – and why would it be in short supply?

It is conceivable that, in a disaster, a very rich man like Bill Gates might be able to buy more protection than, say, Alan Sugar, but it’s unlikely that either man is haunted by such a scenario. Rather, what they’re worried about – like everybody else – is keeping their money safe. Unlike everybody else, however, the rich can’t just stick their millions in a Post Office savings account. That sort of money requires specialist management, which is, in effect, a competition for the best investment opportunities.

This, of course, is all rather circular – the more money you have, the more you need to have in order to keep it safe. But such is nature of wealth, which is why Bill Gates is so wise to be giving his away.

And the relevance to the rest of us?

  • "In ‘middle class’ societies, wealth is widely distributed and most peoples’ consumption desires are not nearly sated. We constantly trade-off a potential loss of insurance against a gain from consumption, and consumption often wins because we have important, unsatisfied wants. So we employ one another to provide the goods and services we wish to consume. This leads to ‘full employment’…"

Thus, if an increasingly large slice of the pie falls into the hands of the sated rich, then there will be less consumption, lower demand and fewer jobs. At the same time there will be more ‘surplus’ money chasing the safest investment opportunities – which is how you can have record low interest rates at a time of rising unemployment and growing government debt.

All of this might correct itself if the rich had to put their money into productive ventures in the real economy rather than the various speculative bubbles that have caused so much trouble of late. But, then, why take a risk on real investments when governments basically underwrite the bubble investments by propping up the banks?

In effect, the state is subsidising the rich by providing them with free insurance. It is time that they paid for their own.


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