Keynes versus Friedman

Why the Rich Keep Getting Richer

Margareth Thatcher would argue that we should not worry about the increasing wealth gap between the rich and poor so long as the poor are also getting richer. On the other hand her opponents would point out that the rich are getting richer much faster than the poor. Why is that?

It is the classic debate of macro-economic theorists John Maynard Keynes vs. Milton Friedman. In essence Keynes warns us that the increasing wealth gap is bad for the economy whereas Friedman claims it is irrelevant. But neither theorist explained why the rich are getting richer faster than the poor. It comes down tobargaining power.

Imagine two men are paid to dig a primitive water well by hand. The job pays $100 total. But one man is a millionaire and the other is broke. The rich man does not feel like doing manual labor, but both men are required to do the job or nobody gets paid. The poor man begs the rich man to help him out, because he really needs the money. So the rich man proposes to the poor man, “you do all the work for $1 and I manage you for $99.” The rich man has a better bargaining position: he does not need the money anyway.

That’s why the rich get richer faster. Money and power are in a positive feedback loop with each other: more money means more bargaining power, more bargaining power means more money.

Comments

Creative Commons License
Keynes versus Friedman by Mathijs Koenraadt is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.