Opportunity

How The Very Rich Get Richer, An Example

This is one way the gap increases dramatically between people, even when there are laws to prevent that from happening, and you can apply to similar situations in other aspects of economic and social life.

Let’s say there is a loophole in the tax system. This loophole allows certain people to manipulate the system somehow and pay 10% less in taxes than they should. People start exploiting this loophole and save some money while the government makes less.

The party will soon end, when the government comes up with a new regulation, a patch basically, that covers up for the previous loophole. Now it is almost impossible to get away with that loophole and people are back to paying the full tax, and they are not saving that 10% anymore.

This new patch is not perfect, as everything in life, and it will create new loopholes in the process, but it’s still extremely difficult to get past the new regulation.

But… There are the very big guys. These people will be able to afford the country’s top tax consultant, who will hire 4 specialists in the field, spend months analyzing their specific situation, come up with a plan, and charge them, let’s say, three hundred thousand dollars for their time. The plan they suggest will also cost half a million to implement. Total cost: $800k.

Not much, if through this new plan they end up saving millions every year.

The smaller guy, let’s say, Mr. $200k cannot afford to hire such consultants, and therefore will not. He will go back to paying his taxes, and will have to wait a few more year to increase his wealth by tax savings.

The small guy? Sorry! Maybe in another lifetime.

Let’s also remember that the 10% reduction in taxes for the big guy is more than the lifetime savings of hundreds of not-yet-rich people. With this huge advantage, the big guy invests in getting more powerful in the market, and enjoys a big competitive advantage over the smaller guys.

With every new cycle of regulations and loopholes the same happens, and the gap widens. The only way out of that I can think of, is either the big guy going bankrupt, or the whole system collapsing.

Why Equal Opportunity Doesn’t Work

Because each of us is different. We all have different levels of skill, discipline, and commitment, and these also vary across fields. That’s basically why.

Imagine leaving a bunch of people, each in a separate room for six months, give them equal amounts of food, have them in a similar environment, and only give them a guitar, for example. A tiny percentage would love the opportunity of playing the guitar every day, some will like it, play a little and then give up, and the majority would not know what to do with that instrument. By the end of the experiment, the musical abilities of the group will have changed, with the people who practiced everyday (who already had better musical abilities than the rest) having improved much more than those who didn't practice. The difference in skill would be bigger than before, and their qualification in the field of music would therefore be completely different by the end of the experiment.

A similar thing would happen if you put the same people with say, painting materials, we would have a different set of people taking up painting and practicing, and our musicians might not improve a bit in painting because they might not be interested in that.

This is always happening in markets. We never have equal opportunity anyway, but even if we managed to create it in a perfect world, quickly that equilibrium will be disrupted by people’s different abilities.

It’s not only about ability, many people don’t want to be at a certain level of pressure, or responsibility, or risk certain things in their lives, so the opportunities go to the people who do. I think we should simply hope for fair, as opposed to equal opportunity, which is much easier said than done. Giving the people who have the skill, ability, and desire certain privileges, and allowing everyone to evolve at their own pace is better in my opinion.

Remember that the elite in a certain field are mere followers in other fields where others lead them. It’s not an absolute system.