Two Short Parables

Imagine a little town on an island. The townspeople are hardworking and, with their combined efforts, have managed to create a degree of meager prosperity for themselves. Some of them are farmers, some graze sheep, and some practice a variety of trades: making shoes, baking bread, etc. Each person produces what they can, and on the market day the town is busy with everyone buying and selling their wares. Chickens are sold for gold which are used to buy some carrots, or perhaps taken home to save up to buy a new plow from the blacksmith. But despite making the best of their resources, the townspeople are no strangers to want. It’s hardly uncommon, especially in years of poor harvest, for people to curse their fortune: “If only I had a bit more gold, I could buy another loaf of bread,” thinks one of the villagers to themselves; “If only I had a bit more gold, I could replace my old worn out clothes,” mutters another under his breath. Whenever the townspeople dwell on these kinds of thoughts, they can’t help but think about the dragon. You see, at the center of this island is an enormous dormant volcano where the grand dragon sleeps atop a gleaming horde of gold, waking only to devour the rare intruder who is foolish enough to venture inside.

Then one day, a brave hero slays the dragon. She triumphantly returns to the town with wagons full of gold, distributing the new wealth to every man, woman, and child. Hooray! Everyone is grinning and thinking the same thing: my days of scraping by, with barely enough gold to buy my daily bread, are over.

Across the sea there is another island, very similar to the first. Except instead of a volcano-dwelling dragon at the island’s center, this island has a grand palace where the island’s king lives. The king has a huge vault filled with gold (there’s some story about his great-great-grandfather killing a dragon, though no one is quite sure if it’s true), which he draws from to finance his kingly lifestyle. Every month he throws a lavish feast, and commissions new tunics and robes for himself from the town’s tailor. There’s almost always some kind of renovation being done to the palace: adding a turret, expanding a hall, or whatnot. Teams of servants are employed to wait on his every need.

Then one day, the king was walking the palace grounds, became red in the face and, clutching at his chest, collapsed to the ground, dead. The king left behind no heirs or family, so it was decided that the king’s fortune would be distributed among all the townsfolk. Everyone was very excited to receive this windfall. They were all grinning and thinking the same thing: my days of scraping by, with barely enough gold to buy my daily bread, are over.

The King is Real

After the gold is distributed to the townsfolk in each of these stories, are they better off than they were before? Why? What’s different about the two stories?

Consider the first story. After the dragon is slain, the fields produce the same amount of crops as before. The chickens lay the same number of eggs. The cobbler is able to craft the same number of shoes each week. Nothing has changed about the productive capacity of the island, so the townsfolk might be disappointed to realize that despite having more gold, there’s no additional bread to be eaten. In the real economy, nothing has changed! Distributing the dragon’s gold may not have helped them at all.[^1]

The second story, with the rich king, differs in significant ways from the first in terms of how the events of the story impact the real economy of what is getting made, and who gets it. While the dragon and the king both have giant piles of gold that get redistributed to the townsfolk at the end, a key difference is that the king participates in the real economy, consuming goods and services, whereas the dragon does not. Consequently, the death of the king has an impact that the death of the dragon didn’t: all the food that would have been served at the king’s feast can be eaten by someone hungry, the clothes that would have been made for the king can be worn by someone in rags, and the laborers who would have been renovating the palace can instead build new homes in town. Some people are better off in this world!

It may sound like redistributing the king’s wealth made the town better off, but that’s not quite what happened. What improved the lives of the townsfolk was redistributing the king’s consumption. With so much of the town’s output flowing to one person, once they stopped doing that after the king died there actually were more resources to go around. The townsfolk didn’t actually need to take the king’s gold at all, they just needed to stop working for him and work for themselves; had they decided to permanently seal the king’s fortune inside its vault instead of handing it out, it would have had basically the same effect on the townsfolk’s overall welfare. The king’s gold was economically relevant only insofar as it represented his future consumption. Because the dragon never planned to go into town and buy anything, it had no hypothetical claims to the town’s goods and services, so its massive gold horde was inconsequential to the townsfolk’s quality of life.

The poor townsfolk on both of the islands were very eager to get more gold into their pockets, but gold wasn’t actually what they wanted. They wanted bread, shoes, and a new thatched roof over their house. Gold just happens to be a unit of exchange in their little economy. We often forget that money is basically imaginary; it is the measure and mediator of the real economy, but it is not the economy itself. What goods and services are produced, and who gets to consume them: that’s the real economy, and it’s the real economy that actually matters.

Food for Thought

Wealth inequality is one of the most talked about social problems in America, but if my highly contrived parables were successful at priming your intuition, you’ll hopefully be open to the idea that wealth inequality, per se, is overrated; the true root of economic injustice is consumption inequality: this distinction may seem pedantic, since there’s obviously a close relationship between wealth and consumption. The reason you own gold, cash, stocks, or whatever, is because you intend to redeem them for stuff in the real economy at some point in the future. So even if you agree that consumption inequality is the actually important thing, in practice wealth inequality is still a useful proxy for the former (it’s a lot easier to measure and talk about at least).

Nevertheless, there are important nuances between the financial economy (wealth accounting) and the real economy (what gets made, and who gets it). If you try to translate between the two, sometimes narratives about wealth inequality are qualitatively the same when thought of in terms of the real economy—but sometimes they aren’t. The vignettes below are left as an exercise for the reader: how do you feel about them initially? If you imagine them in terms of the real economy of who gets to consume what, does the situation appear different?

1. An entrepreneur closes a major funding round, and at the new valuation their company has officially reached “decacorn” status, valued at over $10 billion. The entrepreneur still owns 10% of the company, so they are now a billionaire on paper based on the value of their stock. The entrepreneur hasn’t sold any of their stock, nor do they intend to realize any of these capital gains any time soon.
2. Sam Bankman-Fried runs a major cryptocurrency exchange and is estimated to have a net worth of $24 billion. He also lives in an apartment with roommates, does not own a bed (a bean bag chair is good enough for him), and almost never goes on vacation. My net worth is significantly less than $24 billion, to say the least. I live in a house with just me and my wife, have a collection of respectably bourgeois furniture, and enjoy traveling at every opportunity.
3. With $50 billion, Jeff Bezos could do anything he wants. Live in any house, buy the world’s biggest yacht, build a spaceship just so he can take it for a ride—truly, the only limit is his imagination. Suppose congress passes a law to levy a one-time wealth tax on the ultra-rich where he must pay two thirds of his net worth of $150 billion to the government.

Addendum: after writing this, I found an old Scott Sumner essay that lays out a lot of these same ideas, perhaps better than I have.

[^1] I acknowledge that there’s some kind of monetarist take about how increasing the gold supply might increase aggregate demand which stimulates investment yada yada… doesn’t really change the main point here.