Wealth of Nations

In 2011,  Harvard business professor Michael Norton and Duke behavioral economist Dan Ariley asked 5,000 Americans how they thought the country's wealth is distributed, and how they thought it should be distributed.  The results were striking.

But first let's talk about distributions.  When we hear stats about economics, we get presented with 'average' data a lot.  Mean wages.  Median home prices.  GDP per capita.  Measures of central tendency can be extremely useful for boiling a complex situation down into a single metric, but that reductive process also boils off important information.  Take a look at the wealth distributions (in thousands of dollars) for three hypothetical countries of ten citizens each.

Even though the countries all have the same mean wealth, the distributions paint three very different pictures of how resources are allocated in each place.  In Country A (blue), for instance, wealth is distributed evenly among the population.  There are no haves, and no have-nots.  By contrast, Country C (green) has a huge discrepancy between its richest and poorest citizen, by more than a factor of 50.  Country B (red) falls somewhere in between: there is a wealth gap, but there's also a smoother transition as we move along the axis from the least to most wealthy.

You can imagine these countries scaled up to be more country-sized, with each bar representing a decile, and start to think about what life might be like in each place.  Does Country A's flat distribution seem to offer much incentive to work?  Are the differences in quality of life so large between Country C's richest and poorest people that they lead fundamentally irreconcilable existences?  What kind of wealth distribution do you think a country should strive for?  Where would you want to live?

Here is another picture of the same three countries, this time emphasizing how wealth is spread among the people.

Country A is pretty uninteresting, but that's what Socialism's box plot looks like.  Boring.  It serves as a good baseline, though -- what absolute equality looks like.  The other plots are incredibly interesting, and here's why.  It's time to let the cat out of the bag.  Remember that survey from before?  Well, we've scaled the numbers down to make them a bit more manageable, but Country B's plot is what Americans — rich and poor alike — think an ideal wealth distribution would look like.  Country C, clearly much less equitable, is what people think the wealth distribution in the U.S. looks like.  That in itself is a little discouraging, but at least people are cognizant of the fact that we have a large disparity between the top and bottom 10% of citizens.

But the truth is almost literally incredible.  The new plot below (black), shows the actual wealth distribution in the U.S.  It doesn't even fit on the same scale.  About 75% of Americans actually have less wealth than people think the poorest 10% of Americans ought to have in the ideal case.  And the wealthiest 10% control more than 800 times as much wealth as the bottom 10% do.  In fact, the top decile controls more than 80% of all the country's wealth, while the bottom half of the population controls only about 2.8%.

The gap between the way people think things are and the way people think things should be is disheartening.  But the gap between the way people think things are and the way things really are is shocking.  If you want to see a demonstration of what we've been talking about, watch this beautifully done video.  And think about the kind of country you might want to live in.

Teachers, want to have this discussion in your classroom?  Check out the lesson materials on our site!

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