Much of the current debate about wage inequality misses several fundamental realities. The first reality of a growing economy is that the greatest resource a society has is the creative drive of it’s citizens. What creates the most wealth for both individuals and societies is the brain power and motivation of people. I restate this, and will again, intentionally because one of the most harmful misunderstandings in economics is that natural or material resources are the source of the greatest wealth. To be sure, gold, oil, land and access to capital, among other things, have powerful wealth creating potential. But by themselves, they are small in comparison with the power of an idea that helps advance society which is vigorously pursued. Any natural resource or wealth that is not used to it’s greatest potential will not necessarily create wealth. In fact, it may even decrease wealth.
To understand the power of ideas in wealth creation, we can look at several countries that have the same land and people but have differing societal structures. Take the Koreas. North Korea, a Socialist dictatorship for decades, is one of the most destitute places on earth. However, the democratic South Korea is a world-wide economic powerhouse. What is the difference in resources? One is a centrally controlled socialist dictatorship and the other encourages it’s citizens to think, create, take risks and engage themselves in bettering their circumstances. The south allows for great success for those willing to put in the energy and with the creative spirit to succeed. Does everyone in the South succeed? No. The distribution of creativity and drive is not equal among any group of people. Is that fair? That’s a bad and unrealistic question. There is a natural distribution of talent, intelligence, drive and ability in any group. There are people that are generally better looking than others. Is that fair? However, in a free society, all people have the same basic equation open to them: use your talents and drive to accomplish as much as you can. Some have natural advantages and some have natural disadvantages. There can never be equality of outcome in a free society. Only equality of opportunity to seek to improve oneself.
Look at the history of Germany over the last 40 years. Divided Germany after World War two gave the world a prosperous West Germany with a more open and free culture. East Germany, by contrast, was a socialist system of forced equality of outcome that is demanded by socialism. The result? East Germany was poor and miserable. The only equality of outcome that is possible is when everyone is poor and miserable. This is the natural and predictable result of socialist economics. It has been proven time and again throughout history. West Germany had poor people, of course. But in free societies the poor, whether by choice or by nature, are overall far better off than the standard in the forced outcome society. Again, the same German people in the same basic area with the same resources had dramatically different outcomes. Solely based on the structure of society. It is worth noting that since the Berlin Wall fell and the East/West divide in Germany was eliminated, the entire Germany has excelled economically.
There are many more examples, but these illustrate the point that the best way to improve the lives of citizens economically is to restrict centralized control to only what is needed to protect individual and organizations rights. The best way to increase wealth in a society is to encourage the “mining” of the massive natural resource which is individual motivation, creativity and drive. The best way to encourage that mining is to allow people to enjoy the fruits of their labors and talent as they create value and create wealth. The beauty of this idea is that first, it is reality based. It’s not based on an emotional appeal for “fairness” or forced equality of outcome. As shown above and through the overwhelming abundance of evidence, you cannot improve living standards by forced equality of outcomes. Instead, you simply force equal misery on all.