Okay.

Welcome back to Gary’s Economics.

Today, we are going to do the second video

in our course on inequality and the economy.

This one is called What is Wealth inequality?

And if we get time we'll go on

to how it affects the economy.

This is really the heart of my economic understanding.

It's what I make my money on.

And it's really important for all of our videos,

so I hope you enjoy it.

All right.

So second video, first video was What is Wealth.

And that was just explaining

that we're not talking about jobs.

We're not talking about income.

Wealth is about assets, physical assets.

Who owns the assets.

So in this country it's

largely property, not just housing,

but also commercial property,

offices, shops, restaurants, bars,

factories, natural resources, like the farmland,

the

power plants.

So the generation of essentials like, food and energy.

Who owns those things and also debt.

So some people owe debt to other people.

That is wealth.

Not about jobs is about who owns the wealth.

And this video is going to be about

what is wealth inequality.

So when we talk about wealth inequality,

it's about who owns those things.

I think the best way to explain

this is through imagining

two separate kinds of economies.

One which is relatively wealth equal.

So all of that wealth is quite evenly distributed

throughout society.

And one which is very unequal.

So where all of that wealth is owned by,

you know, a small handful of families.

So in the wealth equal economy,

basically everyone's going to own like a big chunk of

the house they live in.

Everyone will pretty much own the house they live in,

but they're also going to own

a lot of the productive capacity in society.

So the way we see

that nowadays is basically

everybody has like a big stock portfolio.

So everybody owns their own house

or a chunk of their house.

And they also have like a stock portfolio,

which means they own some of the corporations.

Through those stocks they're going to own,

you know, some of the commercial property,

some of the buildings, some of the skyscrapers.

They'll also own a chunk of the natural resources.

So, they’s own a little bit of the farmland.

They’ll own some of the power production,

that's a wealth equal economy.

Everybody owns.

You know, not everybody's going to own the same stuff,

but everybody's got like a decent chunk of the wealth

that exists in the country.

That's the wealth equal economy.

Now, the wealth unequal economy.

This is where basically everything is owned by, like

a small elite.

You know, it could be,

you know, it could be a thousand people.

It could be,

it could be a million people, 1% of the country.

They own everything basically.

So in that economy, ordinary people don't own anything.

They don't have a stock portfolio,

they don't own their own house

so they're likely to be renting

or they're likely to be owning with a big mortgage.

and everything is owned by this small elite basically.

When you have this situation,

then what you get is

like significant transfer payments.

So when you have the equal economy,

there's not really a lot of transfer payments.

So if there are,

they sort of go around because okay,

maybe you own the shops

that I shop in,

but maybe I own the farm where your food comes from,

you know, sort of ends up kind of balancing out.

We all have a bit of passive income.

There's no significant transfer payments.

But once you have a very unequal economy,

you have these big transfer payments.

So let's assume I'm

sort of rich elite

and you're just like a regular person.

One thing to recognise straight away is

the amount of wealth owned by the wealth owners

per person is much, much,

much higher in the unequal economy.

Because all of the wealth exists

but now, like it's only distributed between

like a thousand people as opposed to like,

you know, this country, 60 million people.

So I own everything.

And you're paying me,

you're paying me rent for your house,

you're paying me for the food that you eat.

You're paying me for the energy that you consume.

Every time you go

shopping, you're paying me to go to the shops,

every time you go to the pub. Because I own the pub.

I own the shop, I own, you know, I own the airport.

You know, I own the hospital. I own the school.

So every time, you're constantly

having to make this transfer payment to me.

That's the wealth unequal economy.

So what are the differences?

I mean, the first obvious difference

is in a wealth equal

economy, you've got a lot more financial security,

and you've got a decent passive income.

Obviously, if you

if you had a decent chunk of the country's wealth,

you could probably survive

without working for the same amount of time.

Firstly, because you've got this passive income,

you've got this stock portfolio.

Secondly, because you're not paying rent,

you're not paying a mortgage

because you own the property that you live in.

So you've got quite a lot of,

a lot of financial security.

You've got passive income.

If you want to stop working for a bit,

if you want to like, pursue your hobbies,

you can do that.

Whereas in the wealth unequal economy,

you, the ordinary person doesn't

have any financial security, right?

You don't have any savings

you can run down if you lose a job,

you know, you basically you're not paying the rent.

So you're much more financially

insecure.

The flip of that is

that the rich have this massive, massive passive income

that they've got every year,

every year, every month, every week, basically.

What we should point out is like the real world

is somewhere in between this.

So there are some countries

which are super, super, super unequal.

You know, if you go to sort of

some countries in, in Africa or Latin America or,

or India,

wealth is very, very unequal.

Ordinary people don't own much.

If they do own stuff, it's like sort of,

they usually have debt behind it.

But you know, this country we're in

now is it's like a middle point.

So I'm not saying that this country

is that super wealth unequal space.

We'll talk about that later

but the real world is somewhere in between.

Yeah.

So that's what you have in the unequal economy,

you have these two groups,

this very, very large group that has no real security.

They have to work in order to live.

They don't have much passive income.

And you have this very small group

that is extremely wealthy

and has this massive passive income.

And, you know,

depending on how much inequality you have,

those groups can vary in size basically.

So when you have this large wealth-less group,

they're insecure,

they don't have a lot of income.

So basically most of what they get

is going to get spent on essentials.

the flip side of that is

when you have a very,

very wealthy, wealthy group,

they’re small but their income is massive.

You need to understand

it's important to understand the economy,

the economics of inequality,

the way that very, very wealthy people spend,

which is basically that they

save almost everything they make.

And this is not because wealthy people are like crazy,

they're obsessed with saving.

It's just simply

because their passive income is so big.

So, you know, I often use example of Rishi Sunak.

His wealth,

according to the Sunday Times, is £700 million.

So he'll make like

like £1 million a week passive income.

So it's not that he's obsessed with saving,

but you know, if you have £1 million

a week, passive income it’s basically impossible to.

Maybe someone can manage it,

but your average person

is making £1 million a week passive income.

You know,

even to spend for me, even spend £10,000

I can't even imagine

how you could spend £10,000 a week.

But because their income is so high,

they simply basically have no choice but to save

the money. So,

so in an unequal society, you have a big chunk,

a big chunk of people

on essentials,

small group of people, but with massive income,

just saving, saving, saving, saving, saving, saving.

Whereas in the wealth equal society,

because everyone is quite secure,

they will tend to live

what nowadays

we consider kind of middle class lives,

which is

they'll spend money, they'll go on holiday,

they'll go to restaurants, they go to bars.

You know, if they want to reskill or pursue a hobby,

they might take time out of work.

They might take time out of work

to take care of children

or to raise children or to travel

because they have this financial security,

they have these assets they can sell,

they have this passive income. So it's very different.

There's these kind of three types of spending profiles.

Right.

The poor spending profile, which is only essentials.

The rich spending profile,

which is almost exclusively saving, buying assets.

And the middle saving profile,

which is

like a relaxed sort of modern middle class lifestyle.

So the first big difference

you have between a more equal society

and an unequal society is that the unequal society

as a whole

cares less about spending and cares more about saving.

And that is

because if we consider only this,

the passive income that comes from ownership

in an equal society,

that's all going to middle class

people and middle class people,

they tend to spend most of what they get

over the course of their life.

If they get more money,

they'll tend to increase their spending.

Whatever, go on more holidays,

buy a bigger house, this kind of thing.

So if you're churning this passive income to middle

class people, it’s getting spent, it’s

getting spent, it’s getting spent.

If instead we take all of that income

and we give it to this tiny elite group,

of course they will spend a lot of money,

but we can see from the spending profiles

of the very rich.

You know, if you give £1,000 to a middle class person,

you'll probably spend £600.

You give £1,000 to Rishi Sunak, you’re

never going to notice right.

He's not going to change his spending at all.

So as we give more and more money to the very rich,

basically societal spending starts to fall.

They don’t want to spend money.

And what they're doing instead is,

well if we look at the behaviour

of the very, very rich is,

they’re just

saving, they're just saving,

they're just saving, they're just saving. Which,

you know, saving can mean a few different things.

It can mean investing.

Or it can also mean buying existing assets,

or it can be making loans.

So they’re buying assets, they’re lending money.

If there are good investments around,

they'll try to do investments as well.

So now I think we can consider

like what these two worlds look like.

When you consider these two things paired together.

Number one, in the wealth unequal world,

there's a lot of people

who are very financially insecure

because they don't have savings to fall back on.

They don't own their own house,

they don't own their own food or energy.

They don't have any passive income.

These people are very insecure,

and they live in a world

where all of the

spending power is held by a very small group of people

who don't spend a lot of money.

So they live in this world where

they really, really, really need to work, but society

doesn't really want to spend that much

because the group of people with spending power

is quite small

and those people tend to save like 98% of their income.

So you can see straight away

they're in a bad situation, right?

Because you have a world, loads of people need to work.

There's very few potential customers,

and those people don't actually spend much,

like as a proportion of their income.

Add on top of that,

these guys have a ton of wealth, right?

And that wealth includes in a high technology society,

it includes a lot of like labour saving stuff.

So these guys own factories, but high tech factories

don't actually need a lot of workers.

Increasingly, you know,

we're moving towards an AI world where, you know,

these guys, they've got really high tech factories

that don't need a lot of workers.

They'll have AI,

which means you need even fewer workers.

I think when you add these things together,

you can basically see

my conclusion, number one,

which is unequal economies have very low wages.

And that is because,

well, first thing I'll say is

I think if you look at the world,

you know, it's

not I'm not saying

this is the only factor that matters,

but I think if you look at the world,

you will see that very unequal economies

have low wages, whereas more middle class economies

like Western Europe,

like North America, like Japan,

like Australia, have higher wages.

But once you see this logic,

I think you can understand why, right?

Which is when you have a very unequal society,

you have a huge group of people

desperate to work for a tiny group of people

who don't spend much money and don't need any workers

because they've got all of this

productive capital, productive technology.

So that's number one.

Conclusion number one,

you can put it up there if you want.

Unequal economies have low wages. That's number one.

So the second thing is,

you know, the reason that wages are low

is because, okay

there's a lot of desperate workers,

but also because the money

is being controlled by people who don't want to spend,

what they're doing instead is saving.

So, you know, there's this kind of argument

and you get this sort of trickle down economics,

which is actually this is good

because you're giving the money to savers

and saving is good

because if we save then, we're going to invest

and we're going to grow.

The problem you get is

when there's not a lot of end consumption demand,

companies don't actually want to grow.

They don't want to invest

because there's not really a lot of customers.

And what companies want,

if they want to grow, is they want customers, right.

So what do rich people do

when they're in a world that they have all this

massive passive income, that they're not spending,

but there's not a lot of actual investment

opportunities around.

The answer is they buy assets.

They buy assets.

And they will try to buy assets from the middle class

if there is a middle class,

or they will try to buy assets

from each other basically. And what you have is

when you have this unequal economy,

you're giving all of the consumption power

to very, very rich people.

Very rich people, percentage wise,

have a very low demand to consume and a massive

demand to save.

Basically what these people want is assets.

So the second thing you will see

is increase in asset prices,

massive increase in asset prices.

Because you're giving all of the money

to people who are just trying to buy assets.

There's not a lot of investment opportunity.

So they’re buying assets,

they’re buying assets, they’re buying assets.

So I think this makes sense, right.

If you take the consumption power

away from ordinary people who spend,

you give it to rich people who save.

Wages will fall and asset prices will increase.

So these are for me,

these really are the two key features

of an unequal economy, low wages, high asset prices.

But you can probably see

instinctively that these two things

like interrelate in quite problematic way, right.

Because if wages are low and asset prices,

like including house prices, are high,

and this includes like other

like basic essentials of life, like,

you know, like the farms

which produce food or, you know, the power plants

which produce energy, these are assets as well.

These will be expensive.

What you have is a world

where ordinary people have no wages

and the things which they need

housing, food, energy are really expensive.

This is kind of like a

really bad combination basically. So

what you see there is

basically really high levels of financial insecurity

because not only are you desperate for work

and it's hard to get a job,

but the things

which you need, the basic essentials of life,

housing, food, energy,

the assets that produce those things, including houses,

are super, super, super expensive.

So you have financial instability,

but also you have this...

It's becomes really, really difficult to climb up

because if you live in a world where wages are low,

housing is really expensive.

Even if you're able to get a higher than average wage,

it becomes

quite possible that you'll never be able

to afford a house, basically.

So there you have the next thing, which is

basically low social mobility, low social mobility.

And also increasingly work becomes

like less important in a weird way.

It is important in one way,

because if you don't work, you'll die

because you need to work to eat.

But work ceases to...

the idea that if I work hard

or if I study hard, I get a better job,

I get a house becomes less and less realistic

because wages are falling, house prices are rising.

You know,

even if you get two or 3 or 4 times the average wage,

it might be that

something like a house is out of reach.

So you get this kind of crystallisation

of the class system,

it becomes impossible to work your way up.

The next thing I want to talk about

is how this leads to a kind of concentration,

economic concentration in capitalism.

So we're talking about a concentration

of wealth, right.

But this manifests in different ways, right.

So we have really once we concentrate wealth

we concentrate passive income.

We also concentrate spending power.

Suddenly then if I'm a business and I want to grow,

what am I going to do?

Well, I'm not going to produce stuff that you want

because you've got no f**king money, right?

You're saving up everything

you can just to buy a house.

You know you can't afford to go to the pub,

you can't afford to go the restaurants.

So your pub's going to close down.

The restaurants in your area are going to close down.

They're going to get turned into basic

like slum accommodation.

I'm a business, what am I going to invest in?

What do the rich want?

Because they’ve got so much money,

so much money, more and more money.

It's growing, it's growing. What do the rich want?

So what you see is increasingly

this split in industry,

which is industry stops producing for the middle class.

It starts producing just like bare bones

essentials for the poor

and increasingly focuses on luxury industries.

So I think you're seeing this or you're seeing this...

I live in London, we're here in London now.

You see this in the...

you see this literally in the housing stock.

So I grew up,

where I grew up in Ilford in East London

it used to be...

It was a poor area when I grew up,

but it was like lower middle

class, upper working class families.

If you go there now, those small terraced houses,

they've been expanded out backwards, expanded up,

and they're running up by the room

to, you know, recent, very, very poor recent migrants.

And what that is, is,

you know, we're no longer

producing middle class housing

because there's no middle class.

This is the thing.

Inequality means no middle class.

So bare bones essentials.

But obviously now I live closer to central London.

If you live in and around central,

what people always complain is

there's only luxury housing being built.

And, you know, that’s an obvious consequence

of this wealth inequality, which is that

capitalism will adjust if the middle class has no money

and the rich have all the money.

We're going to stop producing middle class cars.

We’re going to stop producing middle class housing.

We’re going to try and transition that to the rich.

I’ve got a lot of friends who are dentists.

I've got friends who are doctors

and the ones who make the most money,

they don't fix teeth of middle class people,

they do plastic surgery

and cosmetic stuff for rich people.

And that's what you would do

because these guys have the money. So the next thing is

wealth inequality leads to industry concentration,

industry concentration.

Businesses no longer really produced for the middle.

They produce for the...

basics for the poor and luxuries for the rich.

But it's also geographic concentration, right?

So when we we go back and we talk again about

the relatively equal society

in a relatively equal society, everyone was an owner,

everyone was a worker,

and everyone was a consumer.

And, this is nice, right?

Because workers need consumers

and consumers need workers, right.

Like, if you want to work,

you need somebody who’s going to, you know...

You’re a cameraman, nobody's making videos, you’ve

got no work, right?

I'm making videos, I need a cameraman.

It works together, right.

These two things come together. But

once you move to that

wealth unequal society, you split.

You have a big group of workers,

but they don't really spend much.

They're not really consuming.

And you have this small group of consumers, they’ve

got a lot of money, but there's not a lot of them.

And they don't need to work, basically.

This causes geographic problems, right?

Because if everyone is a worker

and everyone is a consumer,

then whenever you have a city,

you've got workers and consumers.

This is like, it works really well, right?

Because the workers need

consumers, consumers need workers,

every worker is a consumer.

So basically cities work economically

because wherever there's people, there's people.

Wherever there's workers, there’s

consumers, wherever there’s consumers, there's workers.

But once you have this unequal economy,

then the workers are not consumers,

and the consumers are not workers.

So what that means is

if you cannot attract rich people to your city,

there's no consumers in your city.

And these guys own your city, right?

They own the housing, they own the food.

You need food.

You need energy, right? Well, these guys got the food.

They got the energy.

What are you offering? You need to offer something.

So if you live in,

you know,

we talk about parts of the North which historically

were big centres of industry.

You know,

I could keep listing lots and lots of places,

you know, places like Newcastle, places

like Glasgow, places like Wigan.

Nothing wrong with these places, but,

you know, places that these...

people have been living there for hundreds of years.

And they used to be like centres of industry.

They're struggling now

because there’s no rich people there.

And then you have workers without consumers.

And if you have workers without consumers,

then there's no jobs.

So what do those consumers have to do?

They have to go to where the rich people are.

And, you know, we've spoken about this in other videos.

I think there's a bit of a misconception

in modern economics

that what we're having is a big city, small city split.

But it's actually not

that it's a rich city, poor city split.

You know I studied in Oxford for two years, it’s

not a big city, very expensive.

You know, places like Glasgow, places that Newcastle

much bigger, much, much cheaper.

Cambridge is also expensive.

You know, if you go to the places

where rich people go on

holiday, phenomenally expensive, you know.

Any popular holiday destination

for the rich is unbelievably expensive.

If you go to the place where they study, like Oxford,

you know, it's very, very expensive.

So basically,

geographically the poor people have to move.

You have to move,

you have to go to where the rich people are.

But the problem you have is

when you have a very unequal economy, you know, if it's

90% : 10%.

Well there’s 9 poor people for every rich people.

If it’s 99 : 1, it’s

99 poor people for every rich person, right.

And also, you know, rich people,

they kind of, they tend to like the same things.

They tend to want to live in the same places.

They tend to want to study in the same places.

They tend to go on holiday in the same places.

They're kind of like a community, right?

You know, rich people,

they don't spend a lot of time in Wigan,

you know, they don't spend a lot of time in Newcastle.

They don't spend a lot of time in Glasgow.

They don't spend a lot of time in Blackpool.

You know, they don't spend...

they just don't spend time in these places.

And then you’ve got to leave because economically

people, most people are now workers but not consumer.

So you’ve got to move.

So then you get these big floods,

you get these big floods of people

from

the north of England to places like the south east.

But you know, it's not at all UK specific.

You know,

you see

really, really similar things happening in the US

where places like the Rust Belt, people are leaving,

they're being moved. They have to move to the coasts.

You see southern Europe, these things are happening.

Spain and Italy, people are leaving.

People are going to like

the industrial cities of Germany, even the UK.

China, same thing is happening.

Same thing’s happening in China,

same thing is happening in India.

These historical places

where people have lived for hundreds

or even thousands of years,

they don't work in a very unequal society anymore.

So people have to leave. People have to leave.

The problem you have then is

they have to go to where the rich people are.

There's not a lot of rich people.

So those places become very overcrowded.

So you get this flood of people and then you kind of,

you then create a sort of

a two world world

where there's either places

where there's no rich people

and no jobs, or places where there are rich people,

poor people having to flood there.

They become extremely dense, extremely overcrowded,

sometimes dirty, sometimes polluted,

but most obviously because everyone has to live there

really, really expensive,

most obviously really, really expensive,

really, really expensive rents.

So you force these people who

really, really need work, can't get work,

can't afford a house

to live in cities with rich people

where rents are expensive

and they can't afford to rent. So it's

kind of disaster on disaster on disaster, isn't it?

And this is the kind of

set of mechanics

which I sort of started to recognise

when I was a trader.

The next video, I'm going to talk about,

why economists never talk about this.

Because I didn't learn these ideas from university.

So for people who don't know, I did an undergrad

at London School of Economics, three years,

I did a masters at Oxford for two years.

So I’ve studied economics

at universities for a long time,

these ideas where never taught to me at university.

I learned these as a trader.

We're going to cover that in the next video.

But before I finish this video,

I just want to add one other thing,

which is going back to transfer payments

in the equal society.

They go around, they go around like in a circle.

In the unequal society, transfer payments go one way.

The people who don't own assets are paying money

to people who own assets.

The people

who have the assets

then use that money to buy the rest of the assets

Which means next year,

the people who don't own assets have to pay more.

Once you understand this, you can see that

there's a worryingly accelerating nature to inequality.

Which is the bigger inequality is, the higher

the amount of transfer payments

made from the poor to the rich,

which means the higher

the rate at which the rich dispossessed the poor,

which means the higher the rate of transfer payments.

So this is, and probably the thing

which sort of caught me the most

and worried me the most about this.

Mathematically, this is not self containing.

This is the thing

that spirals out of control once it becomes...

and I think this is why,

if you looked throughout history, you'll see that

in most of history inequality is very high.

Okay.

So that's it.

Quite a big one, second video on the course.

But I think it's really important.

Because it was quite long,

I'll quickly run down the main points, which is,

when inequality is very high,

there's a high level of financial insecurity.

There's a high level of transfer

payments from the both the rich.

There's not a lot of spending,

a lot of poor people trying to work

for a small amount of rich people

who have productive capital and don't need workers.

Wages are low. Number one, wages are low.

The rich have enormous amount

of passive income, way more than they can spend.

They want to invest it,

but there's no investment

because there's not a lot of spending.

They're trying to buy assets, asset prices are high.

Wages are low, one.

Asset prices are high, two.

Industries tend to concentrate

in whatever the rich people want.

But people are also forced to concentrate on whatever

the rich people want.

So poor people are forced to flood to the cities.

Places where the rich

are not living, become very economically deprived.

Places where the rich are living

become extremely expensive.

Rents become high,

and because the poor paying lots of money to the rich,

inequality tends to increase

and the situation tends to get worst year after year.

Okay, that's number two.

This is one of the more

depressing videos on the channel.

I suppose, but it's really important to understand it.

And you know,

I made a lot of money betting on these things.

I think it's what's happening,

it’s helped me to make the really good predictions

we've made on the channel.

Next video will cover why

economists never talk about it if it's so important.

And we'll keep building up more and more videos

to build a really comprehensive course

of how inequality affects the economy.

And that’s it, video done.