Why It’s Much Easier to Build Wealth When You Already Have Some, Explained by Cows
By Rachel Puryear
If you have any interest in economics, you have probably heard of the “two cows” analogies used to illustrate the various economic and corporate systems of the world. These popular analogies are helpful to give a basic – as well as satirical – introduction to how different economic systems work.
Here are a few of the best-known ones:
- Socialism: You have two cows. Your neighbor has none. The government takes one of your cows, and gives it to your neighbor.
- Capitalism: You have two cows. You sell one cow, and buy a bull.
- Communism: You have two cows. The government takes both, and gives you some milk.
- Fascism: You have two cows. The government takes both, and sells you some milk.
- Nazism: You have two cows. The government takes both, and shoots you.
- American corporation: You have two cows. You sell one, and force the other to produce the milk of four cows. Later, you hire a consultant to figure out why the cow has dropped dead.
There are many other “two cows” analogies, but this post will expand on the socialism and capitalism analogies, in order to examine common perceptions of each.
To illustrate the current state of economics in the present-day United States, here’s what that “cows” analogy more closely resembles: Lots of people have no cows (poor/working class). Lots of people have just one cow (working class/low-middle/middle class). Many have two cows (middle class/upper-middle). Some people have several cows, and they’re in the minority, but they are not uncommon (upper-middle). A small number of people may have dozens or hundreds of cows (upper class). A very small number in the far upper class may have thousands of cows (super rich), and just a few people at the top have millions and millions of cows (richest of the rich/billionaires).
People in the U.S. are taught to think of socialism as inherently along the lines of taking cows from people who have two or a few, and giving the cows to people who have none. Many people who have a small number of “cows” deeply fear socialism, largely because of this perception (there’s more to it but this post focuses on this big reason).
Ideally, socialism would look much more like taking large amounts of milk from those who have thousands or millions of cows, and using that to fund important needs for everyone – health care, education, economic development, social safety nets, environmental efforts, and so forth. Rather than a “Robin Hood” theme (which does not appeal to most), it looks more like everyone paying their fair share, and everyone benefitting (which, presented like this, could be appealing to the majority). Funding these aforementioned needs also gives opportunities for people to achieve upward mobility, as well as assist those in need.
Most people have been taught to think about capitalism in terms of everyone starting out with similar numbers of cows. Or, at the least, they don’t realize how extremely unevenly “cows” are actually distributed in the modern-day U.S.
The “capital” part of the word “capitalism” refers to means of producing income. Capital can include cash to invest (which many people save for), real estate, other assets, profitable businesses (or shares), business equipment (machinery, tools, computers, technological devices, vehicles, and so forth), goods which can be sold, livestock, and any other wealth which could be used to generate income.
In the “cows” analogy of capitalism, the cows represent capital. In order to sell a cow and buy a bull – and thereby produce more baby cattle, and continue generating profits from that – it takes having sufficient capital to get started. Having no cows means there are no cows to sell and no cows to breed, either. But even having one cow is not enough – because if that cow is sold, then there is no mate for your new bull.
As I have said before, most people are very unlikely to ever become wealthy (upper-middle level or higher) by working for wages and salary alone. Even if you did make that much, you’d still need to retire someday. Wages and salary should be thought of as a means of providing for living expenses now, while also saving some and investing in a nest egg. It’s through investing in and building capital that people become relatively wealthy, while their earnings play more of an indirect role as a means of investing.
Therefore, building wealth by building capital can help someone get wealthy where:
- (1) They have enough income to invest in capital, on top of providing for current living expenses, and/or
- (2) They already have capital which generates income.
The more capital someone has, the greater their potential to generate income, and to continue to invest and build more capital. This is (a major reason) why it’s so much easier to build wealth when you already have some, and so much more difficult when you don’t have much wealth to begin with.
Furthermore, the higher someone’s earnings are, the greater their ability to invest in and build capital, even if they didn’t have much capital to begin with.
Final Thoughts on Perception and Reality
Anyone who earns money throughout their lifetime – whether it’s a little, some, or a lot – worked hard for it. There is no denying that.
At the same time, someone who earned twenty million dollars in their lifetime (that’s an average of $400K a year for 50 years) probably did not work twenty times as hard as someone who earned one million dollars in their lifetime (the latter not being as much as it sounds like – that’s averaging $20K a year for 50 years).
Though we Americans love “Horatio Alger” stories; that is, tales of people who went from rags to riches through hard work and exceptional services or products; the reality is that these stories are the exception rather than the norm. And if we look more deeply at these unicorns, we will usually find that they had at least some advantages along the way. Again, this is not to diminish the impressive accomplishments of anyone who made success far beyond where they came from – but only to point out that no one truly does it alone, as with all things in life.
Mark Zuckerberg, Jeff Bezos, and Bill Gates are just a few examples of “self-made” ultra-wealthy men who earned huge amounts of money in their lifetimes, but also came from a fair amount of privilege to begin with. They out-earned their parents, to be sure; but nonetheless had a very nice springboard to start from. Even if their parents didn’t directly give them money (though sometimes they did), they still benefitted from their families’ connections, reputation, and financial and business sophistication.
Even for people who truly did come from poverty and become rich, they usually had something favorable going for them – a very supportive family or partner, a mentor, a connection with someone who could help. Their accomplishments are certainly impressive – but again, no one does it alone.
One thing that is also very helpful in upward mobility – and which was key in my own parents moving from the working class they were born into, and moving into the middle class – was the availability of low-cost college education (at that time), which could help them get into better paying careers. This was key for many in their generation (boomers).
This does not mean people should instead be fatalistic about chances of success. People born into similar circumstances will still have widely differing outcomes. However, the fact that many have achieved success with a hand up is a great reason to value extending opportunities to advance to as many people as possible.
It’s part of human nature that people are quick to recognize and acknowledge where someone else has an advantage over them (actual or perceived). At the same time, people are much more reluctant to recognize – and much less acknowledge – where they have an advantage over someone else. This tends to color people’s stories of their own success.
Again, at the same time, this is not meant to minimize anyone’s achievements.
Successful people often get rightfully frustrated that people see their rewards, people often hold their hands out to them, people scoff at how much they make – yet people don’t tend to see so much of their many years of very hard work, sacrifice, discipline, and struggling financially while they were getting there. This is also very true.
For the very richest of people – billionaires, people with millions of “cows” – having them pay enough in taxes to benefit all, and create opportunities to advance; is less disruptive to their lives than having the greatest tax burden fall on those with a lot less (people without so many “cows”). The more “cows” people have, the more “milk” they can contribute without becoming impoverished, or being unreasonably deprived of what they earned. This is why it makes sense for people with more to contribute more; and for those with a lot more, to contribute a lot more.
Socialism and capitalism should not be necessarily thought of as at odds – a thoughtful blend of the two appears likely to give the best chance at a society that is both prosperous and just.
Thank you, dear readers, for reading, following, and sharing. Here’s to better understanding economic systems, and using that better understanding to better influence policy.
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