Why do the rich keep getting richer?

Summary #

The rich and the poor make money differently. The rich make money by investing money. The poor make money through wages. In a capitalist economy, wealth accumulation is exponential in investments and gradual in wages. This makes the rich richer and keeps the poor in poverty.

Explanation #

There is a big difference in making money from a job and making money from investments. The money you make from a job is not scalable. You can have only one or two jobs at a time. But the money you make from investments is scalable. If you invest more money in your or other’s business, you will make more money. If you invest more money in financial markets, you will make more money. There is a risk in investing money. But you can reduce this risk by diversifying your investments. The more money you invest, the more you can diversify, the lesser the risk. You can also reinvest your money to make even more money. So if you are rich, you can exponentially grow your wealth through investments.

The poor can become rich by saving and investing their money. It will be risky, and the growth in wealth will be less in the beginning. But with reinvestments, the growth will steadily increase, and the poor can eventually become wealthy. But most poor people won’t do this because of their mindset on money. They look at making money as a matter of survival. They make money with the intent of spending it. Even when they save money, they eventually spend it. So they never accumulate money beyond their expenses. Investment is never an option for them. In contrast, the rich look at making money as a sport. They don’t make money to spend it. They like accumulating money. Their consumption pattern doesn’t increase with their wealth. They invest money because they know that it is the best way to accumulate more wealth.

The mindset of the poor and rich is culturally ingrained by successive generations of being poor or rich. The mindset continues even when there is a temporary change in income levels. For example, when a poor person wins a lottery, he will spend all the money and become poor again. When a rich person goes broke, he will take up a job, save money, and start investing it. He will try to become rich again. It is the mindset that keeps the poor in poverty and makes the rich richer.