There has been a discussion about economic inequality on an email list I’m on. It started with a link to this CNN summary of “must reads” on inequality, and has continued over a few other threads the past couple months. I’ve written a few thoughts in those threads, and thought I would assemble them here to see what others have to say.
My main theory is that the rise in inequality is linked to the rise in globalization. Capitalism (theoretically) links income to the impact that a company has. When that company can operate globally instead of locally, they (a) can make more money because they are having a bigger impact with more customers and (b) are out-competing local providers who are losing their customers. So the successful companies get richer while the local providers get driven out of business, which increases inequality. Within the US, you can see this in Amazon and Walmart rising to dominance at the expense of local shopping.
This dynamic of greater competition from globalization is also playing out in the labor market. A manual laborer is now competing with billions of people worldwide, and with that greater supply of people, demand has gone down and thus the price for their labor has gone down. At the same time, highly skilled software engineers can now be employed worldwide, and with companies from around the world bidding for their services, incomes for those engineers have gone up. Again, globalization is increasing inequality. The best in the world at their professions, whether they are a CEO, athlete, or engineer, are reaping the benefits of their expertise while those without similar skills are losing out.
One other effect that is happening is that technology is enabling more work to be done by less people. For instance, the graph at http://inequality.is/expensive shows average productivity going up without wages going up, with the implicit statement that these should go up in parallel. But suppose an engineer creates a machine that increases productivity by 10x, such that one person can now do what 10 people did before on the factory floor. 9 people are now out of a job, and if the engineer gets paid, say, 50% of that difference, the difference between average productivity and wages will have increased while also increasing inequality. A similar story is in play when a technology company is willing to give away a product for free (e.g. “Android may be the greatest legal destruction of wealth in history”).
If those inequality trends are linked to globalization and technology, as I posit, then I don’t see how efforts to decrease inequality by mandating pay caps (e.g. this Swiss law proposing that executives can make no more than 12x their lowest-paid employees) are going to work without also breaking the market economy. Under such caps, somebody is not getting paid “fairly” – either the executives or engineers are not getting paid enough, or the janitor is getting overpaid.
“Fair” has two meanings here, which is also part of the confusion. I am using “fair” in the sense of “people should earn what they are paid”, and so people who have more impact should get paid more, and that people who aren’t contributing don’t deserve anything (shades of the Protestant work ethic). But many liberals believe that it is unfair for one person to earn orders of magnitude than another because we are all humans and all interconnected. (thanks to Jonathan Haidt’s book The Righteous Mind for identifying this interesting split on the meaning of “fair”)
So is the rise in inequality intrinsically a bad thing? Many liberals, using the second definition of fair in the previous paragraph, take the stance of “Inequality is growing. That is unfair. QED.” I disagree and believe that inequality is “fair” in and of itself, as it is a reflection of the greater impact that people and companies can have in a world of rising globalization and increasingly powerful technology. But that’s not the whole story.
One thing that came out of the email discussion is that the effects of inequality serve to perpetuate inequality. In particular, highly concentrated wealth uses the existing system to reinforce itself. There are two ways in which this happens:
- Money buys access in our political system, such that those who make a lot more money can change the rules to preserve their advantage in a de facto plutocracy.
- Money buys access to education. For children, parents need money to afford private schools or to afford houses in great school districts. For college students, the best universities cost an absurd amount of money, but I still think those elite universities are worth it. So having more money gives a huge advantage to the next generation also, making it more difficult for people outside the wealthy class to get a “fair” chance to break into that class.
These are both problems that need to be addressed, but I don’t think that the problem is inequality per se. A cap on how much people can earn does not feel right to me, as it is attacking inequality directly, when I think it is these effects that are the problem. And trying to cap how much people or companies can earn via laws feels like it will be a game of Whack-a-Mole, as people will find loopholes in the laws, and other countries (e.g. tax havens) will write their own laws to attract such people and companies.
For political access, I’d prefer to address that with Lawrence Lessig’s efforts to attack the money problem in politics directly. Let’s figure out how to get money out of politics and out of campaigns, and then it won’t matter as much if companies make a lot of money. They will have the same access everybody else does
For educational access, we need to break the connection between money and education. I don’t know if the right answer is better public schools (particularly preschools), funding public schools from the state level rather than the district level (to break the connection between property taxes and school quality), or just finding ways to pay our teachers more so that our best students can make a good living by teaching (I know several people who loved teaching but eventually give it up, because they can get paid so much more as an engineer). It’s a tough problem, but it’s the right problem to solve – not how to stop inequality from happening.
What do you think? Is rising inequality a problem in and of itself? Or is it in the effects of inequality perpetuating itself through political and educational access? And what should we do about it?