Inequality, Globalization and Technology

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 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?

11 thoughts on “Inequality, Globalization and Technology

  1. Interesting! A few notes:

    “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.”

    When you say inequality is fair, you’re not actually disagreeing with the statement “inequality growth is unfair”. They’re two different things. I think most liberals, including me, believe that some inequality is both fair and inescapable, but that the degree of our current level of inequality, and its rate of growth, is both unfair and seriously damaging.

    Basically, we’re way past the point where compensation aligns with incentives. CEOs who run their company into the ground do pretty well — they still get bonuses, etc — and it’s hard to believe that if their take-home pay were cut 10%, they’d quit in a huff. Even if the policies used to reduce inequality to reasonable levels were *unfair*, it doesn’t seem like they would actually lower prosperity.

    Inequality growth correlates much more strongly with domestic policy than with globalization trends (citation needed). Taxes on the rich were relatively high under Clinton, and the economy was pretty good even though globalization was in full swing by that point. When taxes got lower, the economy didn’t improve and inequality got way worse. There’s evidence (citation needed) that inequality contributes to recession bubbles: rich people have more money than they can spend, so they invest in crazy, useless stuff that no one understands, whereas the people in the poor and middle class take out lines of credit to get what they need.

    It’s also worth noting that a cap on the ratio of highest-paid to lowest-paid isn’t actually a cap on how much people can earn. Rather, if you’re at the top and you want to earn more, you have to give some other people raises before you give yourself a raise. I’m not sure I agree with the law (12:1 sounds severe to me), but it’s not completely ridiculous.

  2. Dan, lots of great points. I agree that taxes are too low in the US, and agree that increasing the tax rate by 10% for high-earners would not affect their incentives too much.

    After further discussion on Facebook and via email, there are a few questions that I’m still struggling with related to this topic:

    1) The ratio cap really bothers me because I can easily see situations where the difference in economic impact is far greater than 12:1 or even 100:1. It’s commonly thought even within the specialized field of software engineering that the best engineers are worth 10 to 100x the worst engineers e.g. this interview with Steve Jobs. And if we compare those top engineers to somebody without a high school education working at McDonald’s, I can see the difference in economic impact as being 1000x or higher.

    2) Indy, this is where your point comes in – have the software engineers “earned” their position, or are they the fortunate beneficiaries of being in the right time and place? I don’t agree that it’s all luck, as that piece seems to suggest, as two people can have the same opportunities, and one can capitalize on those opportunities while the other squanders them.

    On the other hand, the marshmallow test seems to indicate that the key ability to defer short-term gratification for longer-term gain is set by the age of 5. Do we reward people for having the early childhood experiences necessary to develop that self-control? If we don’t reward them for it, then what incentive do people have to develop it? Is there a better way to compensate people that is not based on what they have “earned”?

    3) Along those lines, the really hard question is what do we do with people who do not have skills in the current economy to “earn” above the US minimum wage? People who have no skills that aren’t replicated by billions of others worldwide? Do we as a society take responsibility for them and pay them a stipend that is above what they can actually “earn” in a market economy? And if so, why do we not also have the responsibility for people in other countries who are currently living on less than $1/day since it is just poor luck that they were born in those countries? It’s not as slippery a slope as I am portraying here, but I don’t really know how to design a system with a safety net that protects people from starvation but gives them an incentive to figure out how to add more value to the economy.

    Regardless, today is a good day to be thankful that I have had many opportunities throughout my life, from my parents to my schooling to my MIT education to the various jobs that I have gotten.

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