Why Inequality Is Necessary

By Mark Olson

Note: This post is part of our League Symposium on inequality. You can read the introductory post for the Symposium here. To see a list of all posts in the Symposium so far, click here.

By and large one working assumption by the left is that economic disparity is a thing to be avoided. Yet, without economic disparity, why work at all?

Economic reward for gainful effort is the engine of economies since, well, since man stepped out of the trees onto two feet in West Africa and uttered things we now call words. If you get the same return for doing nothing as you do for doing hard work, why work at all? This in turn is the basis of economic inequality. I work, you don’t. I get, you don’t. Voila, inequality. We all don’t have the same abilities, the same diligence, the same intelligence, the same work ethic. These things all engender disparate economic reward, i.e., inequality. If there wasn’t economic disparity then there would be no point. It is the engine of a free society. The only alternative is motivation to effort through fear (of violence). When fear replaces anticipation of reward … that doesn’t work so well. See how well that works in North Korea or similar. If you want a free society, you must therefore embrace economic disparity. This leads us to a fundamental problem with arguments against economic inequality. Work vs non work yields different pay. Different pay is also given for different skills. A Yugo costs less than a Bugati and just so an hour of a neurosurgeon’s time is remunerated at a higher hourly rate than a grocery bag boy.

The quick rejoinder from the economic inequality = bad thing proponents is that this is a straw example. Yes *some* economic inequality is warranted. they offer. But too much of it … that is what is wrong. In a book which was very interesting on other grounds, Paul Collier in The Bottom Billion finds some evidence that this too is an assumption that is unwarranted. The Bottom Billion is not a book which directly speaks on economic inequality directly. There are 6 and a half or so billion souls on this planet. A billion of these people are wealthy. 4 and a half of them are on their way to getting wealthy in a historically very rapid manner. But the remaining billion or so around the world are mired in extreme poverty. The Bottom Billion is a book which attempts to study reasons why those people are stuck and what works and what doesn’t in getting them unstuck. What on earth does this have to do with economic inequality? Well, Mr Collier is studies those poor in the third world with modern social scientific methods. If you think economic inequality is important … how about using the laboratory of the civil wars and violence in the third world countries over the last century to test this hypothesis? As the question, is civil violence correlated with economic inequality? You can measure violence, and you can measure economic inequality. Mr Collier investigated this question. And what was the answer? He found that economic inequality over the last century is statistically uncorrelated (!) with civil war and the outbreak of violence in the third world. Uncorrelated. This puts the straw hat on the other head. Clearly at the extreme end, as demonstrated in the prior paragraph, economic inequality is required for any meaningful economic activity. On the other side of the coin, actual civil unrest is uncorrelated with this “bad thing.” Those that assume economic activity is a bad have a hard row to hoe to demonstrate that this is to be avoided at high (or even moderate) costs seeing as it doesn’t engender the social ills you fear. What then is wrong with economic inequality? Apparently what is wrong is harder to put a finger on than one would suspect.

Yet the rejoinder continues … this too apparently is a straw argument. Inequality they cry is only OK when it is “fair” … whatever that might mean. How might we measure fairness?

In an early entry to this symposium, a post by a Mr B-psycho puts what he implies is a well celebrated graph of corporate productivity compared to remuneration over the last decades showing a divergence. This is assumed to be a “bad” thing, without much examination. After all, if you make more stuff per hour than you did 10 years ago, shouldn’t you by rights be paid more? That can’t be fair, right? Well the short answer is no. The anomaly in the graph isn’t the divergence that we see now, but the past closing tracking of these figures. Look at an extreme example in agriculture. Move from people pulled plows, to horse drawn, to tractor drawn plows. Productivity skyrockets. Yet, during those times pay for farming hasn’t changed nearly so much. A single family farmer makes do today, but not a whole lot better. A single family farmer made do but not much better … 300 years ago too. And 1000 years ago. No big change, yet productivity has increased by many thousand fold. This is a really really good thing. Automation is the engine of our wealth today, making more with the same work. Increasing productivity. Increased productivity is the engine behind lowering costs for consumers (not pay) … that is the important factor. Not the increase in profit but the decrease in costs. When automation made possible finely woven fabrics and ceramics … there is no denying that benefits accrued more to the capital/marketing people than the unskilled laborers. But the bigger benefit is that every single woman wasn’t spinning thread and weaving cloth anymore and a pair of pants no longer cost a months ordinary wages. That those same unskilled laborers could buy pants and booze and (now) smart phones and so on for a smaller and smaller fraction of their wages.

One of the common argument to identify “fairness” is to claim that those who “work” should reap the majority of the reward, as opposed to those who provide the capital. This is disingenuous and fails on inspection. Look for a while at those “capitalists”, those “managers” and the hours they keep. They don’t get greasy and sweaty. They also don’t limit themselves to working only 40 hours a week. Those top CEO salaries that are decried as unfair? Problem is the cut throat competition, the never ending work cycle that got those guys to that point. For most of them, the question of when are they working (and working hard) is equivalent to the question of when they are awake.

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129 thoughts on “Why Inequality Is Necessary

  1. Honestly, this sounds like a strawman from start to bottom. Who on the left is aiming for a flat social structure? There is not a communist party in America, and if there was it’s certainly not the happily business friendly Democrats.

    The only socialist of note in America is Bernie Sanders, and his socialism is so far right (as these things go) that if you just viewed him as a guy okay with capitalism, but he’d like to guaruntee everyone a certain minimum standard of living and you’re free to go nuts to make your life more, you’d be pretty spot on.

    The problem isn’t inequality per se — it’s too much of it. Water’s necessary too — but too much of it and you drown.

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    • The problem isn’t inequality per se — it’s too much of it.

      What is the problem with too much of it? As noted, it doesn’t lead to civil unrest. If people thought it an important problem one would think there would be a correlation between econ/inequality and civil unrest/wars. There is not.

      This gives you two problems, identifying a criteria for fairness and insuring the costs of correction justify the payback. The data from Mr Collier suggests the costs of leaving inequality untouched are low.

      greniak

      See above final paragraph.

      One note, the submission criteria suggested that we give positive arguments not rip others arguments. This wasn’t an effort to post up and squash straw men. The essay above first establishes that inequality is necessary. The next point was that extreme inequality is not as problematic as we pretend. The third point were two modest efforts to note that identify fairness if that is your criteria for inequality readjustments is non-trivial.

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      • I don’t know of data that correlate inequality and civil unrest.Maybe there is, but i would think there were few riots and revolutions based on people being unhappy with the king.

        Why should one very small group get most of the benefits of an economic system? Wouldn’t you wonder if that very small group are getting the lions share because of reg capture/gaming the system? Is it really that hard in this country, of all places, to think the richest folk might have the laws written for their benefit.

        I know Roger feels the Zero sum fallacy is a good point but I’m not seeing it. If one small group is getting most of benefits that leaves less for everybody else. I know some people will, correctly, note that consumers are benefiting from cheaper consumer goods. True, however some of that sounds like so much High Def bread and circuses to keep the masses happy. I got a sweet HD 32 inch tv last year for 300 bucks. Go me. But if i didn’t have health insurance, the economy in my town had been creatively destroyed, of some financial wheeler dealer had screwed up the econ that would be cold comfort. Consumer goods are great, especially if we have a country that survives on constant consumption, but that doesn’t speak to other important things.

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              • Literature on the French Revolution. I have the book at my parent’s house, but I think it’s a reasonable consensus (I read this ten years ago, dudes, I don’t remember the book’s name). So maybe ping a french Revolution scholar?

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                • You rang…? (Admittedly, I’m more of a Napoleonic Era and later into the 19th century kind of guy, but close enough.)

                  Okay, I chuckled a bit at the notion of there being much of a consensus among French Revolution scholars. But, basically, the problem you have in France at the time isn’t exactly inequality- it’s that too, but it’s tied up with the rigidity of the social structure- the system of privileged orders, which makes it difficult or impossible for most people to move up in any sense. Then, you have a very unprivileged bulk of the country that’s paying the lion’s share of taxes while only a small faction that pays very little in taxes decides who pays how much in taxes. It’s basically an oligarchy. On top of that, you have a string of very bad years for the very poor in terms of food famines, and some popular Enlightenment writers who have these radical ideas about democratic republics and human equality that are going around. Finally, the state had taken on a high level of debt at a high rate of interest and had to appeal to the people to raise taxes once more, and did so by use of local assemblies that gave people a taste of this democracy thing they’d been hearing of. So, no, inequality in itself isn’t necessarily a problem, but this is like saying pregnancy isn’t a problem- it sort of depends on the situation and circumstances that got you there.

                  Otherwise, I’d say it’s still too soon to know why there was a French Revolution.

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      • My coming post on the matter addresses pretty much all the points, but I agree with the assessment that your argument is a strawman.

        Nobody is arguing that (financial) inequality, up to a certain point, is either unnatural or unhealthy.

        What is being argued is that there are two types of inequality. There is inequality that exists within a stable equilibrium zone that is healthy for society, with corrective forces to restrain it when it is too large and to enhance it when it is too small, and there is inequality that exists OUTSIDE the stable equilibrium zone that devolves into a dangerous, harmful societal mode that only can be brought back to the stable equilibrium through massive and drastic upheaval.

        You wouldn’t like that second one, it generally ends with torches and pitchforks and angry townspeople.

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  2. Its good that you identify the strawman argument you are using. Unfortunately your defense of the strawman didn’t eliminate it at all. Some inequality is fine, nobody is arguing for us to all make the same amount of money and dress in identical unisex jumpsuits. Most things exist on continuum, why inequality shouldn’t be one of those things is beyond me. Some is fine, to much is bad. To much inequality leads to massive power imbalances (as Mark suggested in his post), strongly suggests the powerful have gamed the system for their own benefit ( which just about everybody is against) and results in a society where only a tiny group are truly benefiting ( which doesn’t sound like a fair/just/good/well designed society).

    I know the use of the word fairness sets many people on edge. What i always say is people use fairness like others use the word just. If you want to try taking someone who uses the word fairness seriously just replace fair with just since that is pretty much how people use the word. Yeah fair is not precise, but frankly most words we use in these discussions are laser precise. Is micron level precision needed for moral or justice arguments?

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    • I just want to make clear that it’s not so much a question of “too much” inequality- I have no idea how one would determine what level of inequality is appropriate or inappropriate in a given society or culture. It’s more a question of increasing inequality, which creates a nasty feedback loop of power abuses and cultural destruction.

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      • I’m not sure there is a big difference between to much inequality and to much increasing inequality. If you have to much increasing inequality that will lead to too much inequality.

        How to determine whether there is to much inequality is most certainly a value judgment. It seems like one of the major evasions in these discussions is just saying “how do we know what is to much inequality?” Well how do we know if we have to much justice? How do we know if we are to equal? ( aside from unisex jumpsuits of course)

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        • I more or less agree with this, except that I’d say that once you’ve established a relatively stable amount of inequality, it’s fair to say that such a level is socially and culturally acceptable. Basically, once you’ve reached that point, power abuses have almost definitionally disappeared and an equilibrium has been reached that means that future economic gains are actually benefitting everyone.

          In my analysis, however, any identifiable trend towards increasing inequality is problematic; the rate of that increase is only relevant towards establishing the tipping point at which quality of life is actually decreasing for a given segment of the population.

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      • “too much” inequality

        Then came there two women, that were harlots, unto the king, and stood before him.

        And the one woman said, O my lord, I and this woman dwell in one house; and I was delivered of a child with her in the house.

        And it came to pass the third day after that I was delivered, that this woman was delivered also: and we were together; there was no stranger with us in the house, save we two in the house.

        And this woman’s child died in the night; because she overlaid it.

        And she arose at midnight, and took my son from beside me, while thine handmaid slept, and laid it in her bosom, and laid her dead child in my bosom.

        And when I rose in the morning to give my child suck, behold, it was dead: but when I had considered it in the morning, behold, it was not my son, which I did bear.

        And the other woman said, Nay; but the living is my son, and the dead is thy son. And this said, No; but the dead is thy son, and the living is my son. Thus they spake before the king.

        Then said the king, The one saith, This is my son that liveth, and thy son is the dead: and the other saith, Nay; but thy son is the dead, and my son is the living.

        And the king said, Bring me a sword. And they brought a sword before the king.

        And the king said, Divide the living child in two, and give half to the one, and half to the other.

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    • When the 99% use the word “fairness”, they are “godless pinko commies” or “whiners” who are “engaged in class warfare.”

      When the 1% insist that the 99% take a pay cut in real terms, they phrase it as “well you have to pay your fair share” and then the 99% lose take-home pay due to larger percentage “contributions” to retirement and health insurance while the CEOs and upper management get bigger bonuses.

      Hypocrites much?

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      • The 1% don’t demand anything. The market does. And the soveroegn of the market is the consumer, that is the 100% You just don’t like the message.

        You are now competing with 2 billion hard working people in China and India. These two billion were previously excluded from the market. You wages gained in prior eras “unfairly” at their exclusion. Until the system rebalances, We are seeing an era of dropping real prices and stagnant wages.

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          • The system never balances, as there are always new disturbances. Probably trillions of them daily. Markets are complex adaptive systems. If you try to strong arm them you actually make them less and less effective.

            For thousands of years, people misunderstood the system and Tried to improve it with minimum wages, price controls, guild regulations and various mercantilist conceits. The result was always the same. A few billion people getting by on the average of a few dollars per day. The economists finally saw the potential of free markets and the result is substantially more people (less dead babies) longer healthier life and ten to a hundred times higher average prosperity.

            Before you preach destroying the system that you owe your life to, can’t you please study how it works?

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          • My fear is that it will take many decades and instead of good wages ala America in the 50s through 80s the world will get the third world sweat shops with the one percenters living long rich lives.
            I have said it before but feel the need to say it again, “Rich people don’t bother me. People sleeping under bridges bother me.”

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        • And the soveroegn of the market is the consumer, that is the 100% .

          Yes and no. It is true that the market consists of how and where consumers choose to use their disposable resources, and that 100% of us are consumers. However, rising inequality means that the power of the average consumer to influence the market decreases dramatically. Imagine a hypothetical situation where one person (we’ll call him the King) controls 99% of the disposable wealth, and that percentage rises every year, as the King captures more than 99% of the economic gains every single year (assume for sake of argument that there are in fact annual gains in GDP). What power do the King’s subjects have to influence the market?

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          • Yes and no back.

            The appropriate response to gain consumer voting share is to produce more value. That is, if you want more voice, you should probably invest in an education, get a job, work overtime toward promotions and marry someone else who has similar values and potential. In other words, the solution is to change your long term income.

            As Scott Winship said in his congressional testimony on the issue:

            “In other words, we have no more downward mobility from the middle than other nations, no less upward mobility from the middle, and no less downward mobility from the top. Nor do we have less upward mobility from the bottom among women. Only in terms of low upward mobility from the bottom among men does the U.S. stand out.[6] This distinctive pattern presents complications for accounts that explain American immobility by pointing to our policies or our economic system. Further muddying the picture is the complete lack of evidence on cross-national differences in the extent to which children outpace parents in absolute terms.”

            But yes, I agree if someone could get a monopoly on everything that the whole notion of markets would be meaningless.

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            • The point of course is that they in fact are producing more value. And as they produce more value they see less and less of the benefits of that extra value. Worse, in the process, cultural norms are being destroyed as the culture shifts ever-more to meet the demands of the wealthiest – those cultural norms have intrinsic, but unquantifiable, value to the populace. And, worse still, the increasing inequality means they have less and less political power to stop or deter regulatory capture; the rules of the market increasingly become whatever rules most benefit the already-wealthy.

              Again, the pie is becoming bigger, but it sure as hell isn’t a chicken pot pie anymore. It’s a fancy mushroom and gold leaf pie, and as far as all but the wealthiest are concerned, fancy mushrooms and gold leaf don’t taste as good as chicken pot pie. Sure, they’ll eat it because it’s better than nothing. But they sure as hell ain’t better off than they were when it was a chicken pot pie, and they’re sure as hell going to be worse off if the last few traces of chicken flavor continue to disappear.

              And you’re telling them that they need to increase their production of mushrooms and gold leaf and STFU about how they’d like to start making chicken again.

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              • Worse, in the process, cultural norms are being destroyed as the culture shifts ever-more to meet the demands of the wealthiest – those cultural norms have intrinsic, but unquantifiable, value to the populace.

                I would argue that the bigger problem with the shift in cultural norms is the increasing social segregation between the classes of people who make the decisions and the classes of people who comprise a pretty strong majority.

                The overwhelming message we’re sending to them is that they need to become us. If we’re getting rid of your job, well you need to become more like us. A failure to provide the means to do so is one problem, and an assumption that what worked for us would work for them even if we did is another.

                No, I have no solution for this.

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              • Mark,

                “The point of course is that they in fact are producing more value. And as they produce more value they see less and less of the benefits of that extra value.”

                I will agree that lower skilled wages have stagnated even as productivity has gone up. Again, economists attribute this to technology and globalization. Lower skilled labor is in oversupply and probably will be for a while.

                ” Worse, in the process, cultural norms are being destroyed as the culture shifts ever-more to meet the demands of the wealthiest – those cultural norms have intrinsic, but unquantifiable, value to the populace.”

                I agree cultural norms are shifting, and I suppose supply and demand are contributing, but I see them as minor players. I suspect the problem is that we have created a dependent class.

                ” And, worse still, the increasing inequality means they have less and less political power to stop or deter regulatory capture; the rules of the market increasingly become whatever rules most benefit the already-wealthy.”

                I share your concern over regulatory capture. I feel it is a wider spread problem though, as much of the damage is done by licensing requirements, minimum wages, self employment barriers and even, dare I say it government unions.

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                • I suspect the problem is that we have created a dependent class.

                  I have met very few individuals (I don’t deny there are any) whose goal is to be completely useless and live off of social safety nets forever.

                  I have met many individuals whose goal is to get up in the world and away from the safety nets, but who despair of doing so not because of the way the safety nets are designed, but because of realities in the employment sector.

                  It’s easy to claim that those who aren’t working don’t want to work when unemployment is below 4% and there are jobs going wanting. It’s much harder to do so when unemployment’s somewhere between 8 and 10 percent, there are 5 people for every job opening, and the 1% have laughed their way to the bank with taxpayer money from bailouts.

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                  • I agree completely. My argument is indeed that there is a subclass that is not working even when the unemployment is at 4%. A segment of the nation has checked out, and started doing so prior to the recession.

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                    • Old economists used to insist that due to population mobility and people taking breaks between jobs, we’d never get under 6%.

                      The “recovery” under Bush was referred to alternatingly as the “jobless recovery” and the “junk jobs recovery.”

                      If we get to 4%, I’m not going to be complaining about the maybe 0.1% who are “not working, on public safety nets, and milking the system.” I’m going to be too busy being happy we got back to 4%.

                      The underlying bullshit assertion you make/imply is that of that 4%, all of them were somehow milking the system prior to the recession. That simply doesn’t fit to any economic theory known to mankind.

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                • I will agree that lower skilled wages have stagnated even as productivity has gone up. Again, economists attribute this to technology and globalization. Lower skilled labor is in oversupply and probably will be for a while.

                  That is all well and good, and I’ve never had much doubt that globalization was the biggest trigger for rising inequality. But it doesn’t address the issue of whether that rising inequality is a problem unto itself, nor is it exactly of any comfort to those bearing the burden of this shift.

                  I agree cultural norms are shifting, and I suppose supply and demand are contributing, but I see them as minor players. I suspect the problem is that we have created a dependent class.

                  Almost by definition, a dependent class cannot shift cultural norms.

                  I share your concern over regulatory capture. I feel it is a wider spread problem though,

                  I rather doubt this.

                  as much of the damage is done by licensing requirements, minimum wages, self employment barriers

                  No doubt, though the minimum wage in the US is too low to have that much of a negative effect. Regardless, as to these items I must ask qui bono? I’d also throw in some things like CPSIA (ptooey!), my Taft-Hartley hobby horse, continual expansion of the Copyright Act, ethanol subsidies, our national sugar policy, and a whole raft of other stuff.

                  and even, dare I say it government unions.

                  Regardless of whether government unions are on net good or bad, what possible effect do they have on the sort of regulatory capture we’re discussing here?

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          • Substitute “government” for “King” and run that one again.

            This is also responsive to Roger’s argument above, that politics has re-written the economic equation for millennia.

            For thousands of years, people misunderstood the system and Tried to improve it with minimum wages, price controls, guild regulations and various mercantilist conceits. The result was always the same.

            At some point somebody figured out that the price of something should equal the amount that somebody is willing to pay for it.

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          • rising inequality means that the power of the average consumer to influence the market decreases dramatically.

            No, that’s not correct. The average consumer has almost no market influence individually; it’s the aggregate of consumer decisions that do. If I choose not to take a weekend trip because gas prices are too high, that has no effect on gas prices. If hundreds of thousands of us do, that does have an effect on gas prices.

            But why would hundreds of thousands of us ever “work together” to have that effect? Because you, like me, like my neighbor, like my brother, like you sister-in-law, etc., each decide that the higher price is enough to dissuade us from a trip this weekend.

            Triple Bill Gates’ wealth, quadruple it, whatever, and none of that changes. Because he’s not going to go out and buy up all the available gasoline just for kicks.

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          • Mike,

            Touché. Fair point.

            The 1% and the 99% have used politics to exploit us. They have not used, mutually beneficial, voluntary interactions to exploit us. Because voluntary, mutually beneficial interactions are not exploitative.

            This just gets to Hanleys post. Government is often the instigator of inequality and injustice.

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            • The 1% are nobody’s ally but their own, and they’re not even their own allies since they are competing against one another. They’re powerful enough that they can afford to do so and have the rest of us still pose no threat.

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            • They have not used, mutually beneficial, voluntary interactions to exploit us.

              I don’t recall the benefit I got from financial types gambling on the values of securitized mortgages supposedly hedged by credit default swaps. I do recall the hideous amount of money required to bail those fishholes out from the disaster they caused, and I’m still living with the consequences of it. So I have to ask: where does “mutual” come in?

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              • Well, that’s just the problem with the whole critique I think, no? The idea is that a voluntary transaction is mutually beneficial (hence positive sum). The MBS meltdown is clearly a case where voluntariness isn’t enough to ensure positive sum outcomes. Of course, voluntariness – even in the MBS/CDS situation – might be enough to establish a legitimate expectation of positive sum outcomes. But even then, it exposes the limits of thinking that the rational expectation of subjective utility enhancement in a voluntary exchange (ie., the absence of regulation) is sufficient for healthy, non-exploitative, stable, (etc etc) market activity.

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                • Slartibartfast: Perhaps I’m old and tired, but I think that the chances of finding out what’s actually going on are so absurdly remote that the only thing to do is to say, “Hang the sense of it,” and keep yourself busy. I’d much rather be happy than right any day.
                  Arthur Dent: And are you?
                  Slartibartfast: Ah, no.
                  [laughs, snorts]
                  Slartibartfast: Well, that’s where it all falls down, of course.

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                • Lol. I do think that exchanges of good and services for cash on a small, personal level – like the purchase of an ipod – is different enough in kind from financial transactions that Roger’s critique of that kind of activity is balls on. For one, those types of transactions are highly transparent (since you in one sense you know exactly what you’re purchasing) and inconsequential wrt the effects it has on others. The higher up the chain you go, tho, the less transparent the transactions are or might be, and the more the transaction has indirect effects on others who are only passive spectators to it. And given the complexity and stakes of those transactions, the likelihood that transparency is limited is increased. I don’t think there’s a bright line between the two, but paradigmatic examples (an ipod v a CDS) show that the two exchanges are so radically different that it’s close to ridiculous to think the same model ought to or even can apply in both cases.

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                  • the end of what I was saying is that Roger’s free market depends on a free press that he seems suspiciously unwilling to support with his own money, even as all of his arguments depend on it.

                    I mean, really, folks!

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              • Mike,

                You were not a party to their transaction and neither was I. The bail out was forced on us by the elites that we elected.

                You know I am not defending the bailout. I am a fan of markets where people live with their actions, not markets where other people are on the hook for our mistakes.

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                  • Immediate gains found when the money from the people who did benefit, donated to political campaigns. Enough advertising money can make a lot of people forget you screwed them come election season.

                    Long-term gains found when the people who did benefit come through on sweetheart deals. Chris Dodd is now the head of the MPAA, sitting on a pretty cushy job while being a lobbyist and corrupting factor even out of elected political office.

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                    • I’m looking for something more fundamental than that. Keep in mind that this was before Citizens United but after BCRA. The short-term gains don’t really provide much of a gain, either, even if it ensured large campaign donations (and I’m not certain the extent to which it did) since those donations at best substantially mitigate the risk to their seat caused by the decision.

                      Your point about long-term gains may be part of it, but if it is, then it’s a symptom of the problem I’m trying to get at here.

                      Keep in mind that I’m asking this question of Roger, not you.

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                  • Mark, are you certain that the bailouts did ignore the interests and desires of the people who elected them? Many of us were, rightly or wrongly, terrified at the consequences of letting the banks fail. We were given two choices:

                    1. Let the financial system collapse
                    2. Bail the bastards out

                    And chose #2. (If you want to explore why

                    3. Nationalize the banks and throw the bastards in jail

                    wasn’t on the menu, that’s a good vehicle for talking about undue influence, but that’s not where I’m going.)

                    Now then, why did transactions I in no way approved or entered into result in my needing to make that ugly choice? Because Wall Street controls so much of the economy that they what they do has huge effects on you and me and the rest of us. That is, because of massive (you guessed it) inequality.

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        • Ah yes, the magical market fairy theory again.

          What is “the market”? Turns out it’s (by libertarian definition) a collection of purchasing and economic decisions made by people.

          In the “ideal market”, everyone is a rational actor who has full information on all the decisions they are about to make, and exists outside of the consequences of their decisions. Someone can refuse a “take it or leave it” job offer and just go look for another job, without any consequences of unemployment or loss of safety net benefits for turning down an incredibly shitty, insulting job offer.

          We don’t live in magical market fairyland, Roger.

          There’s a group of people who have not just control of the majority of financial wealth, but control of information. The steady destruction of unions has destroyed, in the private sector, the main means by which their power was counterbalanced and by which workers pooled information to get a better view of the whole situation, rather than having to operate in an asymmetric situation where the prospective employer has all the information, a vast majority of the negotiating power, and the prospective employee is operating blind.

          Until the system rebalances, We are seeing an era of dropping real prices and stagnant wages.

          So it is your assertion that over 40 years of time is not long enough for “the system” to rebalance? When do you see that happening? And why is “the system” rebalancing only to harm the lower and middle classes?

          Again, we are not living in magical market fairyland. There are real people involved in this, and too few real people wielding too much power on one end of the calculation for magical market fairyland assertions or Hari Seldon-esque proclamations about things magically coming back into equilibrium to be worth more than the toilet paper it would require for me to print them and then wipe with.

          I suppose to you, the butcher with his thumb on the scales is just “normal market behavior” too, instead of fraud and greed.

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          • See above, it never balances, and never will.

            No it is not perfect. For your grandchildrens sake though, please understand it before you destroy it. A few billion deaths is not to be decided lightly.

            Better yet, why don’t you go to the economists consensus forum I linked and see what they say?

            They don’t agree with everything I’ve written, but they would agree to the folly of too much interference in the system.

            By the way, thumb on the scales is called fraud.

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        • The 1% don’t demand anything. The market does.

          To follow up on Mike S’s point – that they only demand tax cuts and bailouts – I’d add that markets, independent of the actors which comprise them, don’t demand anything. They’re an abstraction. It’s the people within markets who demand things, and those demands, and how they determine resource allocations, price and methods of exchange – the thing we call “markets” – are most definitely influenced (sometimes coercively) by the 1%.

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        • Heh. There was that brief moment, oh maybe seventy years or so, where those billions were labouring under the ideal of Communism, where government was sposta wither up and blow away.

          Seems I’ve heard some of that cheap talk recently about how government’s sposta dry up and blow away. That’s right, it’s the Libertarians saying it now. And it sounds just as dumb coming from their mouths as from the Communists. Not a whit of difference, really, one side damns the government where the other damned the markets and neither of them can find their asses in the dark with both hands and a map and a flash light.

          China’s not exactly prospering. It went from Communism to Fascism without a hiccup in its beer. Out in central China, things are pretty grim. India’s wealth hasn’t flooded out into the countryside. It’s just a rind of prosperity, fuelled by what’s left of the world created in the era of the 40 hour week and workplace regulation. No such impediments to progress in China or India.

          Roger, if China or India were actual democracies, they’d be in far better shape. As it is, both are asymptotically corrupt and the wealth never gets out of the hands of the few. The whole world would be a better place. There’s so much room for progress in the world, I’m perplexed why it hasn’t happened elsewhere any faster than it has.

          And while I’m not the subject, who’s being a Zero Summer now?

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          • I am being a zero summer. I never denied that there is a level of competition in free enterprise. Two producers vie for the opportunity to sell their good. The interaction (the sale) is a win win. The other producer lost the opportunity for a sale. Pure and simple. Most positive sum games have a zero sum dimension. Jason already profiled that the game does not stop at this point of course.

            By the way, I agree on your china and India concerns.

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            • Here’s how it works, in practice. A company straight outta Leftyville goes to some cheap labour country. Say Apple Computer. They don’t speak Chinese, they can’t actually own any land or even the corporation. They go through Foxconn, which for all the bad press, is substantially better than other such middlemen.

              Remember all that hooey about Nike Shoe using child labour? That wasn’t really Nike, it was the middlemen in Pakistan and Cambodia and suchlike. It couldn’t be: these countries don’t allow external ownership.

              Before we start in on competition, let’s both agree markets don’t operate well when they’re subject to distortions of this sort, grifters and well-connected gummint types attaching themselves to the markets like so many goddamn tapeworms. If it were Americans in charge of those operations, we wouldn’t put up with child labour. We just wouldn’t. It’s contrary to our nature. We didn’t get this far down the road to democracy so we could have little children smearing glue onto the bottom of shoes and not going to school.

              But these grifters, different story. This is their big chance to make a profit on human misery at the expense of their fellow citizens. I have a solution to this mess, one which I believe even Libertarians could buy into.

              The phrase Free Market begins with the word Free. Add these grifters and let’s call them what they really are, enslavers, and it’s not Free any more. We should impose huge tariffs on undemocratic regimes. Want our manufacturing business? We’re glad to employ your citizens. Now let’s see

              1. Free and open elections.
              2. A free press
              3. An independent judiciary.

              No tickee, no washee. Free Markets start with Freedom.

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              • A company straight outta Leftyville

                Which companies would those be? Can you give me a list? How do you identify them?

                We should impose huge tariffs on undemocratic regimes. Want our manufacturing business? We’re glad to employ your citizens. Now let’s see

                1. Free and open elections.
                2. A free press
                3. An independent judiciary.

                No tickee, no washee. Free Markets start with Freedom.

                That sounds a lot more like what gets described these days as Fair Trade rather than Free Trade, to me.

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                  • Pat Cahalan alluded to this in his own Inequality essay. The layers of abstraction decouple the stockholders from the consequences of some pencil-neck looking at a spreadsheet and saying “It’s cheaper to outsource this to some screwed-up country.”

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                • I did say Apple. And there’s me, in Guatemala. I have to run my company and little Spanish language school and restaurant through my ex-sister-in-law. You wouldn’t believe how many penny-ante government officials try to hit me up for bribes. All the red tape and bribes, I gave up trying to employ teachers full time, I now deal with them on per-student contracts and pay them cash. Same with the home stays, all cash. And the restaurant, you wouldn’t believe the hassles of dealing with the city and the state.

                  All my problems would go away if I simply bought into Mordida, the bribe system. I refuse to do so and I’ve earned the enmity of the other schools and restaurants because I pay better wages. Also earned the lasting hatred of a few of the local coffee fincas because I created a spot market for 50 kilo bags of local coffee, which broke their lock on screwing the little growers, Now everyone knows the actual price of coffee. As with wine, about five percent of the product is worth at least twice the value of the rest.

                  Some of those Fair Traders are sorta naive. I genially despise Do Gooders. Coming down there, acting like they’re so much smarter and better than the local people, gonna tell them everything. Creating dependencies — no, if people are going to engage in Fair Trade, expose the prices to a larger world, connect a buyer and a seller and get the grifters out of the picture, these things solve themselves.

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          • I’ve heard some of that cheap talk recently about how government’s sposta dry up and blow away. That’s right, it’s the Libertarians saying it now.

            Drink! (Yet another ridiculous misrepresentation of libertarianism, made by someone who can’t be bothered with accuracy.)

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      • There is no 99%. There are only people who want everyone to think that there’s a 99% so that the 2-20% won’t realize that the 99% advocates will have to gore their ox to get what they want. Unlike the 1%, the 2-20% won’t be able to hide behind tax wizardry.

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  3. At the time I was writing there was another chart I considered including that showed executive pay growth outpacing both wages and corporate profit. Instead I just mentioned it in passing. Upon further reflection, I should’ve included it.

    As others have said, I’m not expecting perfect equality either, and I really have no problem with wealth provided it is earned fair*. My beef is that a lot of celebrated wealth doesn’t appear to match up with the effort provided (and in the case of the finance sector, they’ve thrived largely because others haven’t). Between management and other inputs, I don’t think it’s out of bounds to ask what the blend was to the value that came out.

    I also have no problem with automation — constant progress of technology and all that — and was surprised to see that angle of critique come up. Most luddite thing I do is use an old-school popcorn popper instead of buy the microwave bags, and that’s because I think it tastes better that way.

    (* – This may help simplify my view: I have no problem with, say, Dwayne Wade having more money than I’ll ever see in a lifetime. Goldman Sachs having so much as a dollar, however…)

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  4. When automation made possible finely woven fabrics and ceramics … there is no denying that benefits accrued more to the capital/marketing people than the unskilled laborers. But the bigger benefit is that every single woman wasn’t spinning thread and weaving cloth anymore and a pair of pants no longer cost a months ordinary wages.

    This isn’t a valid explanation for real median wages rising so much more slowly than productivity. The real median wage is adjusted for inflation, so it takes the falling real prices of consumer good into account.

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    • Brandon,
      The explosion of cheap products due to automation is not deflation.

      Prior to the recent recession in the decade or so before it hit companies have been investing in more and more automation all along. Many had a fair weather policy that went along the lines of “no person will lose his job to a machine” … which went out the window when the recession crunch hit. This explains why after the fair weather went out the window and lots of people got let go without affecting production, which in turn explains the divergence of productivity and pay.

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      • But Mark, have prices dropped across the board as production costs have gotten cheaper? Prices aren’t directly tied to costs as much as they are tied to the market. If you can cut your costs in half using automation and still sell pants for $90 a pair, you’ll do that and pocket the extra profit. The worker replaced by a machine sees no gain. The worker working alongside it sees no gain. The guy who invented the machine sees no gain. Most, if not all, the gain goes to the folks who decided to replace people with machines. Which is and ought to remain legal. But it exemplifies the shitty culture we’ve created around personal gain at all costs.

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        • I’m not sure that prices have gotten cheaper.

          Certainly my pants, my shoes, and the produce aisle at the local grocery aren’t any cheaper. In fact, to buy a decent running shoe today will run me ~$60, down from ~$15 back in 1992. And to get to $60 I have to go with an off-brand like Skechers, rather than a more trustworthy brand.

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        • Kazzy,
          Prices drop when an industry automates and gets these gains, competition then lowers the price as companies play slow motion chicken with market share, price, and cost. If one company automates and the rest don’t there is temporary gains in profit. That one farmer who got a tractor and can cultivate 10 times more land than his neighbor pays for his tractor and then makes a bundle …. until the rest of his neighbors get tractors and the price wars begin.

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          • Can you give a contemporary example? What has gotten considerably cheaper because of automation? I should say that I’m not necessarily arguing withyour premise as much as I’m hoping you can flesh it out with real-world examples. Thanks.

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            • Almost everything electrical you can possibly buy. Between pick-and-place robots putting chips onto boards, to bed-of-nails testers to QC robotics testing the built component, if you want consistency, you use a robot.

              People are best used to handle exceptions. Just shove the device off the assembly line, give it to a person if the test fails.

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                • You name it. If it has an on button, it’s probably been QCed by a robot. I’ve done at least two dozen QC robots just for phones, a dozen for TVs and puters. Car radios. Weld inspections. Most have 28 second tach times on an assembly line station, longer than that, I need more stations and I’ll divide the tests up.

                  There’s no getting human beings out of the loop, though. People handle exceptions better than robots.

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              • And please pardon my ignorance… I have only recently begun purchasing items like these for myself (past five years or so, if not less) and in many cases, have only purchased one of each type of item, so don’t have enough of a personal history to say, “MAN! I used to pay 5 times this!”

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                • Here’s the deal. An assembly line needs to get, say, 800 units a day off the end and into the box. People don’t do repetitive work consistently. A manufacturer wants to fail 5% of his product, get them to exactly 5% every day and they will just shriek with delight. That way, they can do process improvement, bump up the quality, ever so slowly, identify points of failure. They’re always dreaming up fresh failure points: my favourite was the click resistance of a car radio knob, that little thump from the off point to on.

                  Now they’ll go through and try to get a Gold Device, the one that’s just right. They’ll have human QC and engineers find that device. Then the robot guy works back and uses those numbers as a Goldilocks Reference Point.

                  In manufacturing, consistency is everything. And you just can’t get that with human beings.

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                • so don’t have enough of a personal history to say, “MAN! I used to pay 5 times this!”

                  In economist Russell Roberts’ The Choice: A Fable of Free Trade and Protection, he argues that the best way to measure prices on things like that is how long the average worker has to work to buy them. My copy of the book is in my office, so these numbers are probably wrong, but back in the ’50s it took the average worker something like 100 hours of work to buy a TV, while today it takes the average worker less than 20 hours of work to buy a TV (and one that’s of superior quality).

                  In fact as bizarre as it sounds, a minimum wage employee ($7.25/hour), can buy a decent TV with only about 10 hours’ worth of work, something unimaginable to the middle income worker 4-5 decades ago.

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                    • You might have to pay more than $100k for a house just to have one with a space big enough to hold a monster like that.

                      I keep thinking that TVs are too expensive, which is why I stick to my garage sale one. But I’m beginning to think I’m just thinking about it wrong. Following up on realizing how quickly a minimum wage worker can afford a decent TV, I realized I could pay for one nicer than theirs with less than one day’s work.

                      And yet I still recoil at the thought of spending $150-$200 on a TV, even though I probably spend more than that in eating out each month.

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          • I should also say that your point about productivity versus work is an interesting one. Is it quite possible that a farmer nowadays does the same or even less work than he did twenty years ago, yet his productivity has skyrocketed because of advances in the field (no pun intended). If these advances were through no effort of his own, it’d be hard to argue that he deserves greater pay. Ideally, those who brought about the advances would reap the most gains from the improved efficiency; this would include those who researched and developed the technology or methods, those who made it possible through financing, and early adopters who proved its viability. I suppose this is an area where intellectual property rights comes into play, though these folks failing to realize gains as they should is probably primarily a result of how they licensed the technology: I’m sure they made boatloads on selling tractors, but imagine if they leased tractors and took a commission on the harvest?

            Of course, there are fields where greater efficiency has led to more work and even greater output. For instance, as a teacher, I can do some things much more efficiently because of available technology. Whereas teachers did/do make handmade posters with their own illustrations for their classroom walls, I can quickly use graphics software to bang those out in literally seconds. This then frees me up to do other things teachers might not have done prior or to do traditional responsibilities of the job that much better. I would describe this as “working harder” because most of the tasks that technology/automation has helped with were the easier ones in terms of my true value as a teacher: they were largely menial and my spending hours on them was an inefficient use of my time. So instead of spending 4 hours making a poster and 4 hours developing curriculum, I am spending 20 minutes making a post and 7 hours 20 minutes developing curriculum, with the latter scenario being decidedly more “work”. I don’t know how this translates to other fields, but I imagine there exist some that mirror teaching in this regard. And, of course, not all teachers use the time freed up by automation as I do; sitting around the secretary’s desk and gossiping remains as popular as ever for some.

            So, yea, this was an interesting perspective that I hadn’t considered when looking at some of those initial graphs. I’m not entirely sold on the response being as simple as what you offered here, but there is an important distinct to make between productivity and work.

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  5. The Left, at least the lefties I know, don’t believe economic disparity can be avoided. That’s a simplistic assertion. If we observe capitalism tends to aggregate wealth, that’s as provable as the law of gravity and works according the same rules. The question, for American lefties, is how to best utilise those forces.

    We’re not Communists. We believe in markets and profit. We know government isn’t the solution to all life’s problems. We do observe the market doesn’t regulate itself effectively and requires both external and internal controls to operate effectively.

    Economic reward didn’t begin with furry ape-men climbing out of trees. That started a bit earlier, when eukaryotic life forms learned to get adenosine triphosphate out of mitochondria by supplying them with the raw materials. ATP is the currency of energy for living things. Mitochondria look and act more like bacteria than the rest of your cells: you get your mitochondria from your mother.

    Economic reward is a function of cooperation and specialization. We eat food, the body goes to considerable trouble to get the raw materials to those mitochondria. But our muscles work. Big payoff for all that trouble.

    Put aside all this talk of Fairness and Inequality. If we’re to make any progress, it will start with putting a pin in the map and plotting a route out of poverty, one step at a time.

    Here’s why the Bottom Billion can’t get out of poverty. Trust me on this, I’ve been at this a while. They live in irrelevant nation states, created out of old colonial structures, mutually-hostile tribes crammed into the same Bed of Procrustes. For these reasons, they have no internal raison-d’etre. Look at Pakistan and Afghanistan for cases in point. Nigeria, too, for that matter, all of Africa.

    The nation-state arose in the West as a result of centuries of internal conflict. The Treaty of Westphalia was concluded mostly so the warring powers could re-solidify their own regimes.

    Where nation-states arose under their own steam, most of them are doing okay. Iraqi identity was mostly forged during the Iran/Iraq War of the 1980s. Even the Kurds, who would like nothing better than their own nation-state, seem content to coexist, like the mitochondria, within the cell walls of a larger state, doing their own deals, with their own DNA and sense of purpose to guide themselves. The Kurds were purposely divided among several states to attenuate their influence. So were the Pashtun in Pakistan and Afghanistan. Trouble is, neither the Kurds nor the Pashtun care about the border. To them, it’s irrelevant.

    When the Kurds came under the umbrella of Operation Provide Comfort and Saddam’s troops where largely driven out of their territories, they began to prosper. They’re still doing far better than the rest of Iraq. They’re cutting their own oil deals, bringing in tourists, oh they’ve got a ways to go, and they do quarrel among themselves, but they have a working state without the need for formal recognition as such.

    The same is largely true of the Pashtun in Pakistan and Afghanistan.

    Abraham Lincoln once said of the USA “By the people, of the people, for the people.” Mankind needs all three for society to work. For any comparison to work, for the words Equality and Fairness to mean anything, it starts with some unit of comparison. When I lived in Niger or Guatemala, I seemed incomparably wealthy compared to the people around me. Come back here to the States, different story. Because it’s a different unit of comparison.

    But if I look at the wealth disparity in countries like Guatemala, where roughly 4 percent of the people own 80 percent of the land, that’s kinda where we’re heading in the USA. It’s a bad trend, when too few people gain control of too much power. Leads to trouble, as predictably as tomorrow’s sunrise. Nobody wants the USA to turn into a Banana Republic. In Guatemala, that disparity led to a civil war which went on for 36 years.

    Funny story about how the Guatemalan Civil War ended. So there’s this particularly awful dictator, name of Rios-Montt. Ronald Reagan had called him a Freedom Fighter, praised him to the skies. But Rios-Montt was murdering thousands of Mayan people, his favourite tactic was to direct-fire howitzers into mountain hamlets. George HW Bush gets a huge case of the ass at Rios-Montt and withdraws all military aid from Guatemala. Within six months, Guatemala had signed a peace treaty with the rebels.

    Communism only arose in the context of feudal states, where the peasants had nothing. It never arose where people actually owned land. I hate and fear Communism, it’s a hellish doctrine. If we want to keep this sort of tyranny at bay, we’d better not give them any fuel for their fires. A large enough core of disaffected poor people who own nothing are uniquely susceptible to madmen and tyrants and that story never ends well for anyone.

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  6. Mr. BP, Two questions. How much of Central America’s turmoil was caused by United Fruit Company and American marines and how did Costa Rica avoid so many of their neighbor’s wars?

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    • Heh. The stories of United Fruit and Michelin are darkly congruent. United Fruit wanted to turn Guatemala into one vast banana plantation, Michelin wanted to turn Vietnam into one vast rubber plantation. So each got its respective government to overthrow a democratically elected regime. The rest you know.

      In for a penny, in for a pound. We might as well lump the plantations of the Confederacy in: they wanted to plant cotton on every square inch. Oh yeah, there’s the Enclosure Acts which drove the Scots and Irish off their lands for vast sheep operations.

      Anyone starting to see a pattern here?

      Costa Rica is an odd story, all on its lonesome. As you know, they don’t have an army. They also got rid of their provincial governments. Lots of monopolies though. Land reform solved most of Costa Rica’s problems.

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  7. > Well, Mr Collier is studies those poor in the third
    > world with modern social scientific methods.

    Typically social scientists publish books after their papers have gone through peer review and they have enough of them to qualify as a book.

    Does he cite his own work, in the book? I’d be interested to read the source material.

    > He found that economic inequality over the last century
    > is statistically uncorrelated (!) with civil war and the
    > outbreak of violence in the third world.

    I find this claim counter-intuitive and remarkable. Not that counter-intuitive, remarkable claims are unheard of. But it would seem highly possible that confounding forces are not accounted for in such a study.

    I doubt that economic inequality alone is a sufficient causal mechanism to lead to civil war and violence in most cases. But I imagine religious plurality also to be an insufficient cause, and likely also political under-representation, and a number of other factors… any one of them alone is unlikely to be highly correlated with societal upheaval (which need not be limited to civil war, mind you). Also: crushing economic conditions are generally agreed to be a major contributor to the rise of totalitarianism in the 1930s, and while that didn’t turn into civil war, it certainly turned out badly for global stability!

    You show me a wealthy, equitably distributed society with no religious, sexual, racial, or other discrimination that falls into civil war, I’d be sort of astonished.

    This is a long-winded way of saying, “I think I need to read that book before I’ll buy the premise of the post”.

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    • Patrick,
      Do read the book. It is excellent and manages to skewer precious preconceptions held by both right and left about causes and cures for the third world poor. I believe he provides footnotes … if not Mr Collier is an academic and you can probably chase down the academic papers on which his claims are based.

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