Contrived Inequality and Equality-Becker

 

The media and many intellectuals have greatly criticized the large growth in inequality during past 30 years in countries as different as the United States, China, and Brazil. Yet people in all countries generally accept, and usually admire, differences in incomes and wealth that they believe result from abilities and hard work, and where the work done by the wealthy is considered socially valuable. For example, the great wealth of a Steve Jobs or Bill Gates is little criticized because they were brilliant at what they did, and they added a lot to social value. On the other hand, objections are raised when high incomes and wealth are considered to be undeserved. The distinction between deserving and undeserved wealth is crucial in the degree of acceptance and hostility to inequality.

Government policies that favor some individuals and discriminate against others are the biggest source of contrived inequality. For example, the Russian oligarchs are criticized because much of their wealth came from government favors when Russia privatized many industries after the collapse of Communism, and also from subsequent favors as the Russian government consolidated ownership in natural resource and other industries. Similar government help propelled the Mexican telecommunications giant, Carlos Slim, to become the wealthiest person in the world.

Until fairly recently, all countries simply gave spectrums for telephone services, radio and television transmission, and mineral and energy rights to politically powerful companies. Economists pointed out that this was granting enormous wealth to these companies without getting much in return. Their writings and other pressures finally forced the US and many other (but not all) governments to auction off such valuable and scarce property. Tariffs on goods like sugar and ethanol, and subsidies to the oil and other industries, artificially raise the incomes of capital and workers employed in the protected industries.

In labor markets, China’s sharp restrictions on rural migrants obtaining residency in urban areas has contributed greatly to China’s rapid growth in inequality during the past two decades. Minimum wage laws raise the incomes of low skilled workers who can find jobs, but they lower incomes of equally productive workers who are made unemployed because these laws price these workers out of employment.

I could give many other examples of government creation of undeserved inequality, but governments are not the only source of such inequality. Unions raise the wages of workers in the sectors unionized, but unions also lower the wages of equally productive workers who are forced out of these sectors into lower paying jobs elsewhere. In addition, unions artificially reduce inequality by suppressing earnings of more productive union members, so that the net effect of unions on inequality is not clear. One blatant example of unions suppressing earnings of more productive members is given by the teachers union’s opposition to merit pay for good teachers, even though good teachers have large positive effects on their students.

Private monopolies and cartels tend to raise the wealth of businessmen and workers who gain from the higher prices created by monopolies. The burden of these higher prices is borne by consumers, other businesses, and by the workers who must exit monopolized industries because of the cuts in output that create the higher prices.

Differences in education and other human capital are the cause of much of the earnings inequality within rich countries, such as the US and Japan. The boom in the returns to higher education during most of the past 30 years has widened earnings inequality greatly by sharply increasing the earnings of persons with at least a college education, and earnings also of other highly skilled individuals. Higher earnings of skilled persons is not a problem per se for most people, but they object to the fact that many young men and women with the talent to benefit from higher education are prevented from doing so. Their families and schools do not adequately prepare them for college, and they do not have the family resources that enable them to pay for a college education.

The effects on children of broken families and uninterested parents are considerable, yet much more can be done on other dimensions to reduce the inequality in opportunities to attend college. Preparation in schools attended by poorer children can be improved by increasing competition among schools, by paying very good teachers much more than average teachers, and by getting rid of the bad and uninterested teachers. Student loans might be made more effective by making the amount to be repaid contingent-up to a point- on the incomes of those who are repaying student loans. This would reduce the loan burden to those who turn out to earn relatively little, although this “tax” on high earnings does affect the type of occupations students with large loans choose, and may make student loans less attractive to students planning to go into high earning fields like business or medicine.

The huge earnings and great wealth accumulation of some members of the financial sector are often viewed with suspicion because they are considered more due to luck than to abilities. This suspicion is not universal since the billionaire Warren Buffett, the second wealthiest person in America, is very much admired, even though he made his enormous fortune from investments in companies. The vast wealth of some hedge fund managers, on the other hand, is often criticized in part because it is assumed to be due to good luck rather than great skill. Usually overlooked is the role of these funds and other investors in arbitraging prices and returns in different sectors. Hostility to high earnings in the financial sector has greatly increased during past few years because of the role of banks and other financial institutions (along with governments and other culprits) in generating the financial crisis that so damaged the world economy.

Since Rousseau, many intellectuals have been opposed to inequality per se. Most people, however, distinguish deserving from undeserving inequality. Clearly, much of the income and wealth inequality in any country would be considered deserving because it results from greater abilities and dedication. Yet a considerable fraction of the inequality in most countries would be considered undeserving. Governments are expected to reduce these obstacles, but unfortunately, governments also create many of the undeserved sources of inequality.

Comments

[Terry Bennett]

I don't think the resentment toward outsized compensation on Wall St. stems from the perception that it's luck. Rather I think it stems from the perception that their activity doesn't actually produce anything, but merely shuffles the money around. Most people have a vague picture that everybody on Wall St. makes millions, so they don't envision lucky vs. unlucky traders. At least in the short run, traders make money whether their clients gain or lose. Maybe they are lucky to get those jobs, but from there the huge payoffs seem to be automatic.

Warren Buffett is admired because he avoids looking like he's trying for a quick buck, often extolling the virtues of holding stock over long periods. The quants of the financial sector on the other hand have abstracted out the reality of the product and turned everything into a game of milli-cents. It's not luck; it's definitely a skill. It's just a skill that does not contribute any increase to the total wealth in the world.

[Henning Makholm]

I think you're wrong in your analysis about why the fortunes of Jobs and Gates don't generate more resentment. It's not that they are deserved -- nobody can possibly *deserve* that much wealth, no matter how hard they work and how brilliant they are. (Lots of people are as smart, and work as hard, without becoming multibillionaires. It doesn't make sense to claim that they all deserve Gateslike wealth; the world's resources are not large enough to allow them all to *spend* that supposedly-deserved wealth anyway).

Rather, we accept that a few persons become extremely rich *without* deserving it, because the inequality it generates is an essential part of a system that brings about vast social benefits *apart* from a chosen few becoming undeservedly rich.

The social benefit is that the system enables the economy to react faster and more precisely to new technological and cultural situations than any other system that's been tried, which in the end makes even the median citizen better off that if we didn't have it. The world today is too complex and unpredictable for anyone to know for sure what society will need in ten or even two years. In a market economy we solve that problem by having a swarm of entrepreneurs with small businesses try *everything* out in practice; some of it will turn out to be what we need, and the few businesses that got it right will be positioned to grow large and fill the demand quicker than if we had to wait for the demand to be obvious to someone in charge of everything.

This, however, depends on an adequate supply of entrepreneurs who're willing to bet the house and work really hard for years in order to make their idea come true. Some of them will fail because they didn't work hard enough, or were not smart enough, or because the idea was stupid. But many others will fail even though they are smart and work hard on a good idea. It simply turned out not to be the right idea the world needed now -- which nobody could have known when they started out. A few will strike it rich and actually manage to make more money of it than they'd kept working for a salary. And *extremely* few will, by some freak coincidence combined with small a bit of business shrewdness, end up filthy rich.

The mere fact that it is *possible* to end up filthy rich must be a major motivating factor for people to take the otherwise thankless and highly risky step of becoming entrepreneurs. If there weren't a few ones who actually became filthy rich, fewer people would try out new things with the necessary spirit. And that would make us all worse off.

It helps that a few random cases of filthy wealth doesn't actually total up to very much money in the big picture. If some benevolent emperor of the world decided to divvy up Bill Gates' fortune equally among all of humanity, each of us would be able to buy, say, one pair of jeans. Yes, there are people for whom even that would be Really Nice, but still it wouldn't be a long-term effect.

[Terry Bennett]

'Deserve' got nuttin' to do with it. - Clint Eastwood, Unforgiven

Henning, the world disagrees with you, specifically the literally billions of consumers who have voluntarily bought the products of Gates and Jobs, and voluntarily paid them their reward. Neither man ever created a necessary product. Jobs himself once described his life's work as creating a better way to distribute porn. I have neither an iPhone nor Windows 8, and I am in no danger thereby.

The free market system does not necessarily reward hard work, nor does it reward risk, as is commonly thought. Rather it rewards vision, which embodies the correct assessment of risk. Gates and Jobs correctly foresaw the future, at least some of the time, and they invested their work toward their visions, and according to the rules of capitalism by which we thankfully still live, however hobbled, they do deserve their wealth (and will indeed spend it).

If the assertion is that in some transcendental metaphysical sense the wealth is not deserved, I would suggest that such a thesis takes a shortsighted view of the human circumstance. The wealth is irrelevant. God doesn't particularly care. Each of us is attracted to the lesson we need. Some of us will grow by the trials and lessons of poverty, and some of us will grow by the trials and lessons of wealth. Gates finds himself relieved of the burdens most people face daily, paying a mortgage and such, but he struggles with other problems we don't have - and he's still going to get old and die. Jobs was notoriously miserable for much of his life.

[Gertrud Fremling]

The question could be posed a bit differently. The perception of those who have accumulated great wealth or who earn high incomes depends a lot on how they spend the money. Gates, Jobs Buffet never had any tendency to "frivolous", selfish consumption and have been frugal relative to their huge wealth. At least Gates and Buffet have set aside enormous amounts to charity.

It is hard to argue that there is anything wrong with great income or wealth inequality if ultimately the money is spent well: being donated to good causes, invested well or even passed down to a large number of (poorer, deserving) grandchildren and other relatives.

[Talin .]

The growing problem of wealth inequality is less about what people "deserve" and more about the gradual erosion of democratic institutions.

For the ultra-wealthy, the fastest and easiest way to get more wealth is not to invest in risky entrepreneurial ventures, but to influence government to change the rules of the game to favor their interests - to pull up the ladder after they've climbed it.

I don't begrudge Bill Gates or Steve Jobs or even Warren Buffet. I'm more afraid of the many wealthy special interests who use the power of the state to engage in rent-seeking that hurts instead of helps the economy. From no-bid military contracts, to the invention of new and stronger so-called "property rights", to the gutting of bankruptcy laws, to the increase in lifelong student debt, we're seeing the little guy get squeezed from every angle. Even the terms of the discourse are so shaped by the media conglomerates that those who disagree have trouble even framing their arguments.

Look, any society has winners and losers, and that's a good thing. But after a while the winners (or their descendants) start to believe that there's a moral rightness to their good fortune. This isn't because the wealthy are bad people, it's just human nature and we're all subject to its temptations.

Now, combine this with the fact that humans tend to react much more strongly to the potential loss of privilege than they would react positively to the gain of that privilege in the first place. The net result is what I call "entitlement panic" - the view that anyone who would compete with us or threaten our privileged status is an enemy, an immoral person, and must be stopped by any means possible.

We live in a society where money has a huge impact on politics - where our elected officials only serve the interests of people who pay for their television ads. What used to be "one man, one vote" is now something much closer to "one dollar, one vote".

So I want to see wealth equalized not for reasons of fairness (although I do think everyone - even the wealthy - would be better off if we did), but because I see my own political franchise increasingly threatened. I don't want to become disempowered and marginalized. I want to reduce wealth inequality because I believe that it inevitably promotes political inequality, and the latter will destroy us all in the long run.

[Skepticismwins]

The primary objection to inequality is not unjust desert for the wealthy, but the political effects of extreme inequality and the distorted policies to maintain that inequality. Put differently, the billionaire is not begrudged his wealth, but his lobbying for tax shelters that reduce his effective tax rate to levels below those of even the mere millionaire. The ability for someone who can donate hundreds of thousands of dollars to a political campaign to meet senior officials to make his case on an issue is much greater than that of someone who can afford only to donate $5,000.

I find it hard to believe that human capital and education can explain either the income or wealth gap between a person at the 95th percentile of income or wealth and one at the 99th. Do we really believe that the top tenth of one percent of income earners hold multiple Phds?

To the best of my knowledge, no tertiary education institution has ever conceived of adopting a merit pay scheme for teaching remotely similar to the ones proposed for primary and secondary education: outsourcing the creation of a test to a private testing firm to be given to students upon entering a class and then on leaving the class, without permitting the faculty to ever see the complete version of the test even after all testing is done under threat of publicly announced dismissal for cause should they obtain it, and using the difference in scores to allocate merit pay.

[Christopher Graves]

Once again, I believe that merit is next to impossible to clearly define and is impossible to consistently reward in a practical way. As I have argued previously, the standard for social justice should be entitlement rather than merit where people are free to gain wealth and status in accordance with a fair process. Professor Becker's examples of government distributing the means of acquiring wealth in an unfair way illustrates the importance of a fair process rather than evaluating a particular distribution of wealth according to the slippery standard of merit.

[Scott Slick]

Dear Mr. Posner,

I apologize for being off topic, but I just learned of Ronald Dworkin's passing. I spent many a hour reading his writings in law school and after. Eventually, I started reading you, and together you helped enrich my thoughts about the law. Part of me still loves the law largely because of your grand discussions.

I am saddened by his loss, but hoping you have many fruitful and happy years to come.

Scott Slick