The End of Inequality
As I wrote in a recent article (Capitalism and Democracy), despite decreases in global inequality because of economic growth in South East Asia, in-country income inequality has been rising. However, this analysis of inequality is misleading as income inequality is less relevant to well being than real consumption inequality.
Interestingly, inequality in life satisfaction has been shrinking in OECD countries suggesting that the quality of life across the income scale is becoming more similar. Inequality has narrowed dramatically in height, life expectancy and leisure. As William Robert Fogel, a Nobel Prize winning economist put it: “In every measure that we have bearing on the standard of living … the gains of the lower classes have been far greater than those experienced by the population as a whole.
Differences in material goods have also declined dramatically. For instance, despite huge differences in prices for various types of cars, air travel or refrigerators, the difference in the actual services rendered is rather small – and nothing relative to the difference between having the good or service and not having it. Today 70% of Americans below the poverty line have at least one car!
Over time the consumption pattern of the less fortunate has become very similar to that of the wealthy. This compression is the predictable result of innovation in production and distribution that push new technologies down the price scale incredibly fast.
As entrepreneurs we sometimes make vast fortunes and widen the income gap but in so doing, we produce ever higher quality goods at ever lower prices reducing inequality where it matters most!
In other words, income inequality no longer matters!
you should see paul grahams article on the wealth gap.
http://www.paulgraham.com/gap.html
I agree wholeheartedly, esp. in America. While poverty’s never over, esp. in Africa and some parts of Asia, I think it’s important to remember how much better our lives as a world population have become.
Income inequality has never mattered in free market economies – the only place where income inequality is a measure of an unjust society are in countries where the economy is not free and you have a thieving, crocked government elite (such as in many of the cleptocracies of Africa).
If the “price” of putting a computer in almost every home and enabling people to come closer over wide distances with the greatest communication tool in the history of mankind (“the Internet”) is making guys like Bill Gates worth $50 billion, sign me up! The world as a whole is a richer place for it.
To quote one of my personal heroes, the Iron Lady, Margaret Thatcher: “The tide of growth will lift all ships, big and small”.
You are proposing that entrepreneurs and inventors who accumulate vast wealth shouldn’t feel guilty about having so much wealth because their innovations may ultimately decrease lifestyle inequality even if it increases income inequality. So, for example, an industrialist who becomes wealthy by championing a more efficient refrigerator-manufacturing process needn’t worry about financially distancing himself from those who need cheap refrigerators because by providing many people with access to refrigerators he has engendered equality of lifestyle.
I have two objections to this line of reasoning.
First, if it is true that equality of lifestyle is so easy to achieve, then surely successful entrepreneurs have a huge amount of frivolous capital. All that capital doesn’t substantially improve the entrepreneur’s lifestyle, according to recent consumption equality studies. The entrepreneur experiences diminishing returns on his wealth in terms of happiness per dollar. Consequently, from a societal perspective, all this capital is quite poorly allocated. Governments could put that capital to better use by implementing measures to reduce income inequality.
Second, say you don’t buy the argument that entrepreneurs do actually increase lifestyle or consumption equality through their innovations (whether it’s because you feel that consumption/lifestyle inequality is difficult to practically measure; other metrics are more informative; innovations that make people wealthy tend not to improve or even affect the lifestyles of the poorest of the poor in the short-term), or say you do buy the argument but think that those within the highest income brackets are more likely to be people born into wealth than self-made entrepreneurs—does the conclusion that “income inequality no longer matters” really follow when there is a readily perceived inequality between the very wealthy and the very poor? Surely it still matters—and this is something governments must creatively resolve—if only because the differences in quality of life appear so extreme.
Steve:
The very measures that government use to reduce income inequality often blight incentives and might prevent said entrepreneurs from producing the consumption inequality reducing improvements. I disagree with the assertion that improvements that make people wealthy don’t improve people’s lives. Financiers improve access to capital to the world and innovations such as micro-credit have helped millions.
However, equality of opportunity is an issue. We need to make sure the lower classes can make it to the top by fixing the K-12 system in the US for instance (untying the funding of schools from property taxes, increasing accountability of teachers and principals, etc.).
http://www.slate.com/id/2178386/
A suggestion by the Undercover Economist that societies can tolerate a degree of income inequality. The original paper outlining the patterns of historical income inequality are fairly interesting as well: http://mpra.ub.uni-muenchen.de/5388/
Btw. car ownership in American society is no longer evidence of income equality. Outside of a few urban areas it is the only means of locomotion.
I have yet to see how ringtones made the world a better place, but I’ll keep my eyes open.
Nicole:
You are using your value judgement to say ringtones are not valuable – and for many people you are right. However, millions of people bought them and got enjoyment out of them which suggests the service was valuable to them.
I have yet to see how ringtones made the world a better place, but I’ll keep my eyes open.
You could say the same for anything that is not essential for survival and/or basic comfort.
The fact that someone willingly pays money for ringtones (or any number of other things) implies that the ringtone as such makes them feel better off than merely saving or investing the money they paid.
It is the core of a market economy – individual agents freely choose to trade value for value in an exchange where both parties end up perceiving themselves as better off than before (otherwise no exchange would have taken place!).
Ringtones may seem inconsequential in the grand scheme of things, but they are nonetheless small drops in the ocean that make up happiness/content for some people.
The comment was meant to be witty.
Income inequality still does matter, but the consequences are dependent on the level of wealth within a society and the relevant distribution pattern.
i yi yi…can not believe the socialists response. His phrase was : …………………First, if it is true that equality of lifestyle is so easy to achieve then surely successful entrepreneurs have a huge amount of frivolous capital—money that is not substantially improving anyone’s lifestyle…….What is so retarded about this is that he thinks the GOVERNMENT doing something is inherently better than something Fabrice Grinda or ( INSERT NAME ) would do. To believe in government being different like this is akin to religious belief and to me demonstrates wherein the Man Made Global Warming impulse arises. In the hearts of socialists there is a never ending dream of a government utopia RULLED BY THEM ( insert socialists name )……..I think it can be demonstrated easily that capital allocation by the uncontrolled and yes oh my god FREE market method is far superior. Why? Because entrepreneurs do not try to sell that which no one buys !!! …. Personally I can not wait for the day when the intelligence augmentation Ray Kurzweil speaks about occurs. I am going to sell a math ROM chip that’s going to plug into peoples head that will completely eliminate and further consideration of such idiotic ideas such as that embodied in the idea that if the government has Fabrice Grinda’s money that I’ll have an improved life. I will not.
Fabrice:
If William Robert Fogel’s recent study shows anything, it’s that the prospect of extreme wealth shouldn’t incentivze us to innovate; Fogel demonstrates that people make the biggest gains in quality of life by attaining basic necessities, not by becoming extremely wealthy. However, put Fogel’s study to one side and look at the bigger picture. Achieving greater equality of income in the United States would increase the rate of innovation by providing the tens of millions of people below the poverty line with improved access to money and knowledge. You point out that equality of opportunity is important. But the balance between equality of opportunity and inequality of wealth is deteriorating in the United States. All the empirical data shows that the much-heralded American Dream is becoming more elusive to more people.
Fred:
The Swedish and Norwegian governments have achieved some of the lowest worldwide poverty rates by implementing programs designed to decrease income inequality. Yes, governments accomplished this.