Economic inequality

Return to capital versus return to labour versus return to state of nature

October 29, 2014 — January 2, 2024

Figure 1

Piketty, Hayek, Marx, Pareto. The supercritical Matthew effect. Informational feedback Matthew effect.

This is more about political economy at scale. For models of how bias and discrimination arise in social interactions, see models of inequity.

WTF is growth, and who does it? Do we care if only the minority does it? Is it a problem if technocapitalist god kings rule over a blasted landscape of diseased stunted serfs, or is that totally cool? If fine, is it sustainable? If not sustainable, does that really matter, or should we just go out with a billionaire yacht orgy on the swollen rotten oceans then blow the lights out with nukes?

1 Equality as moral good

I do not personally regard equality of outcome as an end-value, which is not the same as saying I can imagine no instrumental cases for redistribution. But maybe I should internalise that. Hughes et al. (2018):

Groups of humans are often able to find ways to cooperate with one another in complex, temporally extended social dilemmas. Models based on behavioral economics are only able to explain this phenomenon for unrealistic stateless matrix games. Recently, multi-agent reinforcement learning has been applied to generalize social dilemma problems to temporally and spatially extended Markov games. However, this has not yet generated an agent that learns to cooperate in social dilemmas as humans do. A key insight is that many, but not all, human individuals have inequity averse social preferences. This promotes a particular resolution of the matrix game social dilemma wherein inequity-averse individuals are personally pro-social and punish defectors. Here we extend this idea to Markov games and show that it promotes cooperation in several types of sequential social dilemma, via a profitable interaction with policy learnability. In particular, we find that inequity aversion improves temporal credit assignment for the important class of intertemporal social dilemmas. These results help explain how large-scale cooperation may emerge and persist.

2 Inequality and conflict

Figure 2

xhxhxhxhx summarises

We do have strong and consistent predictors of social conflict. They just don’t include inequality. Paul Collier and Anke Hoeffler, in “Greed and Grievance in Civil War” Oxford Economic Papers 56:4 (2004), found that many variables simply do not matter. Not inequality. Not political rights. Not ethnic polarization. Not religious fractionalization.

So what did matter? Chris Blattman and Edward Miguel’s review paper, “Civil War,” in the Journal of Economic Literature 48:1 (2010) tells us that two factors are robustly linked to civil war: “low per capita incomes and slow economic growth.” Håvard Hefre and Nicholas Sambanis, “Sensitivity Analysis of Empirical Results on Civil War Onset” Journal of Conflict Resolution 50 (2006), which tested standard predictors for robustness, identified a few more:

… large population and low income levels, low rates of economic growth, recent political instability and inconsistent democratic institutions, small military establishments and rough terrain, and war-prone and undemocratic neighbors.

I haven’t read the quoted studies, but I presume they assume that inequality doesn’t lead to conflict, controlling for economic growth, democratic institutions and so on. Leaving aside the question of whether one can select the true causal factors here with high probability from the awful data on natural experiments available, and presuming the authors have responsibly identified spurious influences by good choice of instruments and so on, this is interesting. FWIW though, the link between long-term inequality and long-term slow economic growth and weak democratic institutions is what I’m more interested in, and this does more to make me think that in fact I should be more concerned about inequality in the light of its potential indirect linkages to conflict. Should read and see how they attempted to control for that.

Development version, Bo Rothstein, How the Trust Trap Perpetuates Inequality

I would like to add yet another factor to this discussion—trust, in two distinct forms. One is social trust, the extent to which people trust most others in their society. An important asset for any community, it influences how likely individuals are to participate in politics or civic organizations, how tolerant they are of minorities and even how optimistic they are about their life chances. The other kind is institutional trust—the extent to which people believe their public institutions can be trusted. […]

I contend […] that yet another factor stands at the head of the causal chain—having cascading effects on institutional trust, social trust and inequality. That fountainhead is corruption, which undermines not only trust in public institutions but also social trust. If people perceive that public servants are generally dishonest, incompetent or discriminatory, they are likely to make two inferences. To begin with, if you cannot trust the judges, police officers or tax collectors who are supposed to act in the public interest, why should you trust anyone else? If most people have to pay bribes or use personal contacts to get what they need from the public sector, how can they be trusted? If powerful, moneyed lobbies are observed to extract undue favors from the government, as seems all too common today, especially in the U.S., that too undermines institutional trust and, in consequence, social trust.

Crucially, corruption in the public sphere also increases inequality by transferring resources from the public to the elites and, more generally, from the poor to the rich. Studies in Africa and elsewhere show the poor have to pay more in bribes as a fraction of their income than both the rich and middle classes, who have ways to circumvent corruption or to take advantage of it. For example, corrupt countries have much less social mobility because the rich use their connections and their money to get their untalented or unambitious offspring into good schools and good jobs. In a corrupt system poor people have neither the contacts nor the money to help their children climb up.

In unequal societies these interlinked factors feed on one another in very destructive ways

  • The Coasean flip:

    As software eats the world, and companies get smaller and we enter a networked economy — as the Coasean flip takes place — there’s a sharp end:

    TaskRabbit workers paying the cost of the company pivot. Neighbours of Airbnb letters soaking the externality of strangers in their space without choosing to accept it. Drivers who used to be employees being encouraged to be independent Owner Drivers — still in City Link livery — bearing the risk of the company’s capital expenditure and future success… without seeing any of the potential upside.

    And then that risk being cashed in, on Christmas Day after the turkey, invoices unpaid.

3 Billionaires

Arguments for and against an economy possessed of ultra-elites

4 Costs of

  • Lost Einsteins: The Innovations We’re Missing summarises the latest from Raj Chetty’s Equality of Opportunity Project

  • The Cost of not Redistributing Money:

    […] What is often forgotten is that in another sense there is also a cost to not redistributing money.

    A dollar is worth a lot more to someone with an income of 10,000 a year than to someone with an income of 100,000 a year, and it is worth even less to someone on one million dollars a year. Thus there’s a certain inefficiency in giving a dollar to someone who already has many dollars, equally then there is a certain inefficiency to some having many dollars while others have few— those dollars could be more effectively contributing to the happiness of humanity if they were given to those who had less. Using certain mathematical techniques it is possible to quantify how much better a society would be in which everyone had an equal portion of income, yet the total pool of income was the same.

5 Incoming

Figure 3: Zach Wienersmith will call your achievements meritocratic for food
  • Chris Dillow, on increasing income inequalities amongst companies.

  • Are intangibles worsening the productivity gap between leading firms and laggards?:

    We wonder whether might be more going on here than just a failure of technological diffusion. Specifically, we suspect that the nature of what the winning businesses are doing is changing in a way that makes it harder for their competitors to catch up.

  • The secret to the Uber economy is wealth inequality:

    Of the many attractions offered by my hometown, a west coast peninsula famed for its deep natural harbor, perhaps the most striking is that you never have to leave the house. With nothing more technologically advanced than a phone, you can arrange to have delivered to your doorstep, often in less than an hour, takeaway food, your weekly groceries, alcohol, cigarettes, drugs (over-the-counter, prescription, proscribed), books, newspapers, a dozen eggs, half a dozen eggs, a single egg. I once had a single bottle of Coke sent to my home at the same price I would have paid had I gone to shop myself.

    […] These luxuries are not new. I took advantage of them long before Uber became a verb, before the world saw the first iPhone in 2007, even before the first submarine fibre-optic cable landed on our shores in 1997. In my hometown of Mumbai, we have had many of these conveniences for at least as long as we have had landlines—and some even earlier than that.

  • The great American make-work program:

    A staggering 96 per cent of America’s net job growth since 1990 has come from sectors known to have low productivity (construction, retail, bars, restaurants, and other low-paying services were responsible for 46 percentage points of total growth) and sectors where low productivity is merely suspected in the absence of competition and proper measurement techniques (healthcare, education, government, and finance explain the remaining 50 percentage points):

  • Nate Wilmers, the labor market seems to be missing high-skilled jobs, not high-skilled workers:

    We often hear that our big jobs problem is that workers without college degrees don’t have the skills needed for “today’s economy.” I’ve been thinking a lot about this chart (from Autor 2015), and I want to suggest that our problem for the last 15+ years has been basically the opposite. For some reason, the economy isn’t creating enough high value-added jobs for college grads and this is messing things up for everyone else. […]

    In the 1980s we seemed to be headed toward a knowledge economy, with rapid employment growth among technicians, professionals and managers. […] But from 1999 to 2007 (and arguably beyond) something really unexpected happened. Growth in the share of highly skilled occupations plateaued while low skill job growth accelerated sharply. There was no increase in employment share above the bottom third of occupations. The economy just created a bunch of low-paying, low-skilled jobs. During the same period the 2 decade-long rise in the college wage premium abruptly stopped growing (Beaudry, Green and Sand 2014) and the rise in demand for non-routine analytical and interpersonal skills, ongoing since the 1970s, leveled off (Autor and Price 2013). […] What happened to the knowledge economy?

    There are two explanations that hinge on technology, one secular and one cyclical […]

  • Apparently Adam smith said:

    The establishment of perfect justice, of perfect liberty, and of perfect equality, is the very simple secret which most effectively secures the highest degree of prosperity to all the three classes.

  • Chris Dillow on wages

  • Chris Ladd on white socialism:

    Why are economically struggling blue collar voters rejecting a party that offers to expand public safety net programs? The reality is that the bulk of needy white voters are not interested in the public safety net. They want to restore their access to an older safety net, one much more generous, dignified, and stable than the public system — the one most well-employed voters still enjoy. …

    Americans with good jobs live in a socialist welfare state more generous, cushioned and expensive to the public than any in Europe.

  • Amusing snark in covering Mansion magazine, the magazine of elite fancy housing.

  • Aver Offer

  • Mancur Olson.

  • Amartya Sen

  • Piketty, Hayek, Marx, Pareto…

  • Joseph Heath discusses Discipline as an aristocratic resource

    Because I am self-conscious about my membership in the self-control aristocracy, I am acutely aware of the fact that, when I think about questions of “individual liberty” in society, I come to it with a particular set of class interests. That is because I stand to benefit much more from an expansion of the space of individual liberty than the average person does – because I have greater self-control. So I recognize that, while a 24-hour beer store would be great for me, it would be a mixed blessing for others. Or I recognize that my enthusiasm for the new TFSA program is not universally shared – not because its benefits flow primarily to the wealthy, but because its benefits flow primarily to the self-control aristocracy.

    What does this have to do with libertarianism? It is important because every academic proponent of libertarianism – understood loosely, as any doctrine that assigns individual liberty priority over other political values – is a member of the self-control aristocracy. As a result, they are advancing a political ideal that benefits themselves to a much greater extent than it benefits other people. In most cases, however, they do so naively, because they do not recognize themselves as members of an elite, socially-dominant group, that stands to benefit disproportionately. They think of liberty as something that creates an equal benefit for all. (Or, to the extent that it fails to benefit some people, it is entirely the fault of those people, for failing to exercise sufficient self-control.)

    I have mixed feelings about this one, possibly because my model of self-control is different. OTOH, addiction is a thing. Also there are many troubling implications. It feels close to patronising, for one. Also, does it justify my breaking the law if I think I do have self control?

    But: interesting idea about unequal distribution of self control. Are there better solutions than banning everything that the self-proclaimed self-control elites think the self-control peasants can’t be trusted to weather?

  • Who Got What, and Why? A Nobel for Claudia Goldin | A Fine Theorem

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