Inequality is increasingly becoming a hot topic lately. I find the way it’s framed in popular discussion to be somewhat nauseating. The two sides tends to present totally incomplete stories that do nothing but perpetuate preconceived notions of class and how people get the incomes they do.
On the right, you have the general perspective that people get the wealth they deserve. Sure, people get some bad breaks, some are born with better genes than others, some have to overcome great obstacles. But in general people end up with a fate significantly related to their work ethic and decision-making. Broadly speaking, wealth inequality isn’t as much of a problem to people on the right because it reflects a difference in contributed value between those at the top of the distribution and those at the bottom. Trying to decrease inequality, then, would be inefficient and unjust since you’d merely be redistributing resources from the productive to the less productive, disincentivizing hard-earned productive work and rewarding unproductive work.
On the left, the general perspective is that rising wealth inequality is the result of people manipulating the system. Rich people are rich because they figured out how to play the game. They were given some opportunities often not presented to others and used it to extract more and more money out of the market. Redistribution is thus justified because the rich aren’t rich because they have provided anything great, nor did they ever really deserve the money in the first place.
These are two polar opposites of the spectrum, but popular commentary tends to take one side of this spectrum without giving much credence to the other side. It is because of this that I find the discussion about inequality is not a discussion at all. It’s two sides talking over each other. Some on the right hear an argument on the left and dismiss it altogether because there’s no acknowledgement of an ethos of hard work nor that many of wealthiest create things that clearly benefit the masses. Some on the left hear an argument on the right and the oversimplification of “hard work > wealth” without any mentioning of significant hurdles and dismiss anything they have to say.
The reality is that a new wealth of economic literature points to an explanation for rising inequality compatible with these points of view and yet suggesting completely different solutions.
A couple decades ago, the idea of the “Economics of Superstars” came to being. Basically, the top 1% of any profession was starting to get a larger share of the industry. It wasn’t just the 1% – I say that proverbially, when I really just mean the distribution is slanted more to the top – of bankers, lawyers, or anyone that tends to be vilified by class warfare. It was dentists, musicians, drug dealers, accountants. Literature shows this change across all professions.
The two strongest explanations for it are technology and globalization. The easiest way to frame it is this: Homer could only tell his stories to 50 people in a night, Shakespeare could only fit a few thousand people in a theater, JK Rowling can sell her books to 7 billion people. A gladiator could perform in front of tens of thousands of people at most at a time, Babe Ruth could perform for tens of thousands and then some because of radio and people reading newspapers, Michael Jordan could perform in front of billions because of television. In each of these cases, the top performer’s audience was enhanced by technology and the emergence of a globalized economy.
The demand for “the best” was satisfied because of the actual ability to be able to get the best. Before, any profession was competing locally or regionally. Now, we compete globally. The best x in the Chicagoland area used to just have to compete with people in Chicago, or maybe just in their neighborhood. Now, the best in Chicago has to compete with the best in London, Dubai, and Sydney. This makes “the best” have a lot more demand in the market. The very slight marginal difference between LeBron James and Kevin Durant is amplified by this globalization and makes LeBron the global icon he is.
You’d rather have the best surgeon doing your heart surgery than the second and third best put together. That’s why the best can demand so much more money. It’s not always clear who “the best is” especially when it comes to subjective entertainment like music, but these mechanisms are still present. Beyonce makes more than Bach ever did not only because of a higher global population that has more money, but because she’s able to reach the audience. The “best” these days might not necessarily be better than “the best” in a less globalized economy. They just have better means to showcase their skills.
The solution I always read in this literature is higher progressive taxation. I’m not convinced. Doing this does nothing to change the roots of the problem. Any solution is particularly tricky because we don’t really want technology to regress nor globalization to stop. And to those who say we should stop globalization, I’ll just say I think it’s impossible. Progressive taxes might increase opportunity and class mobility, but none of this research ever mentions at what point progressive taxation becomes too much. Until I see a convincing analysis of this, I will remain skeptical.
So my take on increasing inequality is different than both of the polar extremes yet still compatible with some of their points. Inequality is not the result of an extra manipulation of the market by the 1%, nor is it purely because of extra hard work from the best of the best. It is instead a result of the changing dynamics of a global labor market. Overall I believe this shift is something to be concerned about because at some point inequality because inefficient, decreased class mobility is against whatever version of social justice most believe in, and there is evidence that it creates credit bubbles as the middle class tries to maintain higher consumption.
However, the rich are not to be vilified for their newly increased wealth. The fact that JK Rowling’s books can reach a global audience should be celebrated. People all over the world have much more access and choice to the music they hear and the movies they watch because of these changing dynamics. This technology and globalization has its plusses and certainly its often more visible minuses. But before oversimplifying the issue as hard work vs manipulation, think about the how the world is changing rather than trying to place blame.