Back in the late 19th century an Italian engineer-turned-economist named Vilfredo Pareto was coming up with some interesting notions regarding wealth distribution. Pareto had noticed that quite a bit of Italy’s wealth seemed to be concentrated in the hands of only a few people. After some diligent work, he determined that approximately 20% of the population owned about 80% of the land. It was the beginning of an inquiry into why it is that in every human population – every single one – the majority of that population’s wealth concentrates itself in the hands of a very few people.
Vilfredo Pareto
The “Pareto principle” is sometimes referred to as the “80-20 rule,” but that is giving Vilfredo Pareto short shrift. The precise distribution figures of wealth in any given society do not always match the 80/20 distribution Pareto first observed in Italy; for any given nation at any given time the precise numbers might be “20% of the population controls 90% of the wealth,” or “15% of the population controls 95%” of the wealth,” etc., etc. As of 2007, for example, 20% of the American population controlled about 93% of the wealth in the United States. That concentration has almost certainly gone up since then.
No, what is really interesting about Pareto’s study is that regardless of the actual distribution of wealth for any given population at any given time, the manner in which that distribution manifests itself is always the same: not by a symmetrical “bell-shaped” distribution pattern (the only distribution pattern most of us were taught in school), but – as one gets closer and closer to the wealthy end of the spectrum -- by a power-law distribution. As Mark Buchanan describes it in Nexus: Small Worlds and the Groundbreaking Science of Networks:
[T]oward the wealthy end of the distribution, each time the value for wealth is doubled, the number of people who have that much [wealth] falls off by a constant factor. Up-to-date numbers show the same pattern for countries all over the earth. In Japan, for example, the constant factor turns out to be close to four. (emphasis added).
(Buchanan, p. 189).
Again, what is interesting is not the specific numbers. The power factor by which wealth is concentrated is different for any given society, just as the actual wealth concentration percentages are different for any given society. What is interesting is that the manner of distribution is always the same: a heavy concentration of wealth in the hands of the few, that concentration being easily plotted using some power-law distribution.
It is the universality of the distribution pattern that presents the puzzle. Pareto’s Law isn’t concerned with differences in creativity or productivity between individuals, and it isn’t concerned with differences in economic systems, it just describes very accurately wealth distribution in a population as a whole. It can’t tell you why a particular person or family got rich, only that a certain number of people or families will inevitably become rich and by a very definite amount of wealth relative to the society in which they live.
But since the general pattern of distribution is always the same in every society, one is led to believe that no matter how a society’s economy is engineered there is something fundamental to our economic network that leads inexorably to the same type of wealth distribution. But what?
Jean Phillippe Bouchard and Marc Mezard
One potential answer was suggested by University of Paris physicists Jean Phillippe Bouchard and Marc Mezard in their 2000 paper Wealth Condensation in a Simple Model of Economy. The term “wealth condensation” means exactly what it sounds like. It describes “a process by which, in certain conditions, newly created wealth tends to become concentrated in the hands of the already wealthy individuals or entities, a form of preferential attachment.” In other words, it describes the already rich getting even richer over time.
(I’ve read Bouchard and Mezard’s paper – or, at least, I’ve allowed my eyeballs to stare at it – and I have to admit that their math is well beyond me. Accordingly, there is a link to the actual paper provided above, but I am going to describe their findings by paraphrasing the explanation/translation Mark Buchanan sets forth in Nexus. The relevant passage in Buchanan’s book can be found in pages 188 – 96.)
Essentially, Bouchard and Mezard created an extremely simplistic model of a “wealth distribution network,” i.e.¸ an economy, that took into account only three basic distribution factors.
The first might be thought of as the “dispersal factor,” and it is the primary means by which wealth spreads itself throughout society. Essentially, this factor consists of nothing more than trade. Every time someone purchases a product or a service they transfer money from their own pocket into those of others, and those others then use some of that money to purchase goods and services from others in turn, who then do the same (and so on, and so on, etc.)
This basic -- almost osmotic -- process is what tends to keep wealth flowing from areas of high concentration (the wealthy) to areas of low concentration (the less wealthy). This is the factor – whether they know it or not – that Conservatives are referencing when they keep telling us to “hold on – trickle down prosperity will happen any minute now.” And, indeed, if this were the only factor affecting wealth distribution one might expect to eventually reach equilibrium where wealth was distributed uniformly across society and nobody was especially poor or especially rich. But that obviously is not what happens in the real world.
No, in the real world there is a second factor at play that kind of screws that idea up. This second factor might be thought of as the “concentration factor,” and it is the primary means by which wealth accumulates in one place. Essentially, this factor consists of nothing more than investment of money over time. Every time someone purchases a capital good that may accumulate value, or that same person invests money in a profit making venture, that person is sinking wealth into an operation that might draw even more wealth toward it. This process isn’t so much osmotic as gravitational, like a black hole where any additional wealth that crosses the event horizon gets sucked in and becomes one with the hole. [See what I did there? While not a Buddhist myself, I am a big fan.]
These two factors – the dispersal factor and the concentration factor – obviously operate at cross-purposes. So one naturally wonders whether they eventually balance each other out or whether one proves to be more powerful than the other. And this is where the insight of Bouchard and Mezard comes into play.
Prior to 2000, everybody else who had attempted this type of simplistic distributive modeling had also restricted themselves to deriving equations based on the dispersal and concentration factors already identified. But Bouchard and Mezard did something new: they posited a third factor.
It seems kind of commonsensical once someone says it out loud, but Bouchard and Mezard pointed out that not every investment scheme succeeds. Sometimes new money gets plowed into a scheme and the scheme just goes bankrupt; when that happens, all that seed money is lost. Investment is not risk-free. And that, of course, means that any given economic actor is not equally as free to engage in investment activity as is any other given economic actor – if you’ve only got $1,000 in the bank you will naturally be leery of sinking $500 into a new, potentially risky venture. On the other hand, if you’ve got $100 million in the bank, you probably are willing to risk $100,000 on something equally as risky.
It is kind of like what Chris Rock talks about when he argues that prenuptial agreements are more important for poor people than for rich people:
People think you gotta be rich to get a pre-nup. Oh no. You got twenty million and your wife wants ten, big deal, you ain’t starving. But if you make thirty thousand, and your wife wants fifteen, you might have to kill her!
I’ll let Mark Buchanan explain the difference this basic insight made:
With this simple observation, Bouchard and Mezard found that they could turn the network picture into a set of explicit and fundamental equations to follow wealth as it shifts from person to person, and as each person receives random gains or losses from their investments. With equations in hand for a network of 1,000 people, the two physicists set to work with the computer to see what they might imply. Not knowing precisely how to link people together into a network of transactions, they tried various patterns. And unsure of how precisely to set the balance between the importance of interpersonal transactions [read: trade] versus investment returns, they tried shifting the balance first one way and then the other. What they discovered is that none of these details alters the basic shape of wealth distribution.
Giving people random amounts of wealth to start out, and letting the economy run for a long time, Bouchard and Mezard found that a small fraction of the people always ended up possessing a large fraction of the entire wealth. What’s more, the precise mathematical distribution followed Pareto’s law exactly – in excellent correspondence with data from the real world. This result occurred despite the fact that every person in the model was endowed with identical “money-making” skills, suggesting that difference in talent may have little to do with the basic inequality in the distribution of wealth seen in most societies. Rather, what appears is akin to a fundamental law of economic life, a law that emerges naturally as an organizational feature of the network. (emphasis in the original)
(Buchanan, pp 191 – 92).
What Do You Mean “It’s Inevitable”?
Pareto, Bouchard and Mezard’s studies all strongly indicate that the economic networks we create will by their very nature lead to inequalities in wealth distribution. And not because the wealthy are inherently smarter, or more virtuous, or more qualified – on average – than any other random person, but only because someone has to end up on the receiving end of the network’s distribution pattern and – hey! – you just got lucky, big guy! Without interference by human agency, income inequality seems to be an inevitable result of any free market economy.
Here’s one way to look at it: suppose you have 100,000 test subjects whose job it is to flip a coin and call the results. The only object is to stay in the game. After the first flip, 50,000 people will have washed out . . . but 50,000 people will have called the coin flip correctly.
After the second flip, 25,000 people will wash out, but 25,000 other people will now have correctly called the coin flip twice in a row. After a third flip, 12,500 people will wash out, but 12,500 people will have correctly called the coin flip three times in a row! And on and on and on.
After 15 iterations, you will be down to about 4 people who have correctly called the coin result 15 times in a row! But does this mean these four are precognitive, or especially lucky, or just really, really good at calling coin flips? No, it just means that these were the 4 people that Fate’s random waiting fist of chance settled on – after all, somebody needed to call all those flips correctly, these four just happened to be the ones to have done so. It was inevitable that four people would do it, but it was random chance that it would be these four.
Now imagine the same scenario, but with a minimum $1,000 bet being placed on the outcome of each coin flip. 100 participants start the game with $1 million each, and the other 999,900 participants start with only $1,000 each. Whenever someone runs out of money, they have to leave the game. The last 5 people left standing get to keep all the money.
Who can afford to play the game longer, do you think? Who has a greater appetite for risk? Who can absorb a long period of bad luck and yet still come out on top? What do you want to bet that at least one of the participants who started with $1 million will end up taking it all?
‘Cause my money’s on the rich guys.
* * *
So let’s be real clear about what the “inevitability” of wealth inequality entails.
It does not reflect any kind of moral determination. Plagues, earthquakes, hurricanes and a certain percentage of fatal accidents are all inevitable as well – but since we climbed out of the Dark Ages most of us have ceased to believe that it is “God’s Will” we suffer such things. That is why we enact sanitation codes, take care not to dig the village well too close to the communal privy, and wash our hands. It is why we invented antibiotics and chemotherapy. It is why we spend money monitoring earthquakes, invest in a national weather system, and fund the Center for Disease Control. It is why we put on our seatbelts, wear condoms and – oh, yeah – vaccinate our children against HPV. Yes, some bad things are inevitable -- that doesn’t mean we don’t do what we can to avoid or lessen their effects.
Nor does the inevitability of wealth inequality necessarily reflect the working of some efficient Social Darwinism (i.e., what Conservatives call “the good Darwinism”). While it is true that some individuals do acquire great wealth because of their innate ability, talent, intelligence, and hard work, the inevitableness of wealth inequality in society springs from none of that. The inevitableness of societal inequality as a whole springs out of nothing more than (i) the difference in the amount of money different people bring to the table when they start The Game of Life and, (ii) the brutal laws of probability and risk that apply to us all.
These all may seem like very basic points, but then again so does the case for evolution or getting the HPV vaccine. Given the state of our political discourse, I am not so sanguine as to just ignore the possibility that if low information voters decide that income inequality is “inevitable” they won’t just treat this news as further evidence of “God’s Will.”
This is especially true in light of a recent Baylor University study that found:
This is especially true in light of a recent Baylor University study that found:
[a]bout one in five Americans combine a view of God as actively engaged in daily workings of the world with an economic conservative view that opposes government regulation and champions the free market as a matter of faith.
“They say the invisible hand of the free market is really God at work,” says sociologist Paul Froese, co-author of the Baylor Religion Survey, released today by Baylor University in Waco, Texas.
“They think the economy works because God wants it to work. It’s a new religious economic idealism,” with politicians “invoking God while chanting ‘less government,’” he says.
“When Rick Perry or Michele Bachmann say ‘God blesses us, God watches us, God helps us,’ religious conservatives get the shorthand. They see ‘government’ as a profane object – a word that is used to signal working against God’s plan for the United States. To argue against this is to argue with their religion.”
Most (81%) political conservatives say there is one “ultimate truth in the world, and new economic information of cost-benefit analysis is not going to change their mind about how the economy should work,” Froese says.
I despair to think that pointing out to these people that the wealthy didn’t get to be rich because they are better, or smarter, or “more productive” just means that these people will then be forced to conclude that the rich must be wealthy because they are “holy.”
Ye Gods.
What’s to be Done?
It's simple.
Unlike the 20% referenced in the Baylor University study, the rest of us can actually learn from and make use of Pareto, Bouchard and Mezard’s work – all we have to do is recognize that the economy is not “God’s Will” or something “divinely ordained” but is instead just a network that we create ourselves, sustain ourselves, and that has value only so long as it works for us . . . and that we can tweak and correct that system as needs be.
(Brief aside . . . I am a religious agnostic, but one of my favorite stories is the story of Jesus and his disciples picking grains of wheat on the Sabbath and eating them because they were hungry. (Matthew 12:1-45) The Pharisees berated Jesus for this, because it was against the Law. And Jesus, essentially, told them to shut the hell up because it was more important that people not starve than that the law be fulfilled. The Law – like the economy – exists for Us, and not the other way ‘round.)
One of Bouchard and Mezard’s chief conclusions, unsurprisingly (as they themselves put it), was that taxation by the body politic went a long way toward minimizing the inequitableness of an unfettered market. In an ideal world, perhaps, a way could be found to force the already wealthy to trade more than they invest, but in the real world this is impracticable. However, taxation essentially functions as the equivalent of forced trade, and thus fosters the dispersal effect of wealth – which, due to existing inequalities, will otherwise always be seriously outgunned by the concentration effect.
You know . . . there has been a lot of ink spilled over the past few years about why America has seen such a rise in its income inequality. Paul Krugman laid the facts out back when Ben Bernanke first testified to Congress as Fed Chairman:
So who are the winners from rising inequality? It’s not the top 20 percent, or even the top 10 percent. The big gains have gone to a much smaller, much richer group than that.
. . . . Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only 34 percent, or about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn’t a ticket to big income gains.
But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No that’s not a misprint. (emphasis added).
And about a year ago, in an effort to understand why the already extremely wealthy have been sucking up ever and ever greater slices of the American pie over the past 40 years, Timothy Noah wrote a series of articles at Slate.com titled The United States of Inequality: the Great Divergence, in which he looked at the income effect of productivity gains, education, globalization, race, gender, immigration, a less powerful labor force, etc., . . .
But maybe that is all just missing the forest for the trees
Rather than getting into the nitty gritty of economic reform, why not address the problem first using broad strokes, and then refine our solutions as the problem becomes more manageable?
Want to reduce income inequality? The data suggest that it’s very simple, even if the perfect optimization is a bit foggy: Raise taxes. Raise ‘em on upper-level income, raise ‘em on capital gains, raise ‘em on the estates of rich dead people. Then pump that money back into the economic system. Forced trade through taxation, dispersal effect strengthened, problem solved. Just as it has been before by every modern capitalist society.
And, yeah . . . I am advocating wealth redistribution by the government. That is what taxation is. And I am doing so not because I like taxes or hate rich people or out of some misguided ideological bent, but simply because the data seem to make it clear that if the government doesn’t start this kind of forced dispersal effect soon – but instead relies on an unfettered free market to allocate wealth – then it is inevitable that America will slide into a third-world, Banana Republic state.
I want to raise taxes and redistribute wealth because I am just too goddamned patriotic to let that happen to the country I love. I’m not a socialist or a terrorist or a communist or a hippie – I’m an American who wants to do the right thing for my country. The uber-rich (other than Warren Buffett) might want to start thinking about doing the same.
Great article, really appreciate the research. Though I'm skeptical of your position, your argument is compelling. I have a couple of questions I wonder if you'd mind addressing?
ReplyDelete1. First a confirmation. I assume you feel the distribution tails are too short, and you would seek to lengthen them?
2. If you would use tax policy to re-shape the distribution, what shape distribution are you trying to achieve?
3. Distributions are relative, they are agnostic about the absolute values. For example, in the 1800's there might have a been a distribution more to your liking. Today, the distribution is not what you would like, but clearly the absolute values are higher across the board.
4. Distributions are also indifferent to individual outcomes, though they inform the odds. Is it possible that the striving for individual outcomes influences not the distribution, but the absolute levels?
5. I assume your familiar with the idea of risk preference? Is it conceivable that different societies would seek different distributions? One society might prefer high odds of medium outcomes, another might prefer low odds of outstanding outcomes. Do you think each society should be able to choose, or is the ideal shape a constant?
Thanks again, hope to hear from you. Very thought provoking, once I get my mind around it I intend to post an article about/linking yours on my blog, honestinquiry.com
Cheers,
Everett
Hmmm - let's see if this works.
ReplyDelete(Ah, that seems to be it -- can't post a comment too long; I'll have to break it up).
ReplyDeleteEverett –
Thanks for commenting. I’d like to address the points you raise, but not precisely in the same order you present them.
Also, I may be off about what you mean by the terms you use; so I will go ahead and tell you what I understand you to mean, and answer the question I think is being posed. I apologize ahead of time if I misapprehend you and – if so – please write me back and explain what I’ve misunderstood and then I’ll try to answer the question you actually presented and that I screwed up.
Point #3: “Distributions are relative, they are agnostic for the absolute value.” I normally think of “absolute value” to mean the distance from zero on a linear graph, but that wouldn’t make any sense here. I suppose it could mean the distance from the mean value of wealth or income, or the distance from the median value of wealth or income, but what I think you intend to ask about – and, again, I’m just taking this from the context of your question – is something different.
You write: “Today the distribution is not what you would like, but clearly the absolute values are higher across the board.” I think what you are asking is that since income as a whole has increased over time, i.e., as the economic pie has gotten bigger, am I justified in being upset about the increasing concentration of wealth? To which I would answer – Yes.
If the economic pie grows, but a single section of the population takes a larger percentage of the pie, then everyone else is – in fact – getting screwed over. I understand that the growth of the economic pie is not limited, but the percentages that can be divvied up certainly are – they can never add up to more than 100%. If one person’s share of that income increases, that increase necessarily comes at the expense of somebody else.
(to be cont'd)
For example . . . suppose you are about to sit down to enjoy a pizza pie with three buddies. Each of you is going to get 3 slices of pie – 25% of the pizza. And then, suddenly, the amount of pizza you have doubles. So now you and your 3 friends have 2 pizzas. But suddenly, one of your friends – we’ll call him Rich Guy – decides that he isn’t happy getting only 25% of the total pizza; he wants 50% of the total pizza. And you and your other two friends agree to that.
ReplyDeleteSo now Rich Guy gets an entire pizza to himself, and you and your two other buddies get to split the other single pizza between you.
Now . . . are you better off than you would have been before, when you only had 1 pizza? In absolute terms, sure. Now you personally get to enjoy 33.33% of a whole pizza, and you used to have to settle for only 25% of a pizza; so you’re ahead of the game. But if your friend Rich Guy hadn’t changed the rules of distribution, you’d have 50% of a pizza – so, in that sense, you really did get screwed. The only way this makes sense is if Rich Guy convinces you he alone is responsible for producing the entirety of that second pizza – which seems far-fetched, but what with all the language flying around these days about how rich people are also, somehow, magically “job creators” that seems exactly like what they are trying to convince us of.
Going back to the time of the Krugman quote that I reproduced above, according to the CBO as of 2007, “the top 1 percent of households [had] seen their income share go up by 7 percent and the bottom 80 percent [had] seen their income share go down by 7 percent. In total, that is $664 billion an increase in inequality, representing $7,000 for each household in the bottom 80 percent and nearly $600,000 for each household in the top 1 percent.” It seems clear that the increase in income share enjoyed by the top 1 percent during this time came directly at the expense of the bottom 80%.
The distribution problem I have is that the pie is growing, and the rich were already getting a pretty good share, but now they’re getting even more; they are taking the productivity gains out of the economy and transferring pretty much all of those gains into their own maws at the direct expense of the rest of society.
(to be cont'd)
Point #4: I think you are correct about this; striving for individual outcomes is definitely the most important thing that affects individuals, but it has no effect on the distribution of wealth across society as a whole. The analogy I like to draw is to the famous pressure/temperature/volume equation that describes a gas in an enclosed space.
ReplyDeleteWe all know what happens if you keep the volume of gas the same, but increase temperature: pressure goes up. And we all know what happens if you keep the volume of gas the same, but you decrease temperature: pressure goes down. And we all know what happens if you suddenly cram the same amount of gas into a smaller volume: both pressure and temperature go up.
It is a simple equation that defines the system as a whole, but it is also an epiphenomenon that arises out of the brownian motion of the millions of individual molecules of gas. But we don’t need to be able to predict what each molecule is going to do in order to predict how the whole system reacts. The research done by Pareto, Bouchard and Mezard only describes the system as a whole – not the individual economic actors. Those individual actors’ outcomes will be significant for their personal event horizon, but will have negligible effect on the distribution of wealth and income across society as whole.
Point #5: I understand the concept of risk preference, and appreciate that different societies will manifest different preferences for risk. Indeed, this is pretty much indicated by one of the quotes I pulled from Buchanan’s work, in which he points out that the power-law factor that appears to govern wealth distribution in Japan is 4 – but, as noted, is different for different populations.
And of course each society should be able to choose their risk preference – in fact, each society does. I don’t know how that could be affected, short of a single world government with command-and-control power over economic activity, which – even were that possible – would be an incredibly, incredibly bad idea.
Point # 2: Regarding using tax policy to reshape income distribution and what distribution would I want to see achieved . . . to tell you the truth, I think there are actually two questions in that.
First, my understanding is that tax policy is not so much used to redistribute income as it serves to reshape income distribution to begin with. But I am not sure that this is something that can be planned in advance. I also am not 100% sure that a very few number of people shouldn’t be the only ones making money.
(Well, actually, that’s not true. I am 100% sure that’s not a good idea, but I’m willing to entertain, for purely conjectural purposes, that maybe we could try something like having the entire $15 trillion US income earned by just, say, 400 people).
Let’s suppose that we get the American economy so lean, so mean, so efficient that it continues to be the world’s largest economy – in terms of wealth taken in and profit being made – but all that money goes to only the tiniest sliver of its population. The rest of the American citizens are surplus goods. Let’s also assume that the people who have all the money are not willing to risk the shame that comes from letting all but the few absolutely necessary worker-drones die off. (This soon after WWII, genocide still smells a bit whiff when one’s entertaining other countries; avoiding genocide and massive starvation is mandatory, if only because a government simply must demonstrate good taste in front of the neighbors.)
(And I know, I know . . . I’m doing a sci-fi dystopia thing, but I’m doing so to make a point).
How would that work?
(to be cont'd)
Well . . . let’s assume that the USA has a $15 trillion economy – that’s more than enough money to take care of a 350 million population (yes, in both instances I’m rounding up) . . . it’s just that, in order to take care of that 350 million population the USA gov’t would have to tax the crap out of the 400 people or so who have all the money. From the standpoint of the 400 this may seem inequitable, but from the standpoint of the gov’t which – after all – is charged by the Constitution with promoting “the General Welfare” and not “private profit” (which phrase does not appear once in our founding document) this is pretty much what it is supposed to be doing.
ReplyDeleteSo, as a matter of principle, I’m not opposed to a very few people getting all of the money, so long as they understand that the government will have to take almost all of that money right back from them in order to make sure that the other 349,999,600 people for whom the gov’t is also responsible don’t die of leprosy in the streets.
If you want all the money, you have to pay all the taxes. It’s a basic rule.
But, of course, that isn’t my first choice, not least because I have a very jaded view of humans’ ability to decide in a central-planning kind of way how to allocate resources. I believe in the free market, but not the unbounded free market that results in the kind of seriously tilted form that Pareto, Bouchard and Mezard indicate arises absent human agency. I’d rather have income broadly distributed across society, and everybody paying taxes – everybody paying taxes because everybody is making money.
Fortunately, it appears that the taxation effect suggested by Bouchard and Mezard’s model works across time as well. In other words, when we get to a situation like the one we have now – where so much of the nation’s income is being funneled to a very few people – the answer is to start taxing the crap out of those people and let the gov’t do . . . well, pretty much whatever it wants. (Yeah, I know . . . I’m against gov’t waste as well, but – remember – we are not talking about the individual gas molecule we are talking about the overall system; the math seems to indicate that it doesn’t make much difference, overall, what the money gets spent on so long as it isn’t just plunged right back into the pockets of the wealthy from whence it originally came.)
Apparently, this taxation and spending by the gov’t is itself enough to skew the income distribution a little bit, so that more of the country’s income ends up going to the middle class. And then, when the middle class is strong once again, you can expect to see calls again to not tax the wealthy so much. And then we will once again see a massive income tilt toward the already rich.
(to be cont'd)
The bottom line is that I think to ask the question “what kind of distribution would you like to see” is to misapprehend the point. I don’t believe it is possible to achieve a “solved state” a “fixed equilibrium.” I do believe that when things get out of whack and the rich start taking a vastly disproportionate share much of the nation’s income then we are supposed to respond by taxing the crap out of the rich. After 30 years or so of that, society gets to a point where it can relax because its middle-class has been built up once again (this is pretty much where the U.S. was in the mid- and late-70’s) . . . and then the underlying math that Bouchard and Mezard pointed out takes over, the rich start once again accumulating so much wealth as to strangle society, and we begin the process all over again.
ReplyDeleteAt least, that is what I hope happens. Let’s remember that the Great Contraction in wealth from the New Deal until about 1975 was something unique in America. Americans love to talk about our “great middle-class” but the truth is we’ve had a middle-class for less than a century. The American middle-class was something that was created by a bunch of well-meaning technocrats playing around with our economy in the wake of the Great Depression and WWII. The middle-class wasn’t inevitable . . . . Hell! it wasn’t even likely. It was something that we called into existence through sheer force of will. And now it is being stripped away again, by the already wealthy who tell us that the unregulated market will make us all rich . . . when, in fact, it will only make them richer.
But we know enough now to know that they are lying to us.
* * *
The bottom line is that I can’t give you an ideal income distribution pattern for which I think we should strive. I don’t think human society works that way. I think we are dumb enough to lurch down a dark hallway, bumping into walls – first the one on the left, then the one of the right – barking our shins and bumping our nose, and often running right into a wall.
But I’ve got to think that we are smart enough to recognize a glimmer of light when we see one, and lurch toward it. And if there’s something out there that gives us a better chance of getting to where we want to be and maybe avoiding a barked shin in the process of getting there . . . well, maybe it’s not the illumination of that comes from switching on the hallway light and seeing the path before us in all its detail . . . but if that glimmer is all we can get, I think we would be fools not follow it.
Sorry for going so long – hope you stuck around for it.
(now concluded)
Of course I stuck with it! Wonderful, well articulated thoughts. As regards absolute values, I think we're on the same page.
ReplyDeleteOne model for examining proposed policy changes is 1) Define a problem, 2) Propose a workable solution that 3) Creates advantages that outweigh disadvantages.
I think the great achievement of your article is its contribution to defining the problem. Actually you contribute to two, inequality of wealth, and inequality of income. They are actually quite distinct, though of course interrelated.
I hope you give more thought to the distribution shape you would advocate. Granted a definitive shape is unreasonable, but certainly there is a range you would find desirable. A more precise problem statement enables a better discussion of solutions. At present you argue the problem is an undesirable distribution, that it should be better. A stronger argument would be the distribution should be A , but the actual distribution is B, and we should do C to close the gap.
The better we understand what we’re trying to achieve, the better we can craft solutions, and the better we can weigh the advantages and disadvantages of the proposed solution. So I hope you take up the challenge and start to think more about how the distribution should look, rather than just different than it is now.
Your comments span an impressive range of thinking, but a few overarching thoughts. Generally, I suspect the inequality of income question is really inequality of wealth in disguise. When the income gap is broken down, the income that is creating the gap is primarily income from investment…wealth. So (I suspect) the real issue is concentration of wealth, and one of the side effects over time becomes inequality of income.
The inequality of wealth problem has a long history. The problem is discussed extensively in the literature of the 1800’s, with inheritance a big focus. I think what is so intellectually challenging about your article is that it suggests that a free market is inherently unfair with regard to outcomes. This is a direct indictment of the core free market tenet of equality of opportunity. Free marketers oppose equality of outcome, but what if free markets create a wealth distribution with such short tails that in all practicality equality of opportunity is illusory? That’s a BIG thought.
I’m off to find the original sources you cite, look forward to more dialog…
Everett -- you are always more than welcome to opine here. And, b/t/w . . . I registered over at your site as well.
ReplyDeleteMr Swellsman,
ReplyDeleteYour a difficult man to contact. I'd love to republish this article on my webzine JeSaurai (www.iwillknow.jesaurai.net) it is very good and links in nicely to many articles I have written for the site. so there's a little vanity in my request.
I'd also like to know your thoughts on the FSFP (you can download the full outline here: http://iwillknow.jesaurai.net/?page_id=316 )flow siphon flat payment which acts as an automatic money supply regulator and should stop the tsunami over the stagnant pond you describe as inevitable if we leave randomness to its own devices in a human market system.
Email me if you are interested. goto submissions and use the email address there: http://iwillknow.jesaurai.net/?page_id=12
David
David -- you are more than welcome to republish this over at your site. All that I would ask is that you credit me for having written it and that you provide a link back here in case anyone wants to click over.
ReplyDeleteI don't think I've heard about the flow siphon flat payment idea before, but I will click over to your place and check it out.
Thanks, and - of course - I am very pleased you liked this.
Here's some additional support for your argument... http://www.aabri.com/NC2011Manuscripts/NC11010.pdf
ReplyDeleteSeen lot's of use of the sources you cite to criticize the distribution, yet to see anyone state what the desirable distribution would be...someone needs to step up!
The problem is the argument against the current distribution is incomplete. An observation about the shape of the distribution is not prima facia an indictment. If one applied the utilitarian standard of the greatest good for the greatest number, we might be more interested in the aggregate living standard than the distribution shape. To state the idea at the extreme, I would think we could all agree that it would not be good to flatten the distribution if the effect were to drive us all into a more equal state of poverty. This is not of course to say that any and all actions to influence the shape are wrong. It's just that unless we understand what we are trying to achieve, and how we propose to achieve it, we simply cannot weigh the advantages and disadvantages.
Swellsman..
ReplyDeleteI hope you like the presentation and the cartoon... I love it.
see: http://iwillknow.jesaurai.net/?p=387
And thank you.
btw have you read the FSFP?