Sergey Brin and Inequality

Arnold Kling on the Sergey Brin effect and inequality:

Income inequality in the United States consists of two gaps. The first gap is an upper-lower gap, between those with a college education and those without. The second is an upper-upper gap, between those with high incomes and those with extraordinarily high incomes. The upper-lower gap reflects changes in the structure of the economy. New technologies place a premium on cognitive ability. Harvard University economists Claudia Goldin and Lawrence Katz have dubbed this “skill-biased technological change.” In today’s economy, more value added comes from knowledge work, and relatively less comes from unskilled labor.

Kling goes on to discuss policy options that might address inequality, such as tax and immigration reform options.

Inequality is one of the most fundamental and divisive political issues around, the root of considerable discontent. It offends many persons’ sense of fairness. Much inequality of fortune stems from luck–where one is born, for example. Growing inequality might be heralded as a forerunner of an H.G. Wells Time Machine world where humanity is divided into two classes that eventually become two species. It might come about as a result of exploitation, in which one group becomes wealthy at the expense of another. This clearly happens in the case of slavery; according to Marxist theory, of course, exploitation is the rule rather than the exception.

The free-market answer to these points is simple enough. Inequality in a market economy should not matter. In a market in which everyone has equal rights, trade makes everyone better off (Marx being wrong on his theory of value). Some have a larger piece of the pie than others, but the pie keeps growing, and there is more for everyone. Inequality might grow, but as the rich grow richer, the poor also grow richer. This argument is nicely made by Cox and Alm in Myths of Rich and Poor. Earlier, Hayek notes that yes, markets reward results, not merit, but from the standpoint of a population, it is results that matter–we want houses that don’t fall down in a strong wind, even if the architect who designs them is lucky rather than good. Furthermore, luck is not entirely beyond one’s control.

Building on this set of argument, it is common for libertarians to set aside concerns about income inequality as a result of “envy.” Whatever it is, it seems to be nearly universal; I recall (and am too lazy to hunt down and link to) a study a few years back showing that populations report higher levels of happiness in countries with less inequality. (There must be a limit to this at some point, one would expect, surely a population comprised almost entirely of people some of whom are starving, where others are merely malnourished, would not be particularly jolly).

Game theorist Axelrod seems to have tracked down the root of the problem. In his various tournaments, he sometimes set up games in which he asked participants not to be envious, that is, not to think of themselves as doing badly even when their opponent in a given game was doing better. He found that people would do it anyway. He hypothesizes that people want to know how well they are doing as compared to some standard, and in the absence of any other standard, are irresistably drawn to compare their results to those of others.

So are we stuck with dealing with inequality as a “problem,” making policy choices that move pieces of pie from the rich to the poor, even though this might mean that overall the pie grows more slowly–or not at all–or even that it shrinks? Hopefully not the latter. Must we adopt a religious outlook, in which wanting is set aside in pursuit of enlightenment, that is, zen, or perhaps a dose of Calvinism, in which all is predestined, or all serves some grand being’s larger plan? I find this stretches my own credulity too far. So teach economic history, and hope for the best.

Along these lines, maybe it was better for capitalism when there were more grim socialist examples around.

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