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Income Inequality vs Productivity Inequality

Democrats plan to demagogue income inequality and the wealth gap for political gain in this year’s elections. Most of what’s said about income inequality is stupid or, at best, ill-informed. Much to their disgrace, economists focusing on measures of income inequality bring little light to the issue. Let’s look at it.

Income is a result of something. As such, results alone cannot establish whether there is fairness or justice. Take a simple example to make the point. Suppose Tom, Dick and Harry play a weekly game of poker. The result is: Tom wins 75 percent of the time. Dick and Harry, respectively, win 15 percent and 10 percent of the time. Knowing only the game’s result permits us to say absolutely nothing as to whether there has been poker fairness or justice. Tom’s disproportionate winnings are consistent with his being either an astute player or a clever cheater.

To determine whether there has been poker justice, the game’s process must be examined. Process questions we might ask are: Were Hoyle’s rules obeyed; were the cards unmarked; were the cards dealt from the top of the deck; and did the players play voluntarily? If these questions yield affirmative answers, there was poker fairness and justice, regardless of the game’s result, even with Tom’s winning 75 percent of the time.

Similarly, income is a result of something. In a free society, for the most part, income is a result of one’s capacity to serve his fellow man and the value his fellow man places on that service. Say I mow your lawn and you pay me $50. That $50 might be seen as a certificate of performance. Why? It serves as evidence that I served my fellow man and enables me to make a claim on what he produces when I visit the grocer. Google founders Sergey Brin and Larry Page are multibillionaires. Just as in the case of my serving my fellow man by mowing his lawn, they served their fellow man. The difference is they served many more of their fellow men and did so far more effectively than I and hence have received many more “certificates of performance,” which enables them to make greater claims on what their fellow man produces, such as big houses, cars and jets.

Brin and Page and people like them created wealth by producing services that improve the lives of millions upon millions of people all around the globe. Should people who have improved our lives be held up to ridicule and scorn because they have higher income than most of us? Should Congress confiscate part of their wealth in the name of fairness and income redistribution?

Except in many instances when government rigs the game with crony capitalism, income is mostly a result of one’s productivity and the value that people place on that productivity. Far more important than income inequality is productivity inequality. That suggests that if there’s anything to be done about income inequality, we should focus on how to give people greater capacity to serve their fellow man, namely raise their productivity.

To accomplish that goal, let’s look at a few things that we shouldn’t do. Becoming a taxicab owner-operator lies within the grasp of many, but in New York City, one must be able to get a license (medallion), which costs $700,000. There are hundreds of examples of government restrictions that reduce opportunity. What about the grossly fraudulent education received by so many minority youngsters? And then we handicap them further with laws that mandate that businesses pay them wages that exceed their productivity, which denies them on-the-job training.

Think back to my poker example. If one is concerned about the game’s result, which is more just, taking some of Tom’s winnings and redistributing them to Dick and Harry or teaching Dick and Harry how to play better? If left to politicians, they’d prefer redistribution. That way, they could get their hands on some of Tom’s winnings. That’s far more rewarding to them than raising Dick’s and Harry’s productivity.

  • MichaelTompson

    Unregulated transportation failed on so many levels so many times that literally all large and mid-size cities all over the world ended up regulating it. In this case, and in many others, such as accedited education system, regulation is for the benefit of consumers and citizens.

  • tim_lebsack

    Spoken like a true regulator.

  • writeby

    Carter’s deregulation of ground trans was slight. On the other hand, compare NTSB’s *domestic* commercial air ‘s safety records prior to airline dereg with that subsequent. Indeed, government operated rail trans–i.e., Amtrak–has a far worse record.

    http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&ved=0CDUQFjAB&url=http%3A%2F%2Ffaculty.wcas.northwestern.edu%2F~ipsavage%2F410.pdf&ei=b6_WUuPLNbStsQSkv4C4Aw&usg=AFQjCNEY-wwsXDxNRYHiyHkIs_nfBPTjxg

    http://www.nytimes.com/1985/09/24/opinion/l-air-disasters-deregulation-is-not-the-culprit-026010.html

  • writeby

    Of note:

    * Accidents involving fatalities: before deregulation, 15; after deregulation, 10 1/2.

    * Fatalities: before deregulation, 206; after deregulation, 138.

    * Fatalities per 100,000 flights: before deregulation, 3.21; after deregulation, 1.85.

  • writeby

    PS. ‘Literally’ means ‘in actual fact.’ In the case of things that are, um, actual facts, its use is, well, literally unnecessary.

  • Arrimine

    As a general theory, this is fine but there are three key issues that the author has ignored:

    1) Finance – not in the sense of me lending you certificates of performance to aid you in serving others, but rather me allowing you to buy and sell wagers on which members of society (the guys at Google or the guys at Apple) will be more productive. In this instance, I’m not even the casino… I’m just the person at the window taking bets — and I am paid better than pediatric surgeons.

    2) Inheritance – it is one thing for Bill Gates to claim that he deserves his certificates of performance because, hey, lots of people own and like their PC’s (we can argue about the marginal contribution he made in a winner-take-all world, but why quibble). But what about Bill Gates’ three children (or his great-great-grandchildren)? He made his largest contributions to society – ostensibly earning his performance certificates – before they were born. Was their performance as children so great that they should inherit wealth for their amusement that would support literally millions of under-performing children in Africa?

    3) Even if it the certificates of performance model is “right” and “fair” in some sense, it can still create societal problems. One example of many: those who lack the productive capability to earn performance certificates sufficient to provide their families with an acceptable standard of living will seek non-productive ways to provide for themselves or their families. This may not be “right” or “fair” in the eyes of many but it is reality. Many people will not say, “Oh well… I didn’t work hard enough in school… I guess I have to take my medicine for a while while I try to improve myself.” Some will abandon their families and some will turn to crime. This is a reality that can’t be ignored. These people aren’t going to disappear and they aren’t happy.

    Don’t get me wrong… I’m pro-Capitalism – just not blindly or naively pro-Capitalism. Inequality of production is a real issue but there are lots of things wrong with Wealth Inequality that Productivity Inequality doesn’t address.

  • Lloyd Burgett

    full time workers should make a living wage.thats not redistribution of wealth,its common human decency.how much they payin you to spout their bullshit?and how exactly is that productivity equality.you ain’t doin nothin for your fellow man but spreading the rich white man’s master plan.you make me sick.

  • writeby

    Trenchant rebuttal, if one accepts ad hominems and oversimplifications as points of argument.

  • Lloyd Burgett

    maybe you would care to enlighten me sir.i came to this site to learn something.thank you in advance

  • miguelggarcia

    Work is voluntary. A person earns just as much as she is willing to take and/or how valuable her contributions to a company are.
    Let’s take Jane, for example. She’s an average burger flipper, Jane’s easily replaceable since there are tens of thousands of average burger flippers that can do what she does just as well. She makes 7.50 doing that job.
    Let’s say that Jane applies herself and learns about how to manage the restaurant. Now, the number of restaurant managers vs burger flippers is much smaller, so she can work to make more money for herself (since she’d be providing more value to her company). Let’s say that now she makes 10.20.
    Let’s say that someone decides that the minimum wage should be 10.10. That means that average burger flippers would be making almost the same that restaurant managers. Is that fair to Jane? Now, is that fair to the “below average” burger flipper that got fired because his performance didn’t justify him earning 10.10 and now makes exactly 0?
    Sure, those lucky to keep their jobs will have a “living wage”, but those that were cut because of their low performance or never hired in the first place because their inexperience will have $0 income from doing productive work.