Is All Inequality Created Equal?

For today’s reading, we have an essay on income inequality by tech entrepreneur Paul Graham.

Mr. Graham makes two key points:

First, he reminds us that in a free society, the natural diversity of human characteristics, talents, and dispositions will always result in inequalities of wealth:

When people care enough about something to do it well, those who do it best tend to be far better than everyone else. There’s a huge gap between Leonardo and second-rate contemporaries like Borgognone. You see the same gap between Raymond Chandler and the average writer of detective novels. A top-ranked professional chess player could play ten thousand games against an ordinary club player without losing once.

Like chess or painting or writing novels, making money is a very specialized skill. But for some reason we treat this skill differently. No one complains when a few people surpass all the rest at playing chess or writing novels, but when a few people make more money than the rest, we get editorials saying this is wrong.

Why? The pattern of variation seems no different than for any other skill. What causes people to react so strongly when the skill is making money?

I think there are three reasons we treat making money as different: the misleading model of wealth we learn as children; the disreputable way in which, till recently, most fortunes were accumulated; and the worry that great variations in income are somehow bad for society. As far as I can tell, the first is mistaken, the second outdated, and the third empirically false. Could it be that, in a modern democracy, variation in income is actually a sign of health?

Mr. Graham kindly (or prudently) frames the cause of these inequalities — that, say, between a Kasparov and the average patzer — only in terms of “caring enough about something to do it well”. Obviously, though, there is more to the story than that: “care” as they might, Danny DeVito would never have been a LeBron James, nor Rachel Jeantel a Feynman. Readers will recall that in their book The Lessons of History, Will and Ariel Durant expressed the same idea, in slightly darker terms:

Nature smiles at the union of freedom and equality in our utopias. For freedom and equality are sworn and everlasting enemies, and when one prevails the other dies. Leave men free, and their natural inequalities will multiply almost geometrically, as in England and America in the nineteenth century under laissez-faire. To check the growth of inequality, liberty must be sacrificed, as in Russia after 1917. Even when repressed, inequality grows; only the man who is below the average in economic ability desires equality; those who are conscious of superior ability desire freedom; and in the end superior ability has its way. Utopias of equality are biologically doomed, and the best that the amiable philosopher can hope for is an approximate equality of legal justice and educational opportunity. A society in which all potential abilities are allowed to develop and function will have a survival advantage in the competition of groups. This competition becomes more severe as the destruction of distance intensifies the confrontation of states.

Mr. Graham’s second point is that where once the only way to get rich was through ‘zero-sum’ appropriation of the wealth of others — by military conquest, taxation, or political cronyism — most of today’s wealth is created by offering desirable goods or services that also enrich the lives of others (see the original for footnotes):

[F]or most of human history the usual way to accumulate a fortune was to steal it: in pastoral societies by cattle raiding; in agricultural societies by appropriating others’ estates in times of war, and taxing them in times of peace.

In conflicts, those on the winning side would receive the estates confiscated from the losers. In England in the 1060s, when William the Conqueror distributed the estates of the defeated Anglo-Saxon nobles to his followers, the conflict was military. By the 1530s, when Henry VIII distributed the estates of the monasteries to his followers, it was mostly political. [9] But the principle was the same. Indeed, the same principle is at work now in Zimbabwe.

In more organized societies, like China, the ruler and his officials used taxation instead of confiscation. But here too we see the same principle: the way to get rich was not to create wealth, but to serve a ruler powerful enough to appropriate it.

This started to change in Europe with the rise of the middle class. Now we think of the middle class as people who are neither rich nor poor, but originally they were a distinct group. In a feudal society, there are just two classes: a warrior aristocracy, and the serfs who work their estates. The middle class were a new, third group who lived in towns and supported themselves by manufacturing and trade.

Starting in the tenth and eleventh centuries, petty nobles and former serfs banded together in towns that gradually became powerful enough to ignore the local feudal lords. [10] Like serfs, the middle class made a living largely by creating wealth. (In port cities like Genoa and Pisa, they also engaged in piracy.) But unlike serfs they had an incentive to create a lot of it. Any wealth a serf created belonged to his master. There was not much point in making more than you could hide. Whereas the independence of the townsmen allowed them to keep whatever wealth they created.

Once it became possible to get rich by creating wealth, society as a whole started to get richer very rapidly. Nearly everything we have was created by the middle class. Indeed, the other two classes have effectively disappeared in industrial societies, and their names been given to either end of the middle class. (In the original sense of the word, Bill Gates is middle class.)

But it was not till the Industrial Revolution that wealth creation definitively replaced corruption as the best way to get rich. In England, at least, corruption only became unfashionable (and in fact only started to be called “corruption”) when there started to be other, faster ways to get rich.

Seventeenth-century England was much like the third world today, in that government office was a recognized route to wealth. The great fortunes of that time still derived more from what we would now call corruption than from commerce. [11] By the nineteenth century that had changed. There continued to be bribes, as there still are everywhere, but politics had by then been left to men who were driven more by vanity than greed. Technology had made it possible to create wealth faster than you could steal it. The prototypical rich man of the nineteenth century was not a courtier but an industrialist.

With the rise of the middle class, wealth stopped being a zero-sum game. Jobs and Wozniak didn’t have to make us poor to make themselves rich. Quite the opposite: they created things that made our lives materially richer. They had to, or we wouldn’t have paid for them.

But since for most of the world’s history the main route to wealth was to steal it, we tend to be suspicious of rich people. Idealistic undergraduates find their unconsciously preserved child’s model of wealth confirmed by eminent writers of the past. It is a case of the mistaken meeting the outdated.

He concludes:

If I had a choice of living in a society where I was materially much better off than I am now, but was among the poorest, or in one where I was the richest, but much worse off than I am now, I’d take the first option. If I had children, it would arguably be immoral not to. It’s absolute poverty you want to avoid, not relative poverty. If, as the evidence so far implies, you have to have one or the other in your society, take relative poverty.

You need rich people in your society not so much because in spending their money they create jobs, but because of what they have to do to get rich. I’m not talking about the trickle-down effect here. I’m not saying that if you let Henry Ford get rich, he’ll hire you as a waiter at his next party. I’m saying that he’ll make you a tractor to replace your horse.

A final thought: Mr. Graham makes a perfectly rational choice in the passage just above, but he is mistaken to think that everyone would. Relative status is a powerful social, psychological, and historical force. To quote the Durants again, also from The Lessons of History:

The experience of the past leaves little doubt that every economic system must sooner or later rely upon some form of the profit motive to stir individuals and groups to productivity. Normally and generally men are judged by their ability to produce — except in war, when they are ranked according to their ability to destroy.

Since practical ability differs from person to person, the majority of such abilities, in nearly all societies, is concentrated in a minority of men. The concentration of wealth is a natural result of this concentration of ability, and regularly recurs in history … the concentration may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing poverty.

… We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution. In this view all economic history is the slow heartbeat of the social organism, a vast systole and diastole of concentrating wealth and compulsive recirculation.

For Mr. Graham, because the process that creates inequality today has, in absolute terms, a beneficial effect for everyone, it should no longer be seen as a social evil to be eradicated, and we should be able, finally, to escape the ancient cycle descibed by the Durants. But is this rational argument really enough to override our ancient, universal concern for relative status? As my mother used to say: I hae me doots.

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  1. Here’s an inequality for your consideration:

    “People are never as good as we hope nor as bad as we fear. They’re always worse.” — TheBigHenry’s Inequality

    Feel free to quote me.

    Posted January 17, 2014 at 12:07 pm | Permalink
  2. Dom says

    Here’s the way I see inequality. All talent is unequally distributed because we would not call it talent otherwise. No one calls breathing air, or walking upright, a talent.

    The market place allows us to sell our talents in exchange for money. In that way, we share other people’s talents. I come home and listen to Duke Ellington, read Elmore Leonard, and eat Italian food, even though I have none of these talents. It’s because of the market place that I live as though I do. At the end of the day, the unequal distribution of talent is changed to the unequal distribution of money. It’s a fair deal.

    I go to Italy every year to see family. I imagine their Gini index is very low (high?) but the first thing that strikes me is, Where are all the talented people? In a country that pretty obviously needs engineers, why is my unemployed cousin waiting (with a handout that buys him vacations) for an opening in the trash collectors union? (It’s a communist union and they are very well paid). This is the country that brought Europe out of the dark ages, and pretty much created the Renaissance. It’s insane need for equality has reduced it to near third world status.

    Posted January 18, 2014 at 7:12 pm | Permalink