Misunderstanding Inequality: Heroes & Villains

The world has seen unprecedented economic growth in recent times, alongside which the world has seen unprecedented increases in capital inequality. Many people feel joy about the first fact and despair about the second fact. So much so, in fact, that many of the nation's problems seem to get blamed on inequality - even the fact that some families are struggling to make ends meet.

 

A moment's thought should make it obvious that the problem with someone's economic hardship is their absolute state of well-being, not their relative well-being in relation to rich people. Alas, despite being obvious, it is doubted by many - primarily, one imagines, because of a) envy, and b) being tripped up by the fixed pie fallacy. The reality is, economic growth naturally engenders marked differences in people's incomes. In fact, much of the time one person's large wealth increase affords many others an opportunity to work, as anyone who has ever been in McDonald's Sainsbury's or Domino's would know.

 

It's also the case that economic growth actually dispenses disproportionately greater benefits to the poorest in society - because not only does it create jobs, which creates money to spend, which creates more jobs, and so on - it also improves their consumption. Once upon a time only the richest people televisions, cars and mobile phones. Now most people have these things, not to mention access to the entire world's knowledge at the touch of a button, and the uncountable other riches that our forebears would have thought impossible.

 

The upshot is, wealth inequality is a so-called problem that's hugely overblown. As long as everybody's absolute well-being and standard of living continues to increase, the income gap isn't much of a problem - quite the contrary, it's a natural non-linear feedback effect of a free market of voluntary exchanges.

 

In fact, monetary inequality with concentrations of capital in the top quintile is actually evidence that a lot of people are becoming better off by purchasing those goods and services through voluntary transactions. As the gap between richest and poorest is narrowing in pretty much every area apart from capital, it's easy to see how much more equal we are becoming, not more unequal.

 

Inequality through the lens of discrimination

Moreover, as I explained in this Blog post, most inequality is due to rational decisions made by people - called statistical discrimination - that play out in terms of society's revealed preferences. In terms of incentives, statistical discrimination is one of the most easy to understand in society, despite some people's distaste for it.

 

Consider when the European Court of Justice (ECJ) ruled that the long-established practice of setting insurance prices according to sex is illegal discrimination. Or consider that even though women statistically live longer than men, insurance companies are no longer allowed to offer different annuity values to men and women.

 

So men come off better on car insurance, effectively being subsidised by safer driving women, which is the same as saying that women come off worse by paying a penalty for less safe male drivers. Both those situations are reversed in the annuity situation.

 

When everyone in a particular group is homogenised, the statistical variances are cancelled out as individuals are assessed based on the characteristics of the group as a whole, not on their own merits and demerits. In many cases this is obviously foolish and wrong. It's much better if men and women are not treated the same in terms of insurance premiums, because women ought to be rewarded for being statistically safer drivers.

 

The inevitable consequences are that some very unsafe women drivers benefit on the back of the average safety of women drivers, and some very safe male drivers lose out because of the average safety of male drivers. Safe male drivers are discriminated against not proximally because of their sex, but more distally because they are pooled with characteristics that we commonly associate with less safe driving.

 

Another example of where discrimination occurs when people are pooled with a group that have an easily identifiable weighted average is that if women are more likely to leave work in their thirties to have children, then some employers are more likely to choose men, even if it means missing out on better talent. Some cry foul of unfair discrimination, but sometimes it is a rational thing to do, as employers look to increase the probability of stable utility and efficiency.

 

But that's not the end of it. Suppose 32 year old Jack and 32 year old Jill are going for a job as project manager in Bob's company. Everything else is equal, so Bob hires Jack purely on the following probabilistic grounds: that there is a chance that Jill may wish to have time off for motherhood and possibly revert to part time hours thereafter. But now suppose the above scenario again, apart from one difference - Jill is slightly better than Jack, but doesn't get hired because Jack is less of a risk in terms of future motherhood. Jill goes on to get a job as project manager in Margaret's company, has a child five years later and returns to work after six months.

 

Bob's preference for Jack over Jill when they were equal was probably a rational choice, but when Jill was better, Margaret gained by recruiting a better project manager, whereas Bob gained a decent project manager too. In other words, rational discrimination usually produces a levelling effect, and employers know that irrational discrimination is an imprudent recruitment policy that hits them in the pocket.

 

The underlying reality about statistical discrimination is twofold: a) it's almost impossible to detect in the first place because people's real motives are not in full view of the public; and b) in a society that values liberty and freedom of choice, people should be perfectly free to statistically discriminate any way they wish. Generally I favour the egalitarian, classical liberalism (of the Hume, Smith, Ricardo kind), meritocratic ethos, and the view that individual pursuits and a bit of luck play important parts in our journey, as does the 'reap what you sow' maxim.

 

Consequently, then, while I'd hope for equality of opportunity wherever it doesn't unfairly disadvantage others, I don't expect equality of outcomes, and I think many people trying to interfere in society to correct things that don't need correcting are, quite naturally, misjudged and making the situation worse. There are several, often connected and complementary (what should be more obvious) reasons why unequal outcomes occur, and why that is no bad thing:

 

1) The effort people put in to things is unequal, which should rightly yield unequal outcomes. Those who work hard and study hard have a better chance of being rewarded for their efforts - and that should be encouraged. A surgeon should be higher on the income ladder than a taxi driver or a tyre fitter, and I don't want society to be less unequal in this regard.

 

2) The risks and inconveniences people take are unequal, which should rightly yield unequal outcomes. People who do jobs with highly scalable outputs, risky jobs, dangerous jobs and jobs with unsocial shift patterns should be paid commensurate to these factors, and once again I don't want society to be less unequal in this regard either.

 

3) The "slings and arrows of outrageous fortune" inequality. This one is often overlooked or not given enough attention, but there are quite natural inequalities by the fact that nature is not very democratic at all. When it comes to health, looks, size, shape, talents, intelligence, sensory apparatus, opportunity and background, nature is far from democratic - there is a notable difference in all of these human qualities in each of us, as their attainment depends on undemocratic things like fortune and pursuit. A significant proportion of outcomes in society are down to luck, serendipity of circumstance and being in the right place at the right time, bringing about expected inequality of outcomes.

 

4) Rewards for innovation in a 'winner-takes-all' market. Most of the world's biggest gaps in income equality are because of innovators, entrepreneurs and job creators (usually one and the same) who have become wealthy by being good at providing things many people want. Market are democratic in that consumers vote with their purchasing habits, and therefore inequalities of this kind are not a problem that needs addressing - they are the result of freely made human choices in a competitive marketplace.

 

What so many get wrong in this area of discourse is in the misattribution of causes for outcomes. It's a base fallacy narrative that, unless corrected, will continue to misinform them about the so-called unfairness and injustices in society. Inequalities that have legitimate causes based on the above four explanations are often misrepresented as societal injustices and misattributed to the plight of human infirmities - something I've blogged about numerous times before.