Understanding Inequality Better, In Three Easy Steps

 

Pretty much all commentary on inequality is misjudged, and it's largely for three reasons; one is to do with overlooking the inevitable dynamic, two is in misunderstanding what should be measured, and three is in overlooking the scale of measurement. Let's take them in turn.

The inevitable dynamic is basically that in a free country, where people have the opportunity to contribute according to their skills, intelligence, industriousness and competence, wealth will be distributed unevenly. When measuring capital, wealth distributions follow a near-inevitable power law, whereby the top 10% percent are going to have a large proportion of the wealth, and the bottom 50% are going to have significantly less, despite substantially outnumbering the top 10%. I have lots of individual blog posts in my 'Inequality' tab that explain why in more detail.

Regarding the misunderstanding of what should be measured, if you only measure capital, then you have a distorted picture of inequality, because you are disregarding all the things already in place that make us more equal. Once you factor in the many goods and services provided by the state - the health service, social services, the state pension and the many public services - they add up to a lot of value that narrows the wealth gap. Because equality, you see, isn't just about capital, it's mostly about consumption. We also have to factor in the knock-on effects of all this economic growth, like having access to the entire world's knowledge, having more leisure time due to technological enhancements, and all the other concomitant benefits associated with human innovation.

Lastly, on top of overlooking the inevitable dynamic, and misunderstanding what should be measured, there is also the overlooking of the scale of measurement. Where you are in particular stages of life says a lot about your capital and assets, but it often creates a distorted view of a nation's inequality. Students are an obvious case in point - when graduating, they start life in debt, but most go on to earn substantial wages, retire with their own property, and across their life timescale go from negative wealth to reasonable wealth. This is also applies to many other workers, who start life on lower wages when they are young, and progress through their careers with higher wealth.

Insipid left-wing articles about inequality never factor in how to properly measure wealth and standards of living, they don't factor in the big picture where most people get better off with age, and they ignore the fact that in any economically free society, an uneven distribution of wealth is an inevitable outcome of a thriving society.

Given the foregoing, my three easy steps to thinking about inequality correctly are as follows:

Step 1 - Be precise in your language, and define ‘inequality’ properly. Are you talking about inequality of capital assets, consumption, or income? Do you mean inequality before the state has taken tax and passed on public sector benefits or after? And are you factoring in the many other social benefits that reduce inequality in other ways, due to increased standards of living?

Summary: Define before you complain.

Step 2 – Be clear on the economic and social dynamic that causes inequality. Skills, intelligence, industriousness and competence are the biggest causes of most kinds of inequality, and they are good things. Good things cause most inequality. Every time you buy a best-selling book, go to a music festival, shop on Amazon, do your shopping at Tesco, renew your Microsoft subscription, etc, you make the world a little more unequal. But you do these things because you are supporting other people’s prodigious skills, intelligence, industriousness and competence.

Summary: Understand how the world works before you complain.

Step 3 – Be aware of the big picture regarding where, why and when people’s individual life circumstances contribute to the distribution curves of the Gini coefficient, and how those contributions change over time.

Summary: Be mindful that (in)equality is dynamical, not static, before you complain.

Finally, some more insight to digest. Suppose Rich Roger has accumulated lots of capital through market transactions. He's done so by providing value to society. But it doesn't end there. Roger's accumulation of capital is going to be two other things; if he spends it, it creates a living for other people; and if he conserves his capital, then in spending less than he is saving he is leaving more goods and services available to everyone else (and at a slightly cheaper price).

Diversity is so often rightly celebrated in society - diversity of looks, talents, age, specialisations, interests, passions, culture, personalities, etc - and diversity in wealth, income and consumption are a fundamental part of, and result of, those other diversities we celebrate. I think we need to get out of the habit of using the loaded term 'income inequality' and simply call it 'diversity of assets', because that's what it really is, and society is all the better for it.

Boris Johnson Misunderstanding Democracy

 

I've just seen this woeful Twitter video from our Prime Minister, where he tells us that:

"If we want to achieve a truly representative Parliament, then we cannot rest until 50% of MPs are women."

This has to be Boris at his absolute worst! Knowing the sort of character Boris is, we all know he doesn't really give two hoots about whether 50% of MPs are women - he's just making this disingenuous appeal because he thinks it's what people want to hear. But even if we grant him this sincerity, then once broken down, his statement is incoherent. The Parliamentary system is not set up to be representative on account of resembling the demographic of society; it is set up to be representative on account of reflecting the voting preferences of society. Desiring Parliament to resemble the demographic of society on arbitrarily chosen traits like sex misses the point of the democratic process. There are lots of xenophobic people in society, but we don’t want a proportion of Parliament to be xenophobic; there are lots of religious fanatics, football hooligans, polyamorists, adulterers and drug addicts in the UK, but we wouldn’t wish for that sub-section of the demographic to be reflected among our 650 MPs.

Some might object on grounds that sex is a different category of consideration, and that desiring a more equal representation of males and females in Parliament is to be lauded. Ok, even though that’s not a good counterpoint – let’s grant it for the sake of generosity. But even allowing for this, the desire for equal representation between males and females is still a preference that goes against the grain of the electoral system, because MPs are elected from 650 individual constituencies, and an individual person cannot resemble a demographic. If 1 individual cannot resemble a demographic, then 1 x 650 individuals cannot resemble a demographic without seriously departing from the rubric under which the electoral system is mandated. To do this would mean straying into something that selects on a different kind of preference to the one in which voters are being asked to participate.

Attempts could be made by political parties in the selection stage to artificially increase the number of women standing as candidates for election, but this no longer necessarily reflects the preferences of the electorate. If there is not a 50-50 split between male and female MPs when Parliament reflects the voting preferences of society, then why does Boris’s preference that this is redressed trump society’s revealed preferences after they have voted in their own constituency for the candidate of their choice? How does Boris (and the like) know that the current ratio is unjust and needs correcting? What if there are many other complex factors involved in the process, and that, actually, the fact that men outnumber women in Parliament occurs for perfectly reasonable reasons based on a complex range of preferences and considerations – Boris and other party politicks have no justification for imposing their preference over ours. If enough people do care significantly about having more women in Parliament then we can expect that to be reflected in constituencies, when more people could vote on the basis of sex than anything else.

My instinct is that, however prudent or infelicitous, what people mostly care about when they vote is the party of the candidate, and the perceived qualities, polices and ethics of the individual candidate and their party. Even those who care a lot about how many women there are in Parliament are unlikely to see that preference supersede the other factors at an individual constituency level – and it is therefore always likely to be the case that the revealed preferences of the electorate (at the individual level) are more representative than artificial attempts to make Parliament resemble the population demographic.

The Spurious Arithmetic Of So-Called 'Unfair Privilege'

In a recent Facebook post in response to John McDonnell's desire for forcing harmful redistributive policies on the UK, I explained that, in terms of what we can control, wealth distribution generally follows the following kind of rule of thumb:

1) The harder you work, the better you do in life

2) The more effort you put in to improving your life, the better you do in life

3) The more intelligent, knowledgeable, conscientious and committed you are, the better you do in life

4) The more time you spend wisely and not wastefully, the better you do in life

5) The better your attitude, and the better and more kindly you treat others, the better you do in life

6) The more value you can provide to enhance others' lives, the better you do in life

7) The more you invest wisely in your future, and the less you disadvantage yourself now with unwholesome, selfish, careless and costly pursuits, the better you do in life

8) The better your life choices, the better you do in life

9) The more thoughtful, empathetic, aspirational, creative, imaginative, dedicated and inspiring you try to become, the better you do in life

There is no better, more reliable, more ethical, more empirically robust system for how wealth is distributed than the system above. And that's a fact!

A friend challenged this by talking about how society is geared towards inequality, and how you’re more likely to succeed if you come from a privileged background. He was referring to statistics like this:

"Although just 7% of the population attend independent fee-paying schools, the survey reveals that almost three quarters (71%) of top military officers were educated privately, with 12% having been taught in comprehensive schools. In the field of law, 74% of top judges working in the high court and appeals court were privately educated, while in journalism, more than half (51%) of leading print journalists went to independent schools, with one in five having attended comprehensive schools, which currently educate 88% of the population. In medicine, meanwhile, Sutton Trust research says 61% of the country’s top doctors were educated at independent schools; nearly a quarter (22%) went to grammar school and the remainder to comprehensives."

The underlying hypothesis my friend is positing is that it’s hard to succeed on your own merit because attending private school greatly advantages people in high positions (would-be judges, executives, top military officers, and top doctors). To see why this is the wrong way to analyse the situation, imagine I run creative writing workshops at the University of East Anglia, and I advertise that while only 0.01% the UK population get their work published, 5% of my students do. It would be absurd to claim statistical unfairness here, because only people who feel they have something to offer in the literary world would attend my workshops. To demonstrate an unfair advantage, you’d need to show that budding writers who attend my workshops do better than fellow budding writers who don’t. It’s a bad methodological error to compare budding writers who attend my workshops to the rest of the population, because most of them aren’t budding writers.

So when you have a statistic like “Although just 7% of the population attend independent fee-paying schools, the survey reveals that almost three quarters (71%) of top military officers were educated privately” – to show that is an unfair bias, you have to show that people who are otherwise just like the top military officers, but who were instead not educated in independent fee-paying schools, do worse. In other words, you mustn't discount the notion that it is the shared qualities and talents that make good military officers and explain the success, and not the fact that they went to private school.

In all likelihood, the people who have the kind of qualities required to be judges, executives, top military officers, and top doctors would probably dominate those industries even if all schools were fee-paying or all schools were state-funded. Similarly, it’s also most likely that the people who get published are likely to be talented writers, irrespective of whether they attended my workshop or not – just as it’s most likely that a horse jockey will weigh under 118lb irrespective of whether they had contacts in the horse racing world nor not.

Even if John McDonnell thinks he can drastically reduce the advantages of a privileged background by a socialist intervention, he can’t eliminate the advantages of intelligence, conscientiousness, hard work, commitment, dedication and wise life choices when they are so vital to success. While it’s true that not all of my list produces a fair outcome every time, and while it is true that there are definite advantages in coming from a privileged background, the notion that politicians can equalise those differences is highly dubious, especially as they make no attempt to show that the statistical differentials are driven by unfair discrimination, and not by shared characteristics (like literary prowess in publishing, or height and weight in horse racing) that procure them a natural advantage in society.

Corbyn & Blair Have Both Got It Wrong

This week Jeremy Corbyn and Tony Blair have been having a spat about which of them cares the most about inequality in accordance with Labour party values. They may not be confused at the same level (it's difficult for anyone to be more confused than Jeremy Corbyn about anything) - but watching their squabble unfold is a bit like watching a tarot card reader and an astrologer arguing about the best way to teach astronomy. Both Corbyn and Blair are so far from the truth that their litany of economic nonsense seamlessly blends together to a messy ideology that bears little resemblance to reality.

Here's the reality: in every way that's important to what humans desire in an economic system, the rich have got richer, but the poor have done best of all. As Matt Ridley reminds us in The Rational Optimist, the poor in the developing world grew their consumption twice as fast as the world as a whole between 1980 and 2000. Poverty has been reduced in the world more in the past 50 years than in the previous 500.

What the Blairites and Corbynites need to understand most pressingly about inequality is that it is only by the rich getting richer that the poor get richer (the past few thousand years ought to be demonstrable evidence of this). An in-country increase in inequality is one of the natural and wholly expected consequences of a growing economy - it almost always entails that income inequality widens, because the way a nation spends its money on voluntary transactions is not in a way that transfers income equally to all kinds of people - it is, by and large, a very naturally unequal and democratic merit-based distribution.

To see why, think of your monthly expenditure, once you've paid your tax. The chances are a great proportion of your monthly needs and enjoyment is going to go to businesses already more wealthy than you: a food bill to Sainsbury's, a television subscription bill to SKY TV, a music CD to Amazon (and the artist), a takeaway bill to KFC, a fuel bill to Shell, and so on. All of those voluntary transactions make people already wealthier than you even wealthier, because those goods and services are also being consumed by many others too. The providers are good at providing what people want and need, and because of this, the income distribution among the population is skewed in favour of a small percent of the population. There is no global conspiracy - just natural concentrations of earned income from market choices (for more on this, see this blog post). 

Further, it is because wealth is not a fixed pie that it should be easily seen how the rich get rich and the poor do as well. It is because of all the wealth creation that even the poorest people in the UK and USA are living lives that their forbears could only dream about. When Harold Macmillan uttered his famous phrase that the folk of 1957 had 'never had it so good' - he was speaking to people who were earning less then on full time wages than the average state welfare beneficiary now - particularly when you factor in other ways to be better off, like better standards of electricity, running water, bathrooms, kitchens, cars, entertainment, widespread communication, health care, hand held devices, and unprecedented access to knowledge that even the richest people in the world a few decades ago would have marvelled at.  

There are also other perfectly natural things that concentre income in richer circles purely due to people's freedoms in making choices - such as assortative mating, freer movement of people, and increased competition - all of these liberalising phenomena increase in-nation inequality. But there's more, because what this also does at the same time is reduce global inequality (as I explain more fully in this blog). Countries expand their economies, and in doing so global inequality falls. If you begin with the base error of unjust inequality, as Corbyn and Blair do, your whole narrative is set up to be wrong.

I'll leave you with this nice quote from Matt Ridley, that the Malthusian alarmists would also do well to heed:

"Since 1800, the population of the world has multiplied six times, yet average life expectancy has more than doubled and real income has risen more than nine times. Taking a shorter perspective, in 2005, compared with 1955, the average human being on Planet Earth earned nearly three times as much money (corrected for inflation), ate one-third more calories of food, buried one-third as many of her children and could expect to live one-third longer. She was less likely to die as a result of war, murder, childbirth, accidents, tornadoes, flooding, famine, whooping cough, tuberculosis, malaria, diphtheria, typhus, typhoid, measles, smallpox, curvy or polio. She was less likely, at any given age, to get cancer, heart disease or stroke. She was more likely to be literate and to have finished school. She was more likely to own a telephone, a flush toilet, a refrigerator and a bicycle. All this during a half-century when the world population has more than doubled, so that far from being rationed by population pressure, the goods and services available to the people of the world have expanded. It is by any standard, an astonishing human accomplishment."

Matt Ridley - The Rational Optimist

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.

 

 

 

 

  

Bless Him - Owen Jones Has Got Himself All Confused Again

Owen Jones' latest gripe about the outrageous injustice of Britain’s wealth inequality is that our MPs, even Labour ones, are lacking the ambition to tackle it to his satisfaction. He thinks that because the rich have a lot more than the poor, this makes this economy 'dysfunctional and rotten', and he is calling for almost all transfers of funds (inheritance, gifts, capital gains) to be treated as money in waiting for the government.

What Owen Jones has never been very good at is understanding causality in these kinds of situation. Rather like how feminist proponents of the spurious gender pay gap don't grasp that when left to their free choices, there will be unequal outcomes as regards men and women's average pay because men and women want and prioritise different things, radical redistributionists rarely seem to grasp that when the results of societal free choices are measured - even in the most equal countries - the lowest two quintiles own next to nothing compared to those in the top quintile.

Alas, Owen Jones is not alone though - errors of causality are highly common. This is because when we ascribe causes to effects we do so by focusing on what seems to be the most primary element of causality at the time. So for example, people will assert that ISIS was caused by (among other things) Blair and Bush's Iraq invasion; that the financial crash of 2008 was caused by (among other things) bankers' recklessness; that the Brexit majority vote was caused by (among other things) a huge anti-immigrant feeling; and that the Trump election was caused by (among other things) a large anti-establishment feeling.

But consider a heart attack by way of an analogy. Your obese neighbour Bob is outside washing his car on a hot July afternoon, when suddenly he keels over and dies of a heart attack. The most primary element of that event, the one on which the local newspaper report would probably focus, would be on the fact that Bob was an obese man over-exerting himself on a boiling hot summer day.

But there are other causes too, multiple causes. For example, Bob's obesity was in part caused by genetics, but also by his eating and drinking habits. Bob drank 40 units of alcohol a week and had a fry-up for breakfast three or four times a week. He also suffered from depression, which drove his excessive drinking. His depression was triggered by multiple past legacies, including being treated badly by his father, and having a mother too scared to protect him.

The upshot of all this is that causes are numerous and complex, and they depend very much on which link on the causal chain is being zoomed in on at the time. Moreover, in the case of Bob's heart attack, all of the causes have some relevance and none of them contradict the others.

The things that are causing all this inequality of outcome are very much not instances of unfairness, they are, by and large, instances of freedom in action, where a society with billions of individual decisions, in aggregation, naturally leads to expected power laws and income disparities. It's all very much to be expected, and probably always will be - it's a natural outcome of societies with diversity and a multitude of options.

And lest we forget, a few other pertinent points, namely:

1) Society has never been more equal

2) The statistics are often misleading when presented by the left

3) Inequality is one of the biggest non-problems

A Little Perspective On The Wealth Gap - Seen Through The Eyes Of Henry VIII

As you know, there is a lot of complaining about the so-called injustices of the wealth gap, with everyone from Oxfam to Jeremy Corbyn to Bernie Sanders complaining that the wealth of the richest people keeps increasing while the poor do not benefit much from capitalism.

This is obviously a foolish assertion - but more than that: even those who acknowledge the benefits of capitalism are often guilty of understating the extent to which the poorer people in the UK and the USA have enjoyed pretty much all the beneficial things the rich have. So much so that the further back in time you travelled, the narrower the difference between today's rich and poor would seem.

To see why, let me run this thought experiment by you. At the time of his death, Henry VIII's wealth was thought to be around 300,000 British pounds. Adjusted for inflation, that would make him worth about £250 million today.

Suppose we resurrected Henry VIII and brought him and his adjusted wealth into the present day to spend a week following round Richard Branson - a man worth about 16 times more (£4 billion) than Henry would be worth. We'd find something quite astonishing. The things about Richard Branson's life that would be most coveted by Henry VIII would not be the luxury goods that make Branson stand out from the average earner of today - they would be the multitude of things that even most low income earners have at their disposal. 

 

What would impress Henry VIII most about today are things like: having access to such a rich variety of food and drink; clean, uncontaminated water; an extremely low chance of mothers and babies dying in childbirth; modern medicine and healthcare; refrigerated food; microwave ovens; cars; high speed trains; computers; televisions; washing machines; global travel in under 24 hours; much shorter working weeks; welfare; access to the entire world's knowledge through the Internet; and all this (and much more) in a world that has seen the virtual eradication of smallpox, polio, diphtheria and tuberculosis.

That is to say, Henry VIII would find the difference between Richard Branson and a low income worker infinitesimal compared with the monumental difference in quality of living between himself and a low income worker in the present day. The most astounding part of present day living for Henry VIII would be the multitude of present day advantages that many people take for granted, and yet still consider themselves poorly off despite having.

Given the foregoing, I find it remarkable that there are so many narrow-minded, short-sighted, entitled people in society who are obsessed with banging on about the inequalities that capitalism creates.

You may say that, for those suffering economic hardship, life is a daily grind - and I will not disagree with you. But as soon as you take your eyes off disposable income, and focus on the way society has been equalised materially in just about every other way, you'll see that instead of bemoaning the gross wealth stratifications in society, a more pertinent reaction would be to feel amazed that after 200,000 years of human history when just about everyone who ever lived was equally poor, we find ourselves living in a time when the majority of us are equally very rich.

Power Law Inequalities & Geniuses

In response to my recent Blog post on inequality, a friend brought up power laws and asked about their relationship with inequality. This is very apt at a time when we've just been subjected to a sub-standard piece of propaganda from the BBC called The Super Rich & Us - a recent programme presented by someone who doesn't understand much about economics, interviewing other people (some of whom were economists) who also don't understand much about economics. With a better understanding of the subject, they wouldn't have spent the best part of two hours utterly confused about most of the matters regarding inequality, power laws, living standards, supply and demand and consumption.

The relationship between power laws and inequality is largely built on society's revealed preferences, but there's a little more to it than that. Power laws do lead to concentrations of wealth falling in a small proportion of the population's hands. But they are nothing much to worry about: they are to be expected because in a free market where goods and services are freely exchanged for money, the rate of consumption always exceeds the rate of service for an individual.

In other words, there are more ways for Jack to procure goods and services from other providers than there are ways for Jack to provide goods and services to others. Whether you're a lawyer, a taxi driver or a circus clown, you earn money providing a particular skill to your customers.

But the money you spend (at Tesco, on Amazon, at the hairdresser’s, at the garage, etc) goes in multiple directions. Lots of people want food, books, a haircut, fuel, etc, so concentrations of wealth fall in the hands of large-scale providers, who are a small proportion of society, relative to the number of consumers.

(By the way, point of technicality, even consumers are providers in that their consumption provides producer surplus for other providers, but that’s not central to the point being made).

So you can hopefully see why power laws exist, and also how wealth can be concentrated in a few hands very quickly. To give you a much simpler illustration than something as complex as UK society; suppose 20 people are put on an otherwise uninhabited island with treacherous weather conditions. They have to stay on the island for one year, and each inhabitant is given 15 tokens a day with which to buy food from a delivery helicopter that lands every day at noon. What they don’t spend on food, they keep, and at the end of the year whatever tokens they have saved can be exchanged for £3 per token.

During their stay it emerges that there is an expert in building safe, warm tent sheltering from the natural plants. For a fee of 350 tokens per person, payable over the next 50 weeks, all 19 of the other inhabitants can have a tent built for them, thereby enjoying warm, dry and safe nights of sleep for their island duration. At the end of the year our tent building expert will have seen a significant concentration of wealth in his hands, at the expense of the other 19 islanders, but they will have enjoyed a year’s worth of tent-related benefits.

That’s a very simple illustration of a much wider phenomenon that is going on across society, where innovators, writers, musicians and hugely successful business owners are the beneficiaries of these power law transfers. Nobody would have any difficulty seeing a just power law inequality in my island scenario - but yet when the situations apply to real business goings on in society, preferences, they don't seem to get it. To the extent that most inequality is the result of an aggregation of society's revealed preferences - inequality is one of the most democratic of all human phenomena.  

But if you take society as a collection of individuals, you’ll find another important trend that plays out in power laws: there should be a continual natural trend towards progression and improvement. Here's what I mean.

Humans are generally working (either together cooperatively or independently) to make their own lives better, and despite exceptions, this engenders an inclination towards making the world a better place, whether it’s through all the benefits of trade, innovations with which we are continually seeking to improve products, technology and new designs, or lest we forget, the numerous formal institutions that (with mixed results, but generally more pros than cons) make laws and implement regulations that are thought to make society a better place to live.

Because the nature of trade and work constantly involves tweaks, improvements and innovations here and there, and further multiplied both across society and in a fairly linear fashion across time, we have a situation where (despite obvious peaks and troughs and chaotic anomalies and degrees of randomness in the system – world wars, financial crashes, tsunamis, etc) there is a fairly inevitable (or at least high probability) and stable trend of human progression built into the system.

And it's this trend that's another catalyst for generating inequality - the fact that nature is not very democratic (looks, size, shape, talents, intelligence, sensory apparatus, opportunity and background), and therefore it is expected that there won't be equal outcomes. 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, as well as hard work, skill and application.

Consequently, then, inequality has a lot do with the fact that humans are tenaciously trying to improve themselves, and the fact that progression is in our blood - it is not just an inevitable part of our journey, it is an exhibition of how influential and advancing our species can be - particularly when you factor that into this observation about human beings.