*Please note that this is not a political commentary. I will leave the political punditry to the people who think politicians are actually capable of accomplishing something.
I have recently come across a number of debates about income inequality so I am going to try to contsruct some context around this issue. A recent article from The Economist notes that income distributions have become more unequal in the large majority of developed countries:
American society is more unequal than those in most other OECD countries, and growth in inequality there has been relatively large. But with very few exceptions, the rich have done better over the past 30 years, even in highly egalitarian places like Scandinavia.
Reports such as this provide easy fodder with which to demonize your favorite economic villian, but before we jump to conclusions it will prove worthwhile to pause and ask a few questions:
Why Do We Care About Income Inequality?
Income is a proxy for well being. Income inequality then is a proxy for a particular conception of fairness. If income distribution is becoming more unequal then our economy would seem to be becoming less fair, assuming all else equal. But, is it safe to assume all else is equal? Let’s break it down a little further…
- Income is a function of both the fairness (meritocracy) of the economic environment and the monetizable value created by a given individual, relative to supply and demand.
- Monetizable value created is a function of a given individual’s ability to create scarce value and his desire to dedicate attention or effort towards such activities.
Therefore, income inequality might increase as a result of decreasing meritocracy, but also might increase as a result of decreasing ability or decreasing desire to create monetizable value.
The Costs and Benefits of Specialization
The most basic formula for creating monetizable value is specialization. The ability to monetize hinges critically on the scarcity of the good or service in question. The more a given individual specializes, the more scarce his abilities; that much is obvious. There is however, an even greater benefit to the specialist when working on scalable products in competitive markets. The now common wisdom in the programming community that a great programmer is worth 10x more than an average programmer, is the most obvious instantiation of this phenomenon. Why is this the case?
Scalable products give rise to winner-take-all markets. When one software product can serve 600 million people, everyone flocks to the market leader and the second place finisher ends up forgotten and irrelevant. In such markets specialization has enormous benefits; being the best in a given domain can yield exponentially greater financial rewards than being merely above average. Therefore, highly competitive markets in highly scalable products will tends to yield dramatic income disparities. Sound familiar?
…when the environment is in a period of rapid flux, specialists can rapidly become extinct. Simply: its favorite sources of energy can dry up or become inaccessible as conditions change. In contrast, the generalist or omnivore, can thrive when the environment is in flux. Given their ability to access and consume nearly anything (despite, sometimes steep, efficiency penalties) they will nearly always find a source of energy to subsist on even if big changes have occurred. They thrive at the same time the specialists die.
The specialist sacrifices resilience during times of change for earning potential in the short run. It also bears pointing out that the short run benefits to specialization are only significant when selection pressures amplify the specialist’s competitive advantage. Otherwise, being 5% better than second best only provides 5% more benefits.
If this point isn’t immediately obvious, consider an analogy to the strict zero-sum competition in sports contests. In an Olympic race, being 1% faster than your competitors could easily be the difference between first and last. Outside of that zero-sum competitive environment, the practical value of being 1% faster than the next guy is negligible.
The natural outcome of the zero-sum competitive environments that favor specialization is an arms race (see: baseball –> steroids). All participants in the market are forced to dedicate increasing resources (attention/effort) just to maintain their position. The rational response, for the participants who cannot compete effectively for the winner-take-all postition, is to opt out of the arms race altogether rather than waste their effort. These absconders will participate only to the degree necessary to satisfy their monetary needs, and will rededicate the remainder of their effort towards more “omnivorous” pursuits.
The overall benefit of the arms race varies depending on the characteristics of a given market. When intense competition encourages the development of increasingly brilliant technological innovations…then we can safely endorse it. When zero-sum competition leads to cutthroat behavior that ultimately detracts from the product…well then, perhaps you would be better off being an omnivore.
The Omnivores was not a cultural identity that existed in any substantial numbers until relatively recently. When market participation was the overwhelmingly dominant form of productive activity, people who opted out were just losers. However, when individuals are empowered to pursue meaningful goals outside the market arms race, the relevance of income as an indicator of status decreases dramatically. In a particularly memorable blog post, John Hagel wrote poignantly about the identity shift from Consumer to Networked Creator:
That is all changing now – our identities are shifting in ways that we are only beginning to understand. All around us, we see people engaging in creation of various forms, sharing these creations and deriving satisfaction, meaning and status from these activities. Whether we look at the resurgence of crafts and hot rod cars, the rise of the “maker” movement, body hacking, social media or open source software, we find people who are investing more and more time and energy in the creation of things they are passionate about.
In many cases this pursuit of passion diversifies the market, creating new opportunities and thereby alleviating some of the inequality intrinsic to winner take all markets. In other cases the pursuit of passion is pulling the Networked Creator away from the market, thereby exacerbating income inequality. This latter group would be the people demonstrating a decreased desire to earn income.
While the Networked Creator finds increasing value in non-market pursuits, he also increasingly experiences less need for money. Increasing non-market production also means less need for market consumption. The benefits of scaling are also to be found here, as the same competitive forces that create winner take all markets also lead to extraordinary value creation for the consumer. A recent essay by Timothy Lee describes this as The Great Ephemeralization. The related minimalist and digital nomad movements serve as obvious examples of significant demographics deprioritizing income earning in favor of non-monetary forms of value.
Putting It All Together
As noted at the outset, this post is not meant to argue for or against any particular position or platform. My hope is that by considering some of the broader shifts taking place we can see that the idealogical political debate only obscures the underlying reality. Income inequality (or anything else) is only be a political issue to the extent that it is created by public policy or can be meaningfully influenced by public policy. To some extent income inequality does meet those conditions. But, we can see from the analysis above that this trend is largely a result of apolitical economic and cultural shifts. In the face of those shifts, the generalizations and cliches that make political debate so mind-numbing prove quite misleading. ”The poor” may be people truly disadvantaged, or they may be four hour work week types who have made a lifestyle choice.
More relevant than how we position ourselves politically, is how we position ourselves individually for success in this new world, whatever that may mean. There is no longer only one game in town…there no longer exists a conventional path. Choose your own adventure, make it matter.
photo courtesy of Bert Kaufmann