Rising Income Inequality & Shifting Identities – The Specialist & The Omnivore

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Shifting Identities*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…

  1. 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.
  2. 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

Benefits

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?

Costs

Specialization does not come without costs. John Robb summmarizes the costs of specialization through biological analogy, describing The Omnivore’s Advantage in a recent blog post:

…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 Result

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.

Shifting Identities

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

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  • http://www.openworld.com Openworld

    Brilliant (again!!!) insights, Greg … 

    And if the drivers you’ve described are working to set a zero price for bits and atoms, in what ways will rising income disparities continue to matter in the future?

    Best,

    Mark

    • http://OnTheSpiral.com/ GregoryJRader

      Hey Mark,
      If I am going to be consistent with my argument above then I can’t really answer that question.  Income does matter but it is just one piece of the puzzle.  Money can sometimes buy happiness; lots of other things can also sometimes buy happiness, and there are a lot more of these “other things” floating around today.  The answer will be extremely context dependent.  

      I do think many of the people who jealously condemn millionaire-executives are just looking for scapegoats.  If you put an extra 0 at the end of my paycheck I would probably still be living essentially the same life I live today.  I would just be doing it while spending my money much more frivolously.  

      Now of course if we are talking about people who truly struggle to put food on the table, then that is a different story.  But, part of my goal in writing this post is to point out that income is disparities are not necessarily providing a good indication of the degree to which people are truly struggling.  

  • Ted Heistman

    I guess money is just a symbol for value that has become an equivalent medium of exchange.

    So possibly as more and more people create value, not totally outside, but oblique to “the system” then eventually billions of dollars will have less equivalency to actual value.

    • http://OnTheSpiral.com/ GregoryJRader

      Thanks for the comment Ted.  I think that is correct.  The more mechanisms we have to achieve various goals outside of the monetary system, the less reliable $ becomes as a comprehensive metric.  Income measures the ability to acquire certain types of value very well and other types of value very poorly.   

  • http://www.ribbonfarm.com Venkat

    I think I’d separate the idea of specialization from the idea of scaling/losers. Deep specialization can exist without mass production economics. Mass production specialization is only one kind where you become what I call a “mindless specialist” who becomes deeply skilled at a component of a value chain instead of an entire value chain. By contrast the deep specialist of non mass-production economies is the guild craftsperson. A weaver or blacksmith is a complete value chain in one person. They can be deeply specialized (for example, specializing in a very particular kind of local weave or exclusively in swordsmithy), but the point is, no matter how specialized they get, they are independent value chains that can convert raw materials into something tradeable for cash. By contrast, a highly skilled welder (among the few remaining high-paid specialist shop-floor jobs) is not capable of independent production.

    This actually means your idea is even broader than you state. It is not only mass-economy specialists who are vulnerable to suddenly changing times. Guild-economy craftsmen are also similarly vulnerable. I believe there have been such busts in trades like masonry, paper-making etc., but I can’t recall details off the top of my head.

    To relate this to the James Scott’s concept of legibility, one way of understanding what Taylor did in achieving the scaling-based winner-take-all economy (driven fundamentally by experience curves) is as follows. The skills of production used to be illegibly inside the heads of master craftsmen, to be transmitted only through master-apprentice relationships, usually within secretive guilds.

    When Taylor stepped in, he made these skills both legible (by deconstructing work, taking inspiration from Adam Smith’s prototypical example of the nail factory) AND centralized the legible knowledge in the minds of managers, leaving in the workers minds only the specialist skills that cannot be used in stand-alone ways independent of the factor. So the actual production could take place without craftsmen, and have the specialization cake and eat it too.

    The result was that while the craftsmen lost both income and skill, a much larger class of mass-production workers who’d been locked out of the economy in marginal subsistence roles suddenly had access to much greater income. Remember that despite the tedium, Taylor and Ford paid their crank-widget employees extremely well. Despite the high pay, farm/guild style workers loved their independent lifestyles and hated the factory model, and it only took off because of smart timing by the early capitalists (for example, the textile industry in Britain took off when a bad harvest or two forced farmers into factories, after which it was a simple matter of one generation of industrial-style schooling of their kids to create an inexhaustible supply of factory workers).

    So I think the income inequality picture is slightly more complex. It happened not through general depression of income at the bottom/inflation at the top, but through the hollowing out of the old middle class (the guilds), who then had to either climb up or down.

    This logic was then applied to information work, further disrupting the guild-structure in information work domains like book-keeping, typesetting (at one time, printers were among the most powerful guild industries), etc.

    But again, both in blue and white collar, this wasn’t the true start of the disparity trend. As with manufacturing, the systematization of office work/white collar work initially led to rising incomes (especially for women, who broke into information work first as typists).

    The trend really started when industrial automation (robotics/CNC machines etc.) started pushing the blue collar class into the burger-flipping class. In a way this was a bait and switch. They got higher wages when they were useful in destroying the skilled guilds. But once the guilds were destroyed and automation was available, they got kicked back to their 1890s income levels.

    Computers did the same thing to the white-collar class.

    • http://OnTheSpiral.com/ GregoryJRader

      Thanks for all the color Venkat.  A couple things jump out at me.  One is that this hollowing out you describe can only occur during periods of stability.  When things are changing rapidly there is no time to take tacit knowledge out of the heads of craftsman and externalize it in processes and institutions.  However, it is also during times of rapid change that previously stable careers are most likely to be disrupted.  It would seem that the onset of stability is when everyone is happiest.  The system builders can start civilizing things, but the craftsman are still needed to help build the systems.  

      The winner-take-all/scalability factor becomes relevant when we start looking at our current age of instability.  We do see a growing class of craftsman in some fields, but where the winner-take-all environment prevails the craftsman oscillate between one end of the spectrum and the other.  Think: the poor kid coding 16 hours a day and eating ramen while hoping for millions, or the blogger who struggles to build an audience for years until the snowball gains momentum, at which point passive income becomes a legitimate possibility.
      When change comes rapidly it seems that the middle is not a demographic but instead a temporary point we pass through while rising or falling.  

  • Ted Heistman

    So the burger flippers need to get a fab lab and begin creating value?

    I think its like instead of turning people into fragments and then building them into machines which was the industrial model, what’s possibly happening is people are forming holarchies while maintaining personal integrity. Hopefully.

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10 Responses to Rising Income Inequality & Shifting Identities – The Specialist & The Omnivore

  1. Openworld says:

    Brilliant (again!!!) insights, Greg … 

    And if the drivers you’ve described are working to set a zero price for bits and atoms, in what ways will rising income disparities continue to matter in the future?

    Best,

    Mark

    • Hey Mark,
      If I am going to be consistent with my argument above then I can’t really answer that question.  Income does matter but it is just one piece of the puzzle.  Money can sometimes buy happiness; lots of other things can also sometimes buy happiness, and there are a lot more of these “other things” floating around today.  The answer will be extremely context dependent.  

      I do think many of the people who jealously condemn millionaire-executives are just looking for scapegoats.  If you put an extra 0 at the end of my paycheck I would probably still be living essentially the same life I live today.  I would just be doing it while spending my money much more frivolously.  

      Now of course if we are talking about people who truly struggle to put food on the table, then that is a different story.  But, part of my goal in writing this post is to point out that income is disparities are not necessarily providing a good indication of the degree to which people are truly struggling.  

  2. Ted Heistman says:

    I guess money is just a symbol for value that has become an equivalent medium of exchange.

    So possibly as more and more people create value, not totally outside, but oblique to “the system” then eventually billions of dollars will have less equivalency to actual value.

    • Thanks for the comment Ted.  I think that is correct.  The more mechanisms we have to achieve various goals outside of the monetary system, the less reliable $ becomes as a comprehensive metric.  Income measures the ability to acquire certain types of value very well and other types of value very poorly.   

  3. Venkat says:

    I think I’d separate the idea of specialization from the idea of scaling/losers. Deep specialization can exist without mass production economics. Mass production specialization is only one kind where you become what I call a “mindless specialist” who becomes deeply skilled at a component of a value chain instead of an entire value chain. By contrast the deep specialist of non mass-production economies is the guild craftsperson. A weaver or blacksmith is a complete value chain in one person. They can be deeply specialized (for example, specializing in a very particular kind of local weave or exclusively in swordsmithy), but the point is, no matter how specialized they get, they are independent value chains that can convert raw materials into something tradeable for cash. By contrast, a highly skilled welder (among the few remaining high-paid specialist shop-floor jobs) is not capable of independent production.

    This actually means your idea is even broader than you state. It is not only mass-economy specialists who are vulnerable to suddenly changing times. Guild-economy craftsmen are also similarly vulnerable. I believe there have been such busts in trades like masonry, paper-making etc., but I can’t recall details off the top of my head.

    To relate this to the James Scott’s concept of legibility, one way of understanding what Taylor did in achieving the scaling-based winner-take-all economy (driven fundamentally by experience curves) is as follows. The skills of production used to be illegibly inside the heads of master craftsmen, to be transmitted only through master-apprentice relationships, usually within secretive guilds.

    When Taylor stepped in, he made these skills both legible (by deconstructing work, taking inspiration from Adam Smith’s prototypical example of the nail factory) AND centralized the legible knowledge in the minds of managers, leaving in the workers minds only the specialist skills that cannot be used in stand-alone ways independent of the factor. So the actual production could take place without craftsmen, and have the specialization cake and eat it too.

    The result was that while the craftsmen lost both income and skill, a much larger class of mass-production workers who’d been locked out of the economy in marginal subsistence roles suddenly had access to much greater income. Remember that despite the tedium, Taylor and Ford paid their crank-widget employees extremely well. Despite the high pay, farm/guild style workers loved their independent lifestyles and hated the factory model, and it only took off because of smart timing by the early capitalists (for example, the textile industry in Britain took off when a bad harvest or two forced farmers into factories, after which it was a simple matter of one generation of industrial-style schooling of their kids to create an inexhaustible supply of factory workers).

    So I think the income inequality picture is slightly more complex. It happened not through general depression of income at the bottom/inflation at the top, but through the hollowing out of the old middle class (the guilds), who then had to either climb up or down.

    This logic was then applied to information work, further disrupting the guild-structure in information work domains like book-keeping, typesetting (at one time, printers were among the most powerful guild industries), etc.

    But again, both in blue and white collar, this wasn’t the true start of the disparity trend. As with manufacturing, the systematization of office work/white collar work initially led to rising incomes (especially for women, who broke into information work first as typists).

    The trend really started when industrial automation (robotics/CNC machines etc.) started pushing the blue collar class into the burger-flipping class. In a way this was a bait and switch. They got higher wages when they were useful in destroying the skilled guilds. But once the guilds were destroyed and automation was available, they got kicked back to their 1890s income levels.

    Computers did the same thing to the white-collar class.

    • Thanks for all the color Venkat.  A couple things jump out at me.  One is that this hollowing out you describe can only occur during periods of stability.  When things are changing rapidly there is no time to take tacit knowledge out of the heads of craftsman and externalize it in processes and institutions.  However, it is also during times of rapid change that previously stable careers are most likely to be disrupted.  It would seem that the onset of stability is when everyone is happiest.  The system builders can start civilizing things, but the craftsman are still needed to help build the systems.  

      The winner-take-all/scalability factor becomes relevant when we start looking at our current age of instability.  We do see a growing class of craftsman in some fields, but where the winner-take-all environment prevails the craftsman oscillate between one end of the spectrum and the other.  Think: the poor kid coding 16 hours a day and eating ramen while hoping for millions, or the blogger who struggles to build an audience for years until the snowball gains momentum, at which point passive income becomes a legitimate possibility.
      When change comes rapidly it seems that the middle is not a demographic but instead a temporary point we pass through while rising or falling.  

  4. Ted Heistman says:

    So the burger flippers need to get a fab lab and begin creating value?

    I think its like instead of turning people into fragments and then building them into machines which was the industrial model, what’s possibly happening is people are forming holarchies while maintaining personal integrity. Hopefully.

  5. [...] thanks to the internet and the low material costs of production and distribution. Gregory Rader has pointed out that as opportunities to do rewarding work increases, our desire to work in extrinsically motivated [...]

  6. [...] the horizon.  Growth in developed economies has slowed to a crawl.  Governments are impotent.  Income inequality is increasing.  Education and health care are a perpetual quagmire.  Nothing feels safe and the [...]

  7. [...] the horizon.  Growth in developed economies has slowed to a crawl.  Governments are impotent.  Income inequality is increasing.  Education and health care are a perpetual quagmire.  Nothing feels safe and the [...]

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