Bryan Caplan  

How Egalitarianism Increases Inequality

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All else equal, people in respected professions make less money.  The mechanism is simple:

1. People like to be respected.
2. People know that if they enter a respected profession they will personally enjoy more respect.
3. This increases the supply of people in the respected profession, which in turn drives down their wages.

So what happens to inequality when one profession becomes more respected?  It depends.  If people in the profession currently earn less than average, then giving them more respect increases inequality.  But if people in the profession currently earn more than average, then giving then more respect actually decreases inequality.

Now for the fun part.  Imagine people become more egalitarian, to the point where they heap scorn on the rich and successful.  What is the effect on inequality?  By the previous logic, the effect is directly counter-productive.  The more you scorn rich people, the more people you scare away from high-income professions.  The more you scare away, the lower their supply.  And the lower their supply, the higher their income!

Lesson: If you really want a materially more equal society, stop beating up on the 1%.  Do a complete 180.  Smile upon them.  Admire them.  Praise them.  Sing songs about how much good they do for the world.  The direct result will be to raise their status.  But the indirect result will be to pique the envy of status-conscious people, increasing the competition among the top 1%, and thereby moderating income inequality.

On the other hand, if you want to increase material inequality, by all means heap scorn on the rich and successful.  Try to fill them with guilt and self-loathing.  The 1% who remain will find that living well is the best salve for their consciences.
 

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COMMENTS (23 to date)
D writes:

Until 2008, was the trajectory of a career in finance one of more respectability or less? Did a Wall Street financier in 1970 have more respect than one in 2005?

Matt writes:

Do you have any sense of how the attitudes towards the rich have changed along with inequality? For example, how were CEO's viewed during the 1950's? I'm way too young to have any kind of idea.

steve writes:

The country which gave the world Lifestyles Of The Rich And Famous and a plethora of reality shows idolizing the wealthy is not beating up on the 1%. When the 1% blew up the world's economy, they were the ones who got bailed out. I find little objective evidence that the 1% gets beat up much. In the 80s, 90s and aughts, the wealthy received constant accolades. The results seem pretty obvious. Look at who gets on the cover of the magazines.

(If this was a humor piece, forgive my misunderstanding.)

Steve

david writes:

If you raise taxes on the rich (or lower taxes on the poor), does pre-tax income inequality rise too?

If status gives welfare, does condemning the rich (or elevating the poor) nonetheless reduce welfare inequality?

Does relative status drive policy fights a la Hanson, or do policy fights set relative status a la Caplan?

Glen S. McGhee writes:

The real world has institutionalized and professionalized what you are calling "respect" in many ways -- through legislation, state monopolies, licensing, credentialing, and the courts, and even through the media touting the successes of the modern professions (guilds).

One of the best examples of this (and its eventual effects) is the American Medical Association (founded 1846), which, in its war with other medical practitioners, worked diligently to raise the status and legitimacy of its members.

The big break came when the AMA was able to persuade the Carnegie Foundation for the Advancement of Teaching to conduct a study of medical education under the pretext that the visitations would lead to additional funding by the foundation. In fact, the 1910 report by Abraham Flexner was so scathing that it produced a veritable revolution in medical education. All but two (2) black medical schools were closed down, resulting in ongoing critical shortages of physicians to these particular communities. Eventually, medical education was absorbed by the rising universities, and "regular physicians" and "hospital men" gained the upper hand, using their influence and control to monopolize the health sector.

I use this historical illustration to emphasize the importance of recognizing the institutional context(s) of all of the professions; without acknowledging the cultural and organizational histories involved, we are likely to miss the ways in which professional "respect" become

Brandon Berg writes:

This decreases income inequality, but increases status inequality, assuming that the wealthy have above-average status. The effect on overall inequality is indeterminate.

david writes:

The economic intuition behind a lot of left-wing arguments seems to be that the rich don't earn their labour product, they earn rent that is disguised as wages.

This post neatly highlights the resulting differences, in a way...

D writes:

Needs empirical support but novel thought!

Doug writes:

@steve

"When the 1% blew up the world's economy, they were the ones who got bailed out."

What?!

So the 99% that got mortgages and consumer debt they couldn't bear no responsibility? The 99% that voted in unsustainable government spending have no relation to the financial crisis? The 99% making up the regulators at the Fed, OCC Basel, and ratings agencies who decided that super-senior CDO tranches should be counted the same from a risk perspective as treasuries (and allowed banks to take massive leverage with government provided fiat money), have no relation?

As for only the 1% getting bailed out, last time I checked virtually every single bank fully paid back TARP with generous interest. The largest costs were by far to the 99% in the auto unions, the 99% receiving mortgage modifications, and the 99% working in state and local governments whose jobs were saved by the "stimulus."

Try to understand reality instead of just blindly instigating class warfare.

Chris Koresko writes:

It looks like Brandon Berg may be on to something: status and pay can be thought of as two parts of the total compensation package. The value of that package will adjust to an equilibrium in which the demand for labor is satisfied. So more status should lead to less pay, and vice versa.

J Storrs Hall writes:

People like doing business with respected persons or companies, and are willing to pay more for the same, objectively measured, products or services. (You're buying a present for your wife. You happen to know that Chanel #5 and K-mart Kologne are molecularly identical substances. Which do you buy and for how much?)

I would guess that the direct effects of this more than offset the indirect effects of price downbidding from competition engendered by increased participation in the respected sector.

The Original D writes:

Doug - Richard Fuld of Lehman made $22 million in 2007 -just one year before bankruptcy. And that's what happened to one of the losers!

TARP was re-paid, but there is no doubt that on a per-capita basis the top 1% benefitted the most from it.

Jehu writes:

If you actually want to decrease inequality, here's my suggestion.

Take steps through the tax system to encourage the rich to have more children (and if possible, the poor or dependent to have less). That would do more to reduce inequality long term than anything I can think of off hand.

steve writes:

"So the 99% that got mortgages and consumer debt they couldn't bear no responsibility?"

Who made money on this? While I agree that those who took out the liar's loans should bear some responsibility, they could not take them out unless the banks offered them. Of course, you seem to be ignoring that the same thing happened in commercial real estate.

"As for only the 1% getting bailed out, last time I checked virtually every single bank fully paid back TARP with generous interest."

They got bargain interest rates. Few lost their jobs. Without the bailouts, most of our large banks would have failed. They are back, many of them, making record profits again.

" 99% receiving mortgage modifications"

Not on principal writedowns. Care to compare the amount spent on bailing out the 99% vs the 1%. How big a hit did those bondholders take? How many homeowners are losing their homes?

"The 99% making up the regulators at the Fed, OCC Basel, and ratings agencies who decided that super-senior CDO tranches should be counted the same from a risk perspective as treasuries (and allowed banks to take massive leverage with government provided fiat money), have no relation?"

Those decisions were made at the request of and for the benefit of the 1%. Those regulators who refused to enforce the law are the same regulators who go back to industry, the !%. We now know that the banks were, see Cohan's book, pretty much ignoring leverage limits most of the time anyway, which is almost besides the point. No one forced them to hold so little capital, and the changes were written by their own lobbyists.

" instigating class warfare."

For the last 30-40 years we have had a celebrity culture. The wealthy have been courted and fawned over. If there is class warfare, it is by the wealthy who have won. If we go back to fawning over them like Bryan suggests, I would expect them to just keep on doing what they have been doing.

Steve

Mark Michael writes:

Did the poster do any experimental measurements to support his premises? Find a survey that measures the level of respect for a set of professions and compare that with their incomes. My initial thought was that they'd correlate pretty well: the more respect the higher the average (or median) income for most of them. Doctors are pretty well respected and should have above-average incomes. Hmm. What about lawyers? Teachers? Artists, musicians, painters, journalists, Hollywood actors, screenwriters, politicians? Hmm. That sort of blows my theory - artists often are "starving" because they love their professions they'll do it for peanuts.

If they can, professions often restrict entry to their gig. "Guilds" have been around for centuries, and require (often) lengthy processes to become accepted as a fullblown, card-carrying member. Today, it's mostly academic credentials. That reduces supply and allows them to charge higher prices for their products & services, of course. That needs to connivance of government or other controlling institutions.

As an electrical engineer, I've thought that the difficulty of mastering enough of the skills, knowledge of the profession was a restriction on entry. Lots of people find the math, science, logical complexity too tedious or frustrating to pursue. They switch majors in college to something more amenable to their aptitudes and personalities. Hence, our somewhat higher wages are due to a natural limitation on supply.

Ditto, I'd think, for artists - musicians, painters, authors, poets - and many other professions. Yet, they don't make much (as noted above), often.

So the idea of just focusing on (1) higher wages, and (2) respect as the two primary factors for attracting people to a line of work/profession seems a little simplistic. Artists may love to paint, sing, play the violin - hence, tolerate a low wage. Thomas Edison loved to discover new things to build that people would find useful. He didn't care much about accumulating money. It was a means to an end, at best. He wanted the satisfaction of inventing, say, the incandescent light bulb, which brought light to the world in an abundance never before seen. (Well, couple that with widespread electrical grids, power generation, etc.)

Enough ruminating!

Keith writes:

So, there are two effects of increasing the status of rich people: (1) an immediate increase in the total (money + status) income of currently rich people; and (2) a consequent increase in the demand for becoming a wealthy person.

I think you're saying that the second effect will lead to a further effect: an increase in the supply of rich people.

But this would not exacerbate inequality. If more people become rich, why would inequality get worse? Inequality would get worse only if the wealth discrepancy between already-rich people and the poor got bigger.

PrometheeFeu writes:

I love it. That said...

1) The people who most often complain about lack of respect are public employees whose salary is determined by political forces where respect is a nice way to get a higher salary. (see relative pay rates of police officers and firefighters)

2) Respect is organic. Generally, professions are respected because they either require high skill levels and/or generate high value. So while respect is part of the compensation package, you often also get more money by going into a respected profession because all else is not equal.

In favor of your point, professors are highly respected and paid very low salaries (given their educational level) while plumbers, electricians and skilled trades in general tend to not be highly respected but have high income levels.

GiT writes:

I'm not aware of any point in history where there was a dearth of people willing to do ignoble things for most any amount of money. In fact, I'd wager a surfeit of such people is pretty much a constant.

If that's the case, then whatever goes on among the minority of folks who are deeply concerned with their career's effect on their status is pretty much irrelevant.

steve writes:

The 1% seems to receive both high and low status. In the media, they are often reviled. But in person, they are treated with great deference for the most part. Similiarly, congressmen receive low approval ratings but are usually treated quite well in person.

Brianna writes:

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Floccina writes:

Steve (above) is right.
That is why I do not like the John Stewart show show. He is tough in theory but when he does the interview at the end of show he is very deferential. Of course if he were not they would not come on his show. Se la vi.

Troy Camplin writes:

The logical extension of Bryan's idea is:

http://theliteraryorder.blogspot.com/2012/01/how-literature-can-reduce-income.html

Some US Citizen writes:

Worship is not respect, Mr. Caplan. You ask for empty praise for people that have been the cause of the problem.

Eliminate the avenues for which such group can establish their contempt - whether it be through offshoring, refusing to hire, complaining about uncertainty, or otherwise - for US citizens.


I'd say that it is right and just to continue upon the 1%. Once they have eaten enough humble pie and earned the respect from fellow US citizens, then it can stop.

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