If you’re so smart, why ain’cha rich?

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If we take a random individual from the population of Australian taxpayers, what’s the probability that her personal income will fall somewhere within the range $20 000-$30 000, or between $120 000-$130 000?

Consider this an inversion of the previous post, in which we used published ATO statistics to examine the income share of various fractiles.

The columns below show the percentage of people whose annual incomes fall within each interval. The probabilities of course sum to unity (100%).

As we can see, individuals cluster within the interval $20 000-$40 000, with the number of taxpayers in each interval declining sharply thereafter as we move upwards along the income scale.  A small number of people receive a huge income.

Income distributions in the United States, Japan, the United Kingdom and Italy closely approximate this Australian pattern.

This is an interesting result. For all their similarities, these five countries differ greatly in labour-market regulation, industry composition, policy settings, degree of ‘social capital’ and spread of ‘human capital.’

Perhaps such details are not, after all, decisive factors in the determination of a country’s income spread.

Indeed there’s good reason to think that this broad pattern of inequality  in which many individuals end up with little income, and very few individuals wind up with a huge income  is a universal feature of market economies, and emerges wherever there is monetary trade by a large number of private agents (and a fortiori whenever a small class of property owners can hire the capacity to labour of those without productive assets).

Ian Wright’s simulation of a market economy involves an agent-based model in which zero-intelligence actors are initially given an equal endowment of resources, then partitioned into classes (employer, employee and unemployed) and led to interact in product and labour markets according to a few basic decision rules.

Just like a real market economy, there are local, micro-level interactions of agents, in which goods and services are exchanged for money. And, just like real market economies, the invisible hand produces macro-level regularities: patterns of income distribution etc.

As in the Australian data shown above, the simulation sees many agents end up with little income, and a small number wind up with a huge income.

Of course, the rich don’t owe their wealth to intelligence or effort (recall that these are zero-intelligence agents, without “strategies” or choice functions, who select a course of action by choosing randomly from a probability distribution).

Merely by the working of chance, a lot of money is bound to end up in the hands of a few.

What’s the upshot of this?

  1. Wherever a large body of private agents (individuals, firms) engages in monetary trade, a highly unequal income distribution is likely to result. This distribution may take a variety of forms (lognormal, power-law, exponential etc.), but its basic shape holds for all reasonable parameter values.
  2. The properties of this income distribution do not arise from individuals possessing unequal endowments of internal talents and capacities (intelligence, responsibility, propensity for hard work). Even with a uniform distribution of initial resources, random interactions and zero-intelligence agents, we end up with a few rich people and large number of low-income people.
  3. So long as market exchange is maintained, inequality of outcome will survive those measures imposing “equality of opportunity”, or “benevolent” welfare and tax policies.
  4. Quotas for disadvantaged groups  e.g. women or ethnic minorities  may increase the “diversity” of the upper strata (through, for example, preferential admission to elite collegiate programmes). But given the essential fixity of the income distribution, the shuffling of social positions is a zero-sum game. The granting of salvation to a special few of the reprobate does not increase the total number of elect; and merely consigns others to damnation in their place.

For left-wing radicals, the implications of this are obvious.

But centrist liberals, too, have cause for thought. Most of them, taking their lead from Ronald Dworkin, incline sympathetically towards a kind of luck egalitarianism. This position holds that inequality arising from unchosen circumstances  as opposed to that inequality which is deserved or for which agents are responsible  is unjust.

Thus Dworkin says:

[Unfair] differences are those traceable to genetic luck, to talents that make some people prosperous but are denied to others… [A just society aims to] neutralize the effects of differential talents… individuals should be relieved of responsibility for those unfortunate features of their situation that are brute bad luck, but not from those that should be seen as flowing from their choices.

John Rawls says that ‘those with similar abilities and skills should have similar life chances.’

But, as we have seen, market societies allocate stupendous wealth, not merely to the innately talented (like Wilt Chamberlain), but also to lucky morons.

Can liberal centrists rise to the challenge of justifying such a distributional order? The example of Dworkin suggests that they can.

In doing so, however, he and his acolytes commit a fallacy of composition. For the vagaries of market exchange and private property, as we have seen, entail the emergence of macro-social inequality even in the presence of identical agents with the same initial endowment of talents and capabilities.

‘Unfortunate features’ of capitalist society must therefore flow not from individual ‘choices’, but from a kind of ‘brute bad luck’: the basic institutions of society.

The young Marx, following the Classical economists, was on solider ground in suggesting that, on a social level, personal merit does not give rise to wealth ex ante. Rather, virtuous attributes intelligence, good taste, attractiveness are retrospectively ascribed to the wealthy because of their wealth.

Here Marx described the ‘power of money’, which Adam Smith had said conferred on its owners the ‘power to command’ labour and the products of labour:

That which is for me through the medium of money  that for which I can pay (i.e., which money can buy)  that am I myself, the possessor of the money. The extent of the power of money is the extent of my power. Money’s properties are my  the possessor’s  properties and essential powers.

Thus, what I am and am capable of is by no means determined by my individuality.

am ugly, but I can buy for myself the most beautiful of women. Therefore I am not ugly, for the effect of ugliness — its deterrent power  is nullified by money.

I, according to my individual characteristics, am lame, but money furnishes me with twenty-four feet. Therefore I am not lame.

I am bad, dishonest, unscrupulous, stupid; but money is honoured, and hence its possessor. Money is the supreme good, therefore its possessor is good. Money, besides, saves me the trouble of being dishonest: I am therefore presumed honest.

I am brainless, but money is the real brain of all things and how then should its possessor be brainless? Besides, he can buy clever people for himself, and is he who has power over the clever not more clever than the clever?

Do not I, who thanks to money am capable of all that the human heart longs for, possess all human capacities? Does not my money, therefore, transform all my incapacities into their contrary?

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One Response to “If you’re so smart, why ain’cha rich?”

  1. It’s a small world « Churls Gone Wild Says:

    […] with the observed distribution of firm sizes and the observed distribution of income flows and wealth stocks between individuals, there is reason to think that this pattern is not alterable, in any meaningful sense, by […]

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