Thursday, 8 November 2012

What 'income inequality', exactly?

From The Daily Mail:

An average earner was paid £7.78 an hour in 1986 – calculated at 2011 prices – which had gone up to £12.62 last year, an increase of 62 per cent.

By contrast, the average pay of someone in the top 1 per cent of the earnings league went up from £28.18 an hour to £61.10 an hour, an increase of 117 per cent.

Those in the top tenth of the league saw their pay rise from £14.78 an hour to £26.75 an hour, an increase of 81 per cent.

At the bottom, the lowest 1 per cent of earners saw their pay go up from £3.48 an hour to £5.93, an increase of 70 per cent.


1. Now, as a completely separate debate, I could point out that some of the hyper-earners deserve every penny, if J K Rowling sells millions and millions of books and DVD's, then she can keep every penny of her millions and millions of pounds, nobody is forced to buy them (I do, as it happens). Ditto Premier League footballers, nobody is forced to buy a season ticket or subscribe to Sky Sports (and I certainly do not). And there are plenty of high earners who are just rent-seekers (quangocrats, directors of large companies, bankers etc.), i.e. add little or no value and create little or no wealth (and possibly destroy it). I don't exclude myself from the latter category, by the way.

2. But be that as it may, the ratio between bottom and top percentiles is only a factor of ten. Is it not possible that, broadly speaking, some people are simply ten times luckier than others? The lucky ones will claim that they are hard working, diligent, skilled etc, and possibly they are, but there is still a large element of luck, not only in being born and raised with those innate abilities, but also being in the right place at the right time to be able to use them. The best coal miner in the world would struggle to make a living in the UK today; and heck knows what would have happened to Mark Zuckerberg had he been born twenty years earlier. If we improved the education system, this might go some way to evening things out, remembering always that 'social mobility' means mobility downwards as well as upwards.

3. The ten-to-one ratio is flattened enormously by the tax and welfare systems, plus the value of all the stuff which everybody gets "for free" (NHS, state education, refuse collection, the right to vote, use a public library etc), so if you adjust for this, the ratio is probably more like four-to-one. Whether you consider this A Good Thing or A Bad Thing is up to you, that's just the way it is.

4. There are diminishing returns to scale and/or higher earners/spenders get worse value for money. A £200,000 Ferrari does not make you ten times as happy as a brand new £20,000 family saloon, which in turn does not make you ten times as happy as a fifteen-year old midnight blue Golf Mark II for £2,000. Plus higher earners who send their kids to private school get shafted by the system.

5. The real inequalities of course, and those which are impossible to justify on any sort of level, moral, economic, whatever, are inequalities in the amount of national wealth (primarily land rent):

(a) which some people can enjoy or collect (heavily subsidised and lightly taxed), and
(b) which other people have to pay through the nose for.

So with income inequality, even if the ratio between top and bottom were a hundred or a thousand, at least there is no such thing as negative earnings potential (because nobody is forced to pay to do a job). But with "land", about half the population is paying to live somewhere, so actually they have negative land wealth; most of the other half is enjoying owner-occupation, and the top few per cent are collecting from the bottom half.

If we are going to worry about inequality, that's where we ought to start (and probably finish). Once that's sorted out, everything else will pretty much fall into place.

27 comments:

Robin Smith said...

Totally.

Thomas Hall said...

This.
Why is something so simple so far away from the common thinking?

Derek said...

Thomas Hall asked "Why is something so simple so far away from the common thinking?".

It's probably because the terms of public debate (and thus the common thinking) are mainly set by newspapers, radio and TV and they generally avoid this way of looking at the issues.

Furor Teutonicus said...

XX Thomas Hall said...

This.
Why is something so simple so far away from the common thinking?
XX

Because they are trying to get the commoners to think. The result is....

Neil Harding said...

Mark, have to agree with you once again. If land was taxed properly, wage inequality might not be too much of a problem even if some idiots get millions for breaking the banks or whacking a football while really productive workers seem to get little. The market is winner takes all, so even if the productive gap is small, the reward gap can be unrealistically huge and morally outrageous. And thats before we get on to monopolies and the other manyfold distortions. Most regulation improves market efficiency by removing the inevitable distortions. We can never get perfect knowledge amongst consumers or infinite numbers of competitors for the market to operate perfectly and regulate itself.

Mark Wadsworth said...

RS, TH, D, FT, thanks.

NH, thanks, but I think you are debating my point 1. I don't mind footballers earning stupid money because I am not forced to pay their wages.

Conversely, I do very much mind bankers earning stupid money, because that's basically all government subsidies (free deposit insurance, too big to fail, their income is largely recycled land rents etc).

And yes, I agree on monopolies, that's a tricky issue, but the most important bit is to get rid of, or tax away the advantages of government protected monopolies.

If a monopoly arises naturally, because the minimum efficient scale is more than half the total market, well so be it.

Chrometum said...

How much does JK Rowling pay to have her government granted monopoly over Harry Potter protected?

Oh and off topic, I just saw this article on the guardian website http://www.guardian.co.uk/politics/2012/nov/08/land-value-tax

Robin Smith said...

Good point on Copyright. There is at least some free protection in it.

On Gauke he was Minister when we went into the Treasury to talk about it. They were not stupid and understood it. They said:

"look, our minister has told us not to come to him with anything radical, if we want to keep or jobs"

Of course Gauke is in the same place from even higher up. A crowd please masquerading as a leader.

This is how the world works. A giant pyramid.

Andrew said...

"morally outrageous"

Bullshit.

What's morally outrageous is a group of people with guns declaring a monopoly of land and violence.

And then thinking they know better than people freely trading with each other.

Monopolies arise because of government action, not the lack of it.

The asymmetry of information is simply the specialization of labour, it provides us with our standard of living. And before Akerlof (?) even raised this nonsense the market had already dealt with it.

The government does not and can not help markets, it can only hamper them.

And again, to think pointing a gun at someone, stealing their money, and telling them what to do is moral, is just bullshit.

Mark Wadsworth said...

Chr, RS, yes of course, JK Rowling enjoys copyright protection provided by the state, so the state is allowed to charge her X% of the royalties she collects.

Andrew, I'm not sure what level of reality you are operating on. You seem to be anti-government, but I hope you realise that 'land ownership' and 'stable government' are two sides of the same coin? You cannot have land ownership without the government proposing to carry out violence on your behalf etc?

So if there is a good case for the government charging JK Rowling a % of her royalties in return for them clamping down on would be copiers, is there not a good case for the government for charging landowners for the benefit of the protection and other services they receive, without which there would be no such thing as 'land ownership'?

'Land ownership' is not a concept which just magically happened by people freely trading with each other, I trust that you know that?

Andrew said...

I'm operating under the basic idea that voluntary interactions are the way forward. You can lump me in with the libertarians if you want, but the two most popular terms tend to be voluntarist or anarcho-capitalist.

If your land needs defending why does it need to be by a government? And the people most apt at stealing land, because of their resources, are those in government.

Charging someone implies a voluntary interaction. That's not the case with government, you pay under the threat of violence. (And you can make a "good" case for the government doing just about anything.)

Maybe removing the violence of government will change the nature of land ownership, maybe it won't. We don't know the future.

If we free the slaves who will pick the cotton?

Mark Wadsworth said...

Andrew, you think that land ownership arises by free market transactions between individuals? like the free-market transactions between white settlers and the Red Indians, or the Normans and the Anglo-Saxons?

The "title" changes hands between individuals, but the "title" itself, and the rental value thereof depends on the stability of the government, the law-abidingness of the population and some combination of "local services" (whether provided by other individuals or businesses, the local council, the central government or by nature, such as a nice view, which in turn is protected by government-imposed planning restrictions).

if Mr X owns plot X, then that only has value because others (trespassers etc) are prevented from encroaching thereon, and that protection is provided for free by either the government (police etc) or the general law-abidingness of the local population. So Mr X is benefitting from the exercise of force or the threat of violence, or indeed the willingness of others to tolerate the restrictions placed on them.
--------------
Or consider this:

Would you rather "own" land within a UK town or city, with planning permission etc, or would you be just as happy "owning" land in Somalia or Afghanistan?

From which site can you derive more income with less effort?

Would you rather "own" one acre of land and buildings in a UK town or city, or one acre of Scottish grouse moor or forest, in the middle of nowhere?

From which site can you derive more income with less effort?

I wish you the best of luck in starting your happy anarcho-capitalist society in Somalia, Afghanistan or in a remote Scottish grousemoor or forest :-)

Mark Wadsworth said...

"Charging someone implies a voluntary interaction."

Correct. So income tax and so on is theft, because that's your reward from other private individuals for your efforts, the government plays little part in this. But "owning" land is in itself voluntary from the point of view of the owner and entirely involuntary from the point of view of 'everybody else'. The government is merely referee.
-----------------
"If we free the slaves who will pick the cotton?"

Human rights notwithstanding, the economic position of freed slaves was barely an improvement, because they were paid "market wages" for their work, but also had to pay "market rent" for the privilege of living where they worked. So they were still not free, in the same way as the American-Indians were no longer free once whitey arrived and forced them onto reservations.

Andrew said...

Red Indians, or the Normans and the Anglo-Saxons - government mass-murder used as an argument for government?

Somalia - http://www.peterleeson.com/Better_Off_Stateless.pdf

Afghanistan - government mass-murder used as an argument for government?

Scottish forests - I don't understand what this has got to do with an argument against giving a small group of people a violent monopoly over everyone else.

"The government is merely referee."

I'm not questioning the need for referees. I'm questioning the need for a referee monopoly.

Mark Wadsworth said...

Excuse me, where did I condone mass murder, perpetrated by whoever, government or otherwise?

Do you geuinely not accept that "land ownership" and "rent collection" in the modern Western sense in modern Western civilised societies (or even stable Communist societies, for that matter) is the flip side of having a stable government and a law-abiding society?

"I'm questioning the need for a referee monopoly."

Do you realise what you just said? What happens if your private competing land registry shows Mr Jones as the owner of a certain plot, but my private competing land registry shows Mr Smith as the owner?

Land is inherently a monopoly, there can be only one piece of land in one location and one "owner" or "exclusive occupant" of that land at any one time.

The only "free market" way to sort out all the competing interests is by payment of money from the beneficiaries to the burdened. In other words, collecting LVT and dishing it out as a Citizen's Dividend.

Andrew said...

"Excuse me, where did I condone mass murder, perpetrated by whoever, government or otherwise?"

I didn't say you were condoning it, I said you were using government mass-murder as an argument for government.

Do you geuinely not accept that "land ownership" and "rent collection" in the modern Western sense in modern Western civilised societies (or even stable Communist societies, for that matter) is the flip side of having a stable government and a law-abiding society?

I accept that government provides propert rights and law.

But I do not accept that it is either the best way or the moral way.

Monopolies lead to abuse and power corrupts.

Do you realise what you just said?

I hope I do, it took me a long, long time and plenty of reading, re-reading, watching, and re-watching the likes of Murray Rothbard, David Friedman, Bruce Benson, etc. to come to that conclusion and make the jump from minarchism to anarchism. I'd accepted it on moral terms as soon as I discovered libertarianism but I took far longer to be convinced on practical terms.

Mark Wadsworth said...

Andrew, just to recap, what I am actually saying, and what is observably true, is that land ownership is only possible within a stable (and by implication peaceful) state and a reasonably law-abiding population.

Clearly, if mass murder is the order of the day, then that's either a sign of an unstable government or a lawless population. Land will be worth little in areas controlled (or not) by such governments and/or lawless tribes, and rents will be correspondingly low (to the extent they arise at all), and land "ownership" will amount to little more than "whoever has the most fire power".

Of course, no man is an island (he cannot stand watch 24/7 with a cocked rifle), so small groups of people willing to wield force will protect each other against third parties. This is what is known as "a state" or "a government".

You are playing some weird game where you keep insisting that I have said things which a) I did not say and b) which are not true anyway.

I never said anywhere that only alternative to "government mass murder" is "more government". You fail to accept that one of the really indisputably good things about stable modern Western societies is that the murder rate* is very low, compared to tribal, hunter gatherer, anarcho-states.

* Unless you have an insane or unstable government. But that's like saying "All cars are bad because some car drivers are idiots".

Andrew said...

Of course, no man is an island (he cannot stand watch 24/7 with a cocked rifle), so small groups of people willing to wield force will protect each other against third parties. This is what is known as "a state" or "a government".

I wasn't aware of this, thanks for the clarification.

So with this in mind, why shouldn't I be allowed to choose which small group of people will defend me?

Mark Wadsworth said...

Andrew: "So with this in mind, why shouldn't I be allowed to choose which small group of people will defend me?"

Oh you are allowed to choose. Whoever has the most weapons gets to choose. So you and your anarcho-capitalist mates can buy up some guns and do a reverse takeover of a Scottish forest or somewhere in the mountains of Afghanisation. Because as we know (if we were honest), all land ownership derives from force.

Best of luck, send me a postcard once your anarcho-capitalist perfect society is up and running with competing land registries and all that.

Andrew said...

"Best of luck, send me a postcard once your anarcho-capitalist perfect society is up and running with competing land registries and all that."

Only if you return the favour when your utopian government matches your pure-fantasy definition.

Mark Wadsworth said...

Andrew, fair point.

Or we could split the UK 50/50 into two halves. In my half, we'll have LVT and a Citizen's Dividend, the rule of law and so on.

In your half it will be every man for himself, clearly, you will be giving away land for free in your half, because if you were to charge for it you would be making money by threat of use of force, which I believe you find abhorrent.

Quite what the landowners in your half will think about all this, well, I am sure that Rothbard or Ayn Rand will have explained all this somewhere.

Andrew said...

Yep, I'll run to Rothbard, you can run to George.

I'm done, have a good weekend.

Kj said...

Oohh. Run in with a real anarchist mr. W. He wouldn't be an Ayn Rand supporter, they are all out in favour of state-enforced monopolies, particulary in land and IP. Rothbard is actually considered leftie in that camp.

Derek said...

Not sure if he is a real anarchist, Kj. The last time we had one, we managed to demonstrate to him that LVT had much the same effect as a series of personal contracts between individuals agreeing to respect each others' land holdings in return for compensation. He went away happy.

I couldn't be bothered explaining it all again though.

Mark Wadsworth said...

Kj, indeedy. Rand didn't rely on "the government" to ensure that nobody infringed the copyright to her tedious books, she relied on "free market transactions" to eliminate the possibility of copyright infringement.

And she never claimed welfare or the old age pension, and certainly never, ever, did she drive along a road which had been built by the government, possibly against the wishes of Local Property Owners.

D, me neither.

But this whole 'responding to comments' is a spectator sport. I do not imagine for one second that we will convince people like Andrew, but I always think, maybe a fairly sane third party will read this one day and I'm making the case to him or her.

Furor Teutonicus said...

XX Would you rather "own" one acre of land and buildings in a UK town or city, or one acre of Scottish grouse moor or forest, in the middle of nowhere? XX

Speaking as the Grandson of a wifey that "owned" 4 to 5 THOUSAND acres of reindeer moor in North (SEVERELY North) Sweden, complete with animals, then the answer is simple.....

Have you ever eaten Reindeer steaks?

Mark Wadsworth said...

FT, the comparison is not with four or five thousand acres of Swedish reindeer moor, the comparison is with ONE acre thereof.