What produces great economic inequality?

[lpetrich]

What produces great economic inequality? It is far out of proportion to amount of work effort or amount of skill or amount of diligence or whatever.

Entrepreneurs, Chance, and the Deterministic Concentration of Wealth

In many economies, wealth is strikingly concentrated. Entrepreneurs–individuals with ownership in for-profit enterprises–comprise a large portion of the wealthiest individuals, and their behavior may help explain patterns in the national distribution of wealth. Entrepreneurs are less diversified and more heavily invested in their own companies than is commonly assumed in economic models. We present an intentionally simplified individual-based model of wealth generation among entrepreneurs to assess the role of chance and determinism in the distribution of wealth. We demonstrate that chance alone, combined with the deterministic effects of compounding returns, can lead to unlimited concentration of wealth, such that the percentage of all wealth owned by a few entrepreneurs eventually approaches 100%. Specifically, concentration of wealth results when the rate of return on investment varies by entrepreneur and by time. This result is robust to inclusion of realities such as differing skill among entrepreneurs. The most likely overall growth rate of the economy decreases as businesses become less diverse, suggesting that high concentrations of wealth may adversely affect a country's economic growth. We show that a tax on large inherited fortunes, applied to a small portion of the most fortunate in the population, can efficiently arrest the concentration of wealth at intermediate levels.

The model does not require rich people to be super geniuses or super Stakhanovites, something that their defenders often claim about them.

What happens is that return on investment is some fraction of current capital, and if one works out how that behaves, one finds an exponential curve. Something like what Thomas Piketty has found.

For wealth W, its change is dW/dt = r*W for rate r, current wealth W, and time t. Solving this equation gives W = W0*exp(r*t)

There are modifications to this equation that one can put in, like a carrying capacity.


Luck may figure in another way. If one's business is small, it is more vulnerable to misfortune than a large business. One of your employees quits or gets sick, your car breaks down, etc. A large business can more easily survive such shocks.

 

[lpetrich]

Being big helps in other ways, like having more political pull -- being "too big to fail".

Having a big income helps in another way, since necessary things take up a smaller fraction of one's income. That makes one less vulnerable.

That Luck Matters More Than Talent: A Strong Rationale for UBI • Richard Carrier

t can now be said with certainty that luck matters more than talent and effort. Not that talent and effort don’t matter, but that they are easily overwhelmed by bad luck, and easily replaced by good luck. Consequently, all ideologies that depend on any version of Just World Theory (as, for example, most versions of Libertarianism and Anarchocapitalism do) are false and must be abandoned. Equality of opportunity requires considerable adjustments be made for the unequal distribution of luck in any given population. And more humility is warranted from the successful, and more empathy for the disadvantaged, than most are naturally inclined to. The rich are not rich because they are better or tried harder. The poor are not poor because they are inept or lazy.

...
For instance, it turns out, in most cases an excess of transactional taxes (tariffs, sales tax, etc.) becomes an unjust mechanism for generating collective revenue, because they disproportionately harm the poor and unfortunate (and also reduce economic activity, which reduces the overall wealth of a society), whereas progressive income taxes are a far more efficient and justifiable mechanism for tolling a hoarded surplus (merely changing what money gets spent on, not how much money transactions cost). State commerce could still be a useful revenue source, but cannot replace taxing the rich, as again any commerce’s revenues arise mostly from the poor, not the wealthy. The wealthy always just skim off the top of everyone else’s transactions. We should therefore skim off the top of what they take, and recycle it back into public goods.

...
That last a point I will explore more here in my conclusion below. But the overall point is that unchecked capitalism leads to as much ruination, injustice, corruption, dysfunction, and failure as unchecked socialism (which, when so unchecked, we often call “communism”). We need socialism as a check and balance against excesses and harms of capitalism, just as we need capitalism as a check and balance against the excesses and harms of socialism. The most sustainable, just, and prosperous society lies at the equilibrium state between those two counteracting forces. Leaving the only question: Where exactly, among all the optional ways of setting up a society, is that equilibrium state?

 

[Derec]

The model does not require rich people to be super geniuses or super Stakhanovites, something that their defenders often claim about them.

That model might not require it, but in the real world it definitely helps to be smart (not necessarily on "super-genius" level) and hard-working (not necessarily Stankhanovite level).

Models are subject to the real world, not vice versa.

 

[lpetrich]

Scott Kaufman summarizes in Scientific American a lot of recent economic science on this question (I highly recommend reading everything he links to and mentions), including a brilliant computer modeling study recently completed in Italy. ...

As Kaufman describes it:

The Italian physicists Alessandro Pluchino and Andrea Raspisarda teamed up with the Italian economist Alessio Biondo to make the first ever attempt to quantify the role of luck and talent in successful careers. In their prior work, they warned against a “naive meritocracy”, in which people actually fail to give honors and rewards to the most competent people because of their underestimation of the role of randomness among the determinants of success. To formally capture this phenomenon, they proposed a “toy mathematical model” that simulated the evolution of careers of a collective population over a worklife of 40 years (from age 20-60).

They used some simplifications, of course, and their model has three main components:

• Resources
• Talent
• Events

One can then run one's simulations with a wide variety of parameter-value and initial-value distributions to see what results tend to emerge.

What Pluchino, Biondo, and Raspisarda (or PBR) found was that no matter how you tweak the models (within any bounds of plausible realism), the same results kept occurring. Unless you change how you distribute resources. Any realistic talent distribution? General outcome is always the same for any given resource distribution. Any realistic luck distribution? General outcome is always the same for any given resource distribution. There are variances in absolute values in the outcomes, of course; but the overall shape of the distribution among those outcomes does not meaningfully differ.

Thus, resource distribution is the only relevant variable.

 

[Trausti]

Cognitive inequality plus assortive mating. But you’re not supposed to notice that.

 

[lpetrich]

The results?

or example, the PBR models showed that no matter what you do, leaving the system to “The Invisible Hand” as proposed by the original philosopher of capitalism (or so people imagine), Adam Smith, always generates the same overall, and rather odd, result: the people who end up on top (“the rich”) are disproportionately merely mediocre in talent; while most of the talented people end up stranded in the middle, or crushed at the bottom, reduced to poverty—indeed, more often they end up even poorer than they started! Thus, statistically, capitalism mostly just rewards luck and punishes talent. This is quite counterintuitive, but when you examine why this happens, it becomes easier to grasp: once any misfortune befalls you, it becomes increasingly more difficult to catch back up; whereas if you start with more good luck, you quickly accumulate enough resources to easily weather numerous misfortunes. The lucky thus become invulnerable while the unlucky get mowed over; talent, makes next to no difference. This is why it is almost impossible to escape poverty, no matter how hard you work or how talented you are; and almost impossible for a rich person to become poor, no matter how incompetent or lazy they are.

RC refers to:

Linda Tirado: “Why Poor People Stay Poor” at Slate. An except from her book Hand to Mouth: Living in Bootstrap America a book that adds to Barbara Ehrenreich's Nickel and Dimed: On (Not) Getting by in America - BE posed as a lower-middle-class working woman to do the research for her book.

"There's a lot we could say about lazy, useless, rich people."

Kaufman:

So what did the simulation find? On the one hand, talent wasn’t irrelevant to success. In general, those with greater talent had a higher probability of increasing their success by exploiting the possibilities offered by luck. Also, the most successful agents were mostly at least average in talent. So talent mattered. However, talent was definitely not sufficient because the most talented individuals were rarely the most successful. In general, mediocre-but-lucky people were much more successful than more-talented-but-unlucky individuals. The most successful agents tended to be those who were only slightly above average in talent but with a lot of luck in their lives.

So those on the top need not be super geniuses or super Stakhanovites, and that is what we find -- that they are not super geniuses or super Stakhanovites.

On whether larger research grants lead to greater discoveries, Kaufman notes a study of that issue:

They found a positive, but only very small relationship between funding and impact (as measured by four indices relating to scientific publications). What’s more, those who received a second grant were not more productive than those who only received a first grant, and impact was generally a decelerating function of funding. The authors suggest that funding strategies that focus more on targeting diversity than “excellence” are likely to be more productive to society.

 

[Trausti]

Ah, the politics of envy. Anyhoo, the lefties/socialists/communists also has an 'invisible hand' theory of the economy. The economy just drops from the sky magically. The inter connected human action is invisible to them.

 

[lpetrich]

What is a good investment strategy?

Starting at the bottom of the list, you can see that the least effective funding strategies are those that give a certain percentage of the funding to only the already most successful individuals. The “mixed” strategies that combine giving a certain percentage to the most successful people and equally distributing the rest is a bit more effective, and distributing funds at random is even more efficient.

The best funding strategy of them all was one where an equal number of funding was distributed to everyone. Distributing funds at a rate of 1 unit every five years resulted in 60% of the most talented individuals having a greater than average level of success, and distributing funds at a rate of 5 units every five years resulted in 100% of the most talented individuals having an impact!

More evidence for PBR's model is from correlations of IQ and wealth - hardly any. “People with above-average IQ scores are only 1.2 times as likely as individuals with below-average IQ scores to have a comparatively high net worth.”

RC then reproduces a graph of IQ values and wealth amounts -- a huge amount of scatter.

He then argues that lazy rich people can get away with their laziness much more easily than lazy poor people - and that there aren't many lazy poor people.

So, one might ask, don’t we need poverty, in order to have that effect? Certainly not. That’s actually in fact the worst of ideas. The negative outcomes of poverty far outweigh any such benefit, because as the PBR model shows, it results in vast amounts of lost and wasted talent, and imprisons or destroys even the industrious. Yes, making everyone rich could be just as bad; but those aren’t the only two options. Once again, the ideal system lies at the equilibrium point: you want everyone to have just enough resources that they won’t be crushed by misfortunes not of their making, but still be lean enough that the ambition to live a life beyond mere subsistence continues to inspire the development of an industrious character. Which is exactly the idea behind Universal Basic Income. It wouldn’t likely encourage laziness, because no one wants to live at subsistence level; being able to only makes it possible to try getting out of that state again, and thus results in more people doing so. Not less. (We now have some evidence to back this expectation up, which I’ll close with.)

...
But “not everyone has equal access to” the “conditions” needed to do any of that. “Neither the capacity nor the need for self-regulation is distributed evenly or fairly,” Roberts points out. Those with privilege and advantage don’t need to put in any work on themselves; and many of those who don’t, can’t because they lack the privileges and advantages necessary to accomplish it. “In a dark irony,” Roberts says, “we demand much more” self-improvement “from those—the poor, the hungry, the homeless or housing-insecure—likely to have the least access to the conditions that make it possible.” As he points out, “Just one more way it’s expensive to be poor” (as has been explained in The Economist, The Atlantic, MoneyWise, Time, The Daily Kos, and beyond). Do you know what does give someone the conditions to self-improve? Access to resources.

That's why rags-to-rags and riches-to-riches are much more common than rags-to-riches and riches-to-rags. To make mobility easier and more common, one needs to subsidize it in some way, and that's why Richard Carrier advocates Universal Basic Income. That applies to other social-democratic features like universal public education.

Those who object to such things I wish to challenge with this proposition: should the military and the police work like that? Should self-protectors subsidize the protection of those whom they might consider too incompetent or too lazy to protect themselves?

 

[bilby]

Inheritance.

A lucky person can become very wealthy from almost nothing; But the probability of getting super-lucky declines very rapidly with lack of inherited wealth.

Most people don't even seem to notice the vast amount of support they get from the wealth of their parents, and are happy to claim to have earned everything they have, while completely ignoring the fact that they spent the critical early decades of their lives subsisting on the wealth into which they were born - and/or ignoring the struggling to overcome its absence necessary for their less fortunate peers.

 

[lpetrich]

RC:

Making the rich richer does not lift all boats. To the contrary, it sinks more than it lifts. Do you know what does lift all boats, rich and poor alike? Unleashing more talent and productivity already untapped in the population. Only an increased access to resources for everyone can accomplish that.

As Roberts also points out, people are very loathe to admit any of this, and build for themselves elaborate delusions and mythologies to deny the outsized effect of luck on their own and others’ fortunes. Much of capitalist and libertarian rhetoric rests on such delusions and mythologies. But if luck determines success to any degree at all, there will always be some percentage of successful people by chance alone—who will interpret their success as due to their unique talent and hard work, when in fact plenty of other people less lucky are as talented or hard working or more. Thus, “being successful” is never evidence you were more talented or hard working than anyone. It often won’t even be evidence you were talented or hard working at all. But even if you are both, it’s being so plus luck that made you successful. It therefore does not follow that the unsuccessful weren’t talented and hard working, rather than merely unlucky. And that is where injustice lies.

RC then slams the thesis of the book "The Bell Curve", that rich white people are breeding themselves into becoming some master race. When one controls for various environmental effects, one finds a negligible difference between IQ's of the races.

RC notes: “Living in certain neighborhoods seems to expand opportunity, and living in other neighborhoods seems to diminish it,” as Dylon Matthews put it. Or as AOC put it, "your zip code determines your destiny".

Kids who grow up in better neighborhoods see their high school dropout rates plummet and college attendance rates double. They are “also likelier to earn high wages and to be employed full time once out of school.” In some cases “the effect size on income was large: about a 31 percent increase in earnings by their mid-20s.” Indeed, the role of luck is so profound, studies find that “opportunity (measured as the share of poor kids who wind up in a higher income bracket as adults) varied widely not just from city to city, but from city block to city block.” Researchers have thus concluded, “Moving to a better neighborhood really [does] make kids better off as adults.”

RC then gets into studies of the efficacy of UBI. “The evidence so far suggests that getting a basic income tends to boost happiness, health, school attendance, and trust in social institutions, while reducing crime.” and "And in every case so far observed, UBI works as well or better than all the existing welfare systems it would replace."

RC then gets into the question of how to finance UBI.

ll these findings demonstrated in practice and through systems modeling corroborate counterintuitive results: since luck is more important than talent in a completely free market system, completely free market systems actually tend more toward rewarding mediocrity and punishing talent and effort than enthusiasts believe, and justify wealth hoarding by the few even less than most had already thought. All this evidence has changed my mind on a few things. I was uncertain about the effectiveness and justification of universal basic income as a societal strategy, but I now think UBI-plus-capitalism is actually the best social system to implement. And as I ever have, I derive this conclusion from the evidence rather than ideology.

 

[lpetrich]

Cognitive inequality plus assortive mating. But you’re not supposed to notice that.

Trausti, there is zero evidence for your master-race theory.

 

[Trausti]

Inheritance.

A lucky person can become very wealthy from almost nothing; But the probability of getting super-lucky declines very rapidly with lack of inherited wealth.

Most people don't even seem to notice the vast amount of support they get from the wealth of their parents, and are happy to claim to have earned everything they have, while completely ignoring the fact that they spent the critical early decades of their lives subsisting on the wealth into which they were born - and/or ignoring the struggling to overcome its absence necessary for their less fortunate peers.

Inherited wealth is fleeting if you don't have the smarts to maintain it.

 

[lpetrich]

Ah, the politics of envy. ...

Trausti, if you don't like getting mugged, does that mean that you envy muggers?

 

[Trausti]

Cognitive inequality plus assortive mating. But you’re not supposed to notice that.

Trausti, there is zero evidence for your master-race theory.

Oh, my mistake. So parents do not pass on traits to their children. My bad. All hail the blank slate! In Lysenko we trust!

 

[Trausti]

This is why Singapore is such an impoverished backwater.

 

[lpetrich]

Inherited wealth is fleeting if you don't have the smarts to maintain it.

One does not have to be a super genius to maintain it. All one needs to do is put it into a variety of safe investments and not live too lavishly.

 

[lpetrich]

... anyhoo, the lefties/socialists/communists also has an 'invisible hand' theory of the economy. The economy just drops from the sky magically. The inter connected human action is invisible to them.

That's nonsense. They recognize human action -- the actions of ordinary workers. They don't subscribe to the Ayn-Rand Atlas-Shrugged theory that it is only those at the top who deserve credit for anything.

 

[Trausti]

... anyhoo, the lefties/socialists/communists also has an 'invisible hand' theory of the economy. The economy just drops from the sky magically. The inter connected human action is invisible to them.

That's nonsense. They recognize human action -- the actions of ordinary workers. They don't subscribe to the Ayn-Rand Atlas-Shrugged theory that it is only those at the top who deserve credit for anything.

Are you tilting at windmills?

 

[Trausti]

Genome-wide analysis identifies molecular systems and 149 genetic loci associated with income

Socioeconomic position (SEP) is a multi-dimensional construct reflecting (and influencing) multiple socio-cultural, physical, and environmental factors. In a sample of 286,301 participants from UK Biobank, we identify 30 (29 previously unreported) independent-loci associated with income. Using a method to meta-analyze data from genetically-correlated traits, we identify an additional 120 income-associated loci. These loci show clear evidence of functionality, with transcriptional differences identified across multiple cortical tissues, and links to GABAergic and serotonergic neurotransmission. By combining our genome wide association study on income with data from eQTL studies and chromatin interactions, 24 genes are prioritized for follow up, 18 of which were previously associated with intelligence. We identify intelligence as one of the likely causal, partly-heritable phenotypes that might bridge the gap between molecular genetic inheritance and phenotypic consequence in terms of income differences. These results indicate that, in modern era Great Britain, genetic effects contribute towards some of the observed socioeconomic inequalities.

RIP the blank slate.

 

[Loren Pechtel]

What's missing here is that a big factor is how much one puts towards the future rather than for current use. That makes an incredible difference over a lifetime and is pretty much under one's control. (Note that it's not always money--applying oneself in school matters.)