In the recent months, we have seen protestors, in major cities globally, demonstrating against the growing income inequality between the “haves” and the “have-nots”. The movement started as “Occupy Wall Street”, which was initially aimed at the big banks and their top executives for the large bonuses paid, at a time when the American households were facing high unemployment and diminished prospects. However, the discontent has now turned more broadly toward the fact that, over the last 30 years, the high income group (the 1%) has experienced significant increase in real income, while the rest of the workforce (99%) has had relatively stagnant growth.
It is interesting to note that many of the protestors currently hold or have walked away from positions with wages that are better than high-income executives in developing countries and enjoy a standard of living that is unmatched in many countries. This is not a movement of the impoverished and displaced, but a movement of the middle working class. What is at the center of the discontent, I believe, is not the absolute level of income and the associated standard of living but is the relative participation in the growth of American prosperity—a sense that the sharing of the pie has been “inequitable” more so than “insufficient”.
What drives income disparity?
There is no disagreement that the top income earners have increased their share of the total “output” that we collectively produce. What drives this phenomenon? We know that wages to workers (salaries + bonuses + stock options) in a free market are set by the invisible hand, given the demand and supply for different skills. If we let emotions subside, for the moment, we must acknowledge that the economy pays high wages to the high income individuals because we desire their skills and because there is a scarcity in those skills. In a free market, high income earners are not friends and relatives of the ruling elites, receiving special payments from the State and thereby robbing the general population. Instead, high income is a result of the consumers bidding up prices on various scarce talents.
By definition, there can only be a small collection of people with scarce skills; therefore only a small fraction (perhaps only 1%) who earn high wages! Income disparity is almost unavoidable; as long as we wish to have free markets and subject ourselves to the prices resulting from supply and demand dynamics!
However, we still need to address the concern that the income disparity has grown significantly over time.
The age of the superstars
An explanation for the rapidly accelerating income disparity is related to the rapid improvement in technology. Below are easy examples to help us understand the theory.
At the dawn of humanity, we had no technology; all of us farmed and hunted with our bare hands and simple tools. There was relatively small difference in the production of food between one fellow man from another—most of them barely produced enough to survive; stronger and healthier men were perhaps a bit more productive than their peers, but certainly not by a wide margin. However, with modern technology, one technology savvy farmer, working on a modern mechanized farm, could produce enough food for a million people. This level of production could not have been achieved by 1000 farmers using 19th century hand tools and fertilizer. The result of the improvement to farming technology meant a dramatic improvement to farming productivity and to the income of the mechanized and technology savvy farmers. However, it almost meant the permanent displacement of farm laborers, who used to supply hard physical labor.
Similarly, before the invention of filmmaking and movie technologies, theater was the most popular form of performance. Across the world, teams of actors and actresses performed Shakespeares, Greek tragedies, Chinese folklores, etc. The local actors made good but not extraordinary livings. However, with the advent of filmmaking and movies, local performances worldwide have largely been replaced by big budget Hollywood and Hong Kong movies. Today, there are a handful of internationally known stars, like George Clooney, Brad Pitt and Jacky Chan, who make millions per movies; through technology, they can extend their presence and appeals to billions of people globally. For the average actor in Hollywood, he needs to work two part-time waiter jobs to support his theatrical pursuit. Is Brad Pitt 100 times better looking or talented than the average actor? However, because of technology ability to leverage the top performers, small differences between individuals can become an income gap that is as wide as the Grand Canyon.
Technology has created the age of superstars. Technology essentially allows a star to shine so much brighter than it ever could and to allow the radiance to reach more people than it ever was possible, and, in the process, eliminating the society’s need for the lesser talents.
Technology not Capitalism is the cause of growing income disparity
Capitalism simply allows the greater talent to earn a higher income. While capitalism generates income disparity as a natural consequence of talent disparity in the population, it does not lead to greater disparity over time; capitalism cannot somehow cause a greater dispersion in human genetic attributes over time.
The improvement in technology, which allows talent to be leveraged aggressively, does lead to very significant increased difference in the wage for talent over time. However, it does not seem like a sensible path to recommend against technological advancements or capitalism, simply because technology, coupled with capitalism, can lead to widening income gap. Capitalism has much to be disliked; supporting this system for resource allocation does not mean we love every aspect of this system. It simply means that other choices seem even less desirable. It is not a trivial exercise to address the observed growing income inequality. Until both sides of the conversation (the protestors and the 1%) have a solid understanding of the nature of income disparity and propose a good solution to this very hard question, the emotionally charged around income disparity will not likely result in a productive outcome.
by jason c hsu