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Friday, September 06, 2002

That's Not a Bug, That's a Feature: Part II-Income Inequality-The macroeconomics textbook we're using had a section on income inequality in their "Markets in Action" section. That's always a straw man that liberals will point to as a flaw in a free-market system. I had "Income inequality: a bug or a feature?" as a slide in my presentation yesterday, and even my young charges understand that it's a feature of our system. The alternative to income inequality is income equality, for each person to make the same amount of money. In such a system, there's no incentive to work hard other than a love of work and your fellow man or the whip of the overseer. Allowing for differences in income gives people financial incentive to work harder, thus creating more goods and services than in a more equitable system. The poor in a free-market system are usually better off than the commoner in the socialist system, for the system create more goods to be distributed. People will rail at corporate CEOs making a hundred times more than the factory rat, but the decision-making skills of a good CEO is a hundred times more important to the company. If his decisions have hundreds of millions of dollars riding on them, a good decision maker may easily be worth a few million dollars a year. Likewise, the superstar ballplayer makes 500 times what I make as a college professor, but I don't have 50,000 fans coming in to watch me explain how to calculate the present value of an annuity or have major networks bid on the broadcast rights for my Managerial Accounting class. The capital-intensive nature of many production methods makes larger companies more profitable than smaller ones. The economies of size that modern corporations have will create organizations that have big decisions that need to be made. Bigger decisions mean bigger money to go to the good decision-makers. Also, the logistics and communications and computer revolutions of the last half-century have allowed goods and services to flow more freely than before, allowing companies to sell products more widely than before. A product that might have only been sold regionally can now be sold around the world. People who can understand how to make this new system work for their companies will be well-compensated. These revolutions have made intellectual labor more important than physical labor, as the decision-making power of intellectual labor becomes more important in a less-localized economy. Intellectual labor have become more productive in the last few decades, as computers and telecommunications advances have allowed white-color work to be leveraged more than blue-collar work. A "information-worker" can have his ideas be used across the country or around the world, while the physical laborer is stuck where he's at. If you add the corporate economies of size, a less-local economy and the better-leveraging of intellectual labor together, you see that the white-color worker's wages have gone up faster than the blue-collar worker. It's a feature of our modern economic system. The economy grows, and the wealth of the blue-collar will go up some, but not as much as the white-collar guy, thus creating greater income inequality. However, if the little guy is making more than he did before, that should be chalked up as a success. Prices also signal resources to move to where the money is; the factory-rat might go back to school to become one of those information-workers, or make sure his kids do so. By rewarding the areas that help the economy grow, we'll draw more and better people into those areas. If the wages of those workers were held down so as to not upset the blue-collar workers, then that shifting of resources would be stifled and the economy slowed. Fighting over our percentage of the pie is short-sighted if we can get a somewhat smaller percentage of a much larger pie. Some people make more than others. Some people are worth more than others. I remember the quip about Babe Ruth; when the owner pointed out that his proposed salary was more than the President of the United States, Ruth was supposed to have replied "I had a better year than he did." Our system works well when the money is allowed to flow to the people who have the good years, for they help cause the economy to grow.

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