Benefits to a smaller income gap?

Great Debates
1

Say you have ten plots of farmland and a single farmer per each, but there’s one shed with shared tools, and one distributor for all of them and so forth. There’s one manager who doesn’t farm, he simply sees to it that good farmers are hired, bad ones fired, makes sure the ones there are, are working, that no one is hording the tools, and that trucks and orders are lined up exactly with production scale and times, etc.

Overall, a good manager can cause every item of produce to make it to the market at the lowest possible price. A poor manager can run the whole area into the ground so that the company goes bankrupt. So it could be said that the results of the company, in this organization, is at least half due to the manager. If the total revenue of the company, per year, is $500,000, then my manager should be making half ($250k) and the individual farmers $25k each (assuming that there are no other expenses nor intent to expand the company.)

Obviously, the leap from $25k to $250k is a rather large one. It means that one man has ten times the market power as any other ten men. Many people seem to think that this is a bad thing for there to be an exponential increase in market power as one climbs the corporate hierarchy. True, even more people (hopefully) feel that it is even worse if there is no income increase as one climbs the corporate ladder (aka true Socialism).

The exponential model of income growth follows basic logic, and really so long as one can move freely on the corporate ladder based entirely on merit, it doesn’t make a lot of sense to decry the income gap as any sort of issue at all. As it is now, ones wage is essentially a compromise based on person A’s view of his personal value and the position, and corporation B’s own view on those questions. I.e. public, popular opinion is what decides the value of a job and of a person. It is, via the bidding market, a democratic process.

But it should be remembered that modern economics started as a branch of philosophy. The idea was to present a method whereby granting personal freedom, in end result, would push the individual into working to better the world for himself and his fellow man through no other prompting than personal gain. Again, the goal is to improve the lot of humanity, not to be fair nor to be democratic nor personally free. So the argument can be made that tampering with the market is allowed so long as it is an improvement on the system (where improvement equates to improving the overall lot of humanity at a greater rate.)

For instance, I can think of two possible advantages to a flatter income increase as rank grows:

  1. More people receiving higher education. The process by which Capitalism works is, at heart, to make people want to innovate and so improve the productivity of mankind so that the value of everything is reduced and services enter the buying realm of more people. But, for this to happen, you need find people who have the personality and education to innovate and give them the resources they need to do it. Giving the best education to those who haven’t the personality is a waste of resources, and not giving the education to those with the personality shrinks the hiring pool. Since personality is, to some extent, independent of ones upbringing, not giving everyone a chance at higher education is going to shrink the hiring pool unnecessarily.

  2. The newest, most innovative products, are only affordable to the most wealthy. By flattening the income ladder, there may be a greater market for these products, thus giving a higher incentive to companies to invest in R&D.

I can think of counter arguments to either of these:

  1. Ensuring a bright future for your children is one of the greater motives for wealth accumulation, so removing or lessening the need to afford a good education for the young could lead to a net loss. Also, personal productivity is to some extent trained by ones parents, so it is likely that there is a higher proportion of people with the correct personality among the minority class of the children of the wealthy so it maybe serendipitous to focus more attention there anyways.

  2. The wealthy usually use their money to invest in new companies, which is also analogous to R&D to a significant extent. Also, the newest and bestest technologies might only be affordable if there’s a super rich minority so robbing that realm of populace might actually have the reverse result.

On the topic of education, it looks to me from comparing various nations like it’s likely that higher education for more has an overall net benefit to innovation, so debate aside, that seems to be the side on which the numbers fall. I’m more interested in topic #2 so far as this debate is concerned, though if anyone has any other thoughts of further possible areas of advantage/disadvantage, I’d like to see them.

2

Do you really think 10 farmers just can’t do without this pencil-pusher who takes half their money?

3

Which is why I said “within this organization”. A single farmer working for himself would have his own land, his own supply chain, his own tools, etc.

A poor manager can and has destroyed any number of businesses regardless of whether the worker bees were going in and doing their best to work every day. Regardless of whether you feel it’s worthwhile to bond oneself to a management hierarchy, once you have done so, the upper echelons can most certainly make all your work go to waste.

Whether its worthwhile to enter into such a hierarchy is of course something that can be debated, but that’s irrelevant to this thread. If it interests you, then I encourage you to start such a thread, but it is off topic to this one.

4

This doesn’t make any sense. The incentive is only greater in a larger market because that translates to a larger opportunity for profit. Making the market larger by removing the actual incentive is going to discourage innovation, not encourage it. It’s like Alpha Co. handing out money so people can buy Alpha Co. products - it’s going to make the company worse off, even if they sell more units.

5

I’m only pointing out that it might not be a very good hypothetical. If I were one of the farmers, by my reckoning the business would already be ruined if this guy were ass-raping us all so badly.

6

A few problems with your scenario.

First, all should innovate, as 11 people with ideas are better than one. However, if the manager comes up with a good idea, he gets to keep half the profit it generates. If a farmer comes up with an idea, he only gets to keep 1/20. Therefore, any innovative farmer will see it in his interest to leave, only Dilbert class farmers will remain, and the business will go under through being unable to compete with those started by the smart farmers. This is made even worse as the manager, making 10 x the farmers, considers himself to be ten times as smart. Unless he actually is, he might well stifle innovation.

Second, bad managers can destroy businesses, but so can bad workers. One of the reasons Communism failed so badly was that workers did not feel they were rewarded for their efforts. How is the manager going to save a business when the workers see little point in pushing, since they are rewarded so poorly? Sure the manager can fire them, but who tills the fields while he is finding a new farmer to work at crappy wages?

As for education, I fail to see why paying for education, which kicks in only at a certain time, would somehow cause a person to work harder where just a better life wouldn’t. With huge income gaps, the probability of education paying off decreases, and it becomes a better bet to skip education and make your pittance for more years.

For your second point, it is true that the wealthy can invest more, but without consumers buying the results of the investment the investment is a bad deal. It seems to be impossible for some conservatives to understand that only an idiot would invest in new production in the middle of a demand crash. What will happen, and what did happen the last decade, will be that the wealthy will invest, wonder why no one is buying, and then invest more in lending to the non-wealthy in order to allow them to buy. When this unsustainable situation crashes, as it must, they’ll wonder why and blame the non-wealthy for taking the loans.

If I were the manager I’d forgo some of my income in order to be able to hire the best farmers (because quality is nonlinear with pay,) make sure that they have incentive to make the farm do the best possible, and offer bonuses for innovations that pay off. In the long run I’ll have a slightly smaller share of a much larger pie. Then I’d use some of that money to buy your farm and kick that manager out on his ass.

7

My scenario is a miniature example of reality. That capitalism leads to innovation is tried and proven. If you want specifics on the process by which that works, I encourage you to start a thread on the topic. The farm example is provided to explain pay grade increases not to explain the capital->innovation process. A farmer example that does is here.

I don’t want to get too off topic in the thread, but your objection here isn’t quite accurate. Firstly, under a truly socialist system, the lowest worker should make more money than under a capitalist one. The $500k would be evenly split among the 11 workers, each receiving ~$45k. Essentially they make no more nor less depending on how much they contribute to the process. In the capitalist system, paying them according to their contribution is the goal. That managers are payed a larger amount simply shows that on the open market, a manager is considered to contribute more. He’s less interchangeable than a farmer.

I don’t quite understand what you’re saying. Could you elaborate?

Can you suggest any way to verify this via actual statistics?

8

It may be said, but you need to justify this statement before progressing.

9

That, of course, leads to the question of who defines “the lot of humanity”. You appear to define it top-down and based on innovation and technology, but those things don’t necessarily make life better for people. The industrial revolution in England featured innovations like mills and power looms. These made textiles much cheaper, but they also lead to the working poor putting in long hours in crowded, noisy, dangerous conditions. The cotton gin was an innovation that made cotton much cheaper, but hardly good for the black slaves who suddenly had more work to do. Recent innovations in financial products have been good for bankers, but bad for ordinary people who saw their retirement accounts cut in half.

So before deciding whether “tampering with the market” is a good means, we first must agree on our ends. I would suggest the following. The goal of all policy is to provide for as many people as possible those things which almost everyone wants, namely physical requirements, safety, financial security, family, community, freedom, and opportunity.

With that regard, we can see many disadvantages to a large income gap. For instance: (1) When the rich get too rich, they also get too powerful and use their power to undermine the rights of the poor. (2) A wide gap between rich and poor leads inevitably to mistrust and hostility between the two groups, which undermines communities. (3) When the poor become too poor, some inevitably turn to extremist movements that promise to rectify the situation. (4) The rich try to rig all social institutions in their favor. (5) Etc… Anyone could name plenty of other problems. (We should note that none of these problems are theoretical. All are plainly visible in places ranging from Manhattan to Saudi Arabia.)

Another fallacy in your post is the assumption that a large income gap comes naturally and that “tampering with the market” is synonymous with closing that gap. The truth is the reverse. The rich benefit tremendously from government programs. Think of all those Wall Street bankers getting millions in bonuses from TARP funds, or millionaire lawyers who made their millions by exploiting government regulations, or big-time athletes benefiting from taxpayer-funded stadiums. By wiping out hundreds of billions in government handouts, we could flatten the income curve quite a bit.

10

I’m fond of “Equal pay for equal work”.
What? You say that’s Marxism or feminism or unionism. Okay. I’m still for it.

11

What if there is someone whose skills are more useful to me, and would earn us more money? Why should I be prohibited from offering him a greater incentive to get him to work for me, instead of all those other morons?

12

Unless you go ahead and make up* some numbers that indicate how much revenue the farmers would make with a neutral manager (i.e. one who nether causes utter chaos nor excess profit) your assertion that the manager is responsible for 250k of the revenue is kinda redic’

  • I say “make up” since the entire remainder of your post is ex-ante invented to fit the point you wanted to make ab initio.
13

Could people move on to the actual question part of the OP rather than the overview paragraphs of basic economics?

In a free market, where the ability to move between pay scales is entirely free and possible for an individual with the proper skills and willingness to work hard and take the right steps, and where the pay scale is itself set on the free market based on human opinion of the value of the position, is there any overwhelming positive advantage to flattening the pay structure? How would one show it to be true?

14

by making shit up like you!

15

Great.

Define ‘equal work’.

This should be fun.

16

One benefit to a smaller income gap is that there’s less danger of a workers’ rebellion. It almost happened during the Depression (the New Deal that all the right-wingers hate so much saved this country from REAL socialism).

When people see no hope for any possibility of making their lot in life better, they’ll TAKE that hope from the people they see as keeping them down.

17

Yes, I’m sorry for trying to compile two chapters into a couple paragraphs. It was evil and entire wholeclothery to do so. :rolleyes:

18

Ok, Sage. A few words about the personality you’re looking for and the education you’re alluding to are in order, no?

19

The latter is easier to answer. Statistically, the greatest indicator of future income is your level of education. People who didn’t graduate high school are poorer than people who graduated. People who graduate from college are wealthier than people who only graduated from high school. People who got even higher academic training (doctors, lawyers, etc.) make even more. (Obviously, this is talking about averages, not on an individual-to-individual basis.)

The former is more easily demonstrated on the low end of the scale. There’s quite a bit of research that poor people teach their children poor monetary and work ethic habits, essentially dooming their children to similar poverty.

[

](http://www.economics.harvard.edu/faculty/fryer/files/cultural_capital_final.pdf)
But on the other side of things, I’m not aware of any studies–though I can search for them–but I can say for certain that the children of the wealthy are more likely to grow up learning about the basics of business and investment, management, and so on just the same as the children of actors are more likely to learn about the acting profession and how to do it well, etc. Getting into a particular business is of course helped by having contacts within that business, but having, essentially, received training in that art from the time you were a child will almost certainly help you to succeed as well, and still be entirely free of nepotistic forces. It’s simply an issue of daily contact from a young age.

20

From Lee Kwan Yew, a nominal socialist who ran Singapore for four decades:

I note that he appears to imply that were he not pressured by the electorate, he would have been more laissez-faire than he was. His rationale seems to be that Singaporeans want a nanny state, and that the best a democratic government can do is figure out the least economically destructive way to pander to public opinion. Jayjay’s rationale is similar: he offers no moral defense of redistribution, but notes that it may be pragmatic to pay “protection money” to the lower end of the income ladder to maintain a peaceful society.

For fun, LKY on the underclass:

Keeping safety nets adequate but bare-bones is a recurrent theme. See herefor how Singapore does universal healthcare.