Inequality makes a nation poorer

Responding to Professor Sir Angus Deaton’s report into the causes of inequality, economics writer Chris Dillow provides an excellent list of eight ways in which unequal societies sacrifice overall economic growth and national prosperity to preserve the fortunes of their elites.

Topping the list is the diversion of investment resources from innovative products and services into socially useless and inefficient "guard labor" (everything from surveillance to high walls to alarm systems to actual armed guards).

Beyond that, inequality produces an erosion of the trust that is a precondition for growth; unequal access to education and opportunity which means that poor peoples' contributions to national wealth are never realized.

One interesting idea is that high managerial salaries entrench "the forces of conservatism" as top officials at monopoly businesses balk at taking risks that might hurt their profits, even if they result in better companies offering services that are more productive and profitable in the long run.

7. The high-powered incentives that generate inequality within companies can backfire. As Benabou and Tirole have shown (pdf), they encourage bosses to hit measured targets and neglect less measurable things that are nevertheless important for a firm’s success such as a healthy corporate culture. Or they might crowd out intrinsic motivations such as professional ethics. Big bank bonuses, for example, encouraged mis-selling and rigging markets rather than productive activities.

8. High management pay can entrench what Joel Mokyr calls the “forces of conservatism” which are antagonistic to technical progress. Reaping the full benefits of new technologies often requires organizational change. But why bother investing in this if you are doing very nicely thanks to the increased (pdf) market power of your firm? And if you have, or hope to have, a big salary from a corporate bureaucracy why should you set up a new company?

My point here is that what matters is not so much the level of inequality as the effect it has. And it might well be a pernicious one. If inequality has contributed to weaker growth, then it is very likely to have contributed to the rise of populism and to Brexit and the divisions with which both are associated. In this way, inequality does political damage too.

How inequality makes us poorer [Chris Dillow/Stumbling and Mumbling]

(via Naked Capitalism)