Great article here on “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity” by Luigi Zingales,  esp the Pigouvian angle. It was also heartening to read the other day that some at the Fed are arguing for the end of TBTF — the revolving door between regulators and regulated has gotten so incestuous I’m starting to think Glenn Reynolds’ 5-year, 50% surtax on earnings from such comings and goings might need to be taken more seriously. Unfortunately tickling Leviathan seems likely to be a growth industry for at least the next four years.

But one thing annoys me in this article, which has some great points about being pro-market vs. pro-business: the obligatory plaint about income inequality.  The focus on this is something that’s been bothering me for a while.

Income/wealth inequality isn’t a real problem, that notion is rooted in a false zero-sum view of the economy — most of the wealth around today was newly created over the last 50 years, and your neighbor getting richer doesn’t actually make you poorer. Consumption inequality is a bit more logical (and is fun to get angry about) but it doesn’t really matter much (especially if you look at absolute consumption levels over time, which are always rising for all quintiles). In a sensible discussion of inequality, the focus needs to be on production inequality — consumption has always been limited by available production, since the first humans started making food and tools.

In other words, if we care about living standards, rather than complaining that some people/countries/communities are being way too productive (rent-seeking aside, everyone agrees that’s bad) we should be asking why the poor are not becoming more productive (in the sense of actual contributions, not just measures of “worker productivity” which are largely governed by capital inputs). Unfortunately that gets into very uncomfortable questions about culture and choice, and as a society we don’t seem to be able to handle that debate very well — the notion that poor people are choosing to be happy consumers rather than productive workers, and thereby making society poorer, is one that people just do not want to face. It’s much easier to think of the poor as victims of… well, something or other… even if their consumption is rising faster than their contribution to production.

But as we get richer as a society, the marginal incentives to produce get smaller and smaller — who wants to work 70-100 hour work weeks in a world that produces so much wonderful utility to consume? Personally I think one would have to have an ambition verging on mental illness to want to be a CEO these days. Maybe instead we should be asking  “how free do we want to be, to let people decide how rich or poor they will be?”