Addressing Income Inequality

Given the recent interest in income inequality around the web, I thought I would string together a few articles and research I’ve encountered to come up with my own little theory. Note that you may reach different conclusion(s) from the ideas or from your own findings – and I would love to hear them! Let’s keep this conversation going.

First, I’ll try to summarize a few relevant articles:

  1. Paul Graham’s essay Economic Inequality – The shot heard around the world. Posits that economic inequality partially stems from variations in productivity between people. The theory here is that many people are motivated by money, and there is a lot of money to be made in creating new wealth through startups. (Particularly true with technology startups.) Hence, we shouldn’t discourage economic inequality because that would be discouraging startups – which is tantamount to preventing technological progress.
  2. Give Some to Get Some – an episode of the excellent Exponent podcast where Ben Thompson and James Allworth react to Paul Graham’s article – noting that there are truths in it but also some obvious oversights and leaps of logic. The nugget here is that creating new wealth happens in two phases. First, technological progress (perhaps via startups) creates wealth for a few while they create efficiencies in how the world works – simplifying transportation, reducing the need for manual labor, etc. Then, the rest of the people in the world need to take advantage of those efficiencies to do more with their own lives – E.g. the hour that used to be spent washing clothes by hand is now spent developing a new drug that cures cancer, etc. The “pie” grows only when the impact of the original technological progress improves the lives of all people.
  3. Why Generation Y is unhappy – A great illustrated guide to what true happiness is based on. The formula is simple: Happiness = Reality – Expectations. If you have simple needs and don’t think you need to be exceptional at everything all the time, you will be happier.
  4. Income Inequality Makes Whole Countries Less Happy – an HBR article with data that shows that as more income is concentrated in the hands of a few, the more likely people report lower levels of life satisfaction. One theory here is that the bigger the range of incomes in a society, the more that people feel it’s impossible to “succeed” by getting into that coveted 1% bracket.

There are so many more articles and research written up about this topic (just doing a search for “income inequality” will show you it’s a global concern) but I feel there is a simple lesson with just the ones mentioned above.

Here it goes:

  • Humans are predisposed to making technological progress. It’s how we evolved, after all.
  • Technological progress benefits few people at first. As in the case of startups, it propels some into the class of the nouveau riche.
  • Economic inequality spikes. On the one hand, this is not a bad thing, as the new technology often enriches people’s lives and (more importantly) leads to efficiencies in the world that enable others to increase their own productivity and hence grow the whole pie. This is why overall GDP of nations increase as they modernize.
  • Unfortunately, the rate at which those get fabulously wealthy from new technology is much faster than the rate at which the rest of the population can take advantage of the new efficiencies to increase their own personal wealth. Thus, the inequality tends to grow larger over time.
  • As the inequality grows, its negative effects start to show. People (especially “Generation Y”, or those with similar culture) see those at the top of the distribution and wonder why their own situations are not developing as quickly. This leads to unmet expectations and ultimately lower life satisfaction measured in countries with this phenomenon – in other words, where there is fast technological progress that triggers this whole cycle.

In summary: As long as people develop technology to improve people’s lives, overall lives will get worse by default. Said another way by my colleague @JK: “Life is hard; suck it up.”

That’s not to say we can’t improve this situation. Looking at the chain of events in the cycle, we could put measures in place to:

  • Stop or discourage technological progress
  • Add handicaps to people so they cannot accumulate wealth so quickly
  • Accelerate the adoption of technology so everyone can realize the improved efficiencies faster
  • Discourage the setting of unrealistic expectations so people become happier with their realities

Those are not necessarily all good ideas… So I will leave it as an exercise to the reader to determine what they would want to do about this (if anything).

One solution – we could all become Buddhist monks. By living outside of traditional societies, none of these issues affect them. And the ones over in Chiang Mai seem pretty happy all the time. 😉

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