Inequality

The Answer Is Under Your Foot. How Ants Solve Inequality.

Information, feedback, and self-organization

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By Diego Espinosa

A forager ant emerges from atop the colony’s hill. In its place, we might imagine stopping to scan the dusty landscape for food locations. The ant has no time for that. What it does next can help us understand broad patterns that emerge from our own social interaction. One of those patterns, an especially important one these days, is inequality.

Economics has a bit of a lock on the question of inequality. This is too bad. Ants, and science in general, have a lot to say about it. An ant colony is a self-organizing system. These arise naturally, without deliberate construction or design. Cells are another example. So are forest ecosystems, consciousness and Twitter. Of course, the list also includes economies.

Self-organizing systems have something in common. They contain interaction. The system’s parts exchange information with one another. Out of that information exchange, all sorts of complex patterns emerge.  British developmental biologist Jamie Davies refers to this exchange as feedback. He argues that cells function because they trade a cacophony of signals about themselves and their environment. These signals allow the cells to coordinate in real time, and therefore to adapt to change in a way that a fixed blueprint could never allow.

Davies argues the feedback loop, not the double helix, is central to being alive.

Inequality happens to be a kind of feedback loop found in self-organizing systems. It is a specific type, called a positive feedback loop. Positive does not mean we like it. It means the loop’s behavior is self-reinforcing: it will run on and on until something intervenes.   Runaway loops are not kind to a system’s survival. To prevent them, they evolve any number of brakes. Some usually kick in sooner and at a lower cost, and some are a more damaging or doubtful last resort, like a truck ramp on a steep mountain highway.

Today, inequality happens to be at a historical extreme. The positive feedback loop is starting to look like it lost its brakes. This is something worth paying attention to, and not just out of fairness. The health of our economic complex system is at stake. The reason is taking that truck ramp may not be a pleasant experience at all. To understand why, we first return to our forager ant.

Ants and Humans Both Depend on Compressing Information

The ant scrambles down the hill in no particular direction. His senses are trained not on the landscape but on the ground. After a bit, he finds what he is looking for: a pheromone deposited by returning foragers. The pheromone is like a blinking neon road sign. Helpfully, it says, “food this way”.

Ants are social animals. Their social interaction is more limited than ours, but still complex. Millions of ants live together in colonies. They cooperate with each other and coordinate their activities. As a result, food goes where it is needed, guards show up to repel intruders, and nurses give infants care. Put that way, the colony sounds a lot like our economy. In fact, both share an important feature. It has to do with the way ants exchange information.

Imagine a single anti-social ant foraging for food. It leaves its warren and hurries around, randomly visiting locations. This ant makes a lot of stops before finally finding food. If we assigned a 0 to no-food locations and a 1 to the food location, his search would look something like this:

000000000000000000000001

Now re-imagine the colony-dwelling forager ant. The ant leaves the hill and quickly finds the helpful pheromone trail. He follows the path for a short stretch before encountering food. The social ant’s food search looks quite different:

0001

That string is a compressed version of the first one. The pheromone trail cuts the amount of information an ant needs from his environment to survive. Less searching creates a bigger surplus back to the soldier and nursery ants, and they in turn produce more ants to help search and produce yet more surplus. Information compression makes the colony possible. It explains why ants are the humans of the insect world: they are a small percentage of species, but account for over half the body mass.

Human economic coordination is also complex. Our global economy requires billions to cooperate in the production of millions of products. Fortunately, these producers need only a small set of information to figure out what to do: market prices. If prices are rising, the producer makes more; if they are falling, they make less.  Our own economic self-organization emerges from this simple adaptation for compressing information. In that sense, we are much like the ants.

Information Compression Can Spark Inequality

Humans, though, are obviously different from ants, and that complicates matters. Ants are genetically hard-wired to cooperate. Evolutionary biologist E.O. Wilson calls them angelic robots. We have more choice in the matter. Our interest is to accumulate wealth, even at the expense of others. If there is a way to game the information compression mechanism of market prices, we will try to find it. This sets up, as Wilson points out, an inherent conflict in human existence.

There are two sides to the conflict. On one is our ability to consciously predict and adapt in pursuit of our self-interest.  The combination of greed and human ingenuity is a powerful force. On the other side is our set of social adaptations, ones that help us to coordinate activities.  These require that we pursue the collective interest more or less unconsciously.

Most of us are unaware of how our actions lead to self-organizing behavior. Few wake up and say, “Today’s a day for furthering our social adaptation.” Collective behavior just emerges as a result of millions of interactions. This puts a heavy burden on the system’s inherent tendencies.

Broad cooperation is a must in a market price system. If too many keep winning at the expense of others, the losers may choose to opt out. This means the system, to persist, has to produce reasonably fair outcomes over long periods.

Fortunately, market prices tilt towards fairness (although it might not seem so!). The tilt is rooted in a concept familiar to any finance undergraduate: the Efficient Markets Hypothesis. Prices are transparent and accessible. Whether you are rich or poor, the coordinating signal is the same. Think of a crowd of New Yorkers assembled at a cross walk. Some are rich investment bankers, some are on the way to a minimum wage job. It does not make a difference. When the walk symbol lights, they all receive the same signal at the same time.

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The key, though, is that fairness is just a tilt, a tendency, of the system. Think of fairness as a pot of water and inequality as steam. The market price system “tends towards” being water within a broad range of temperatures. At the limit of this range, two outcomes are in competition: water and steam. A slight change in temperature can make the water disappear. This brings us back full circle to the positive feedback loop.

It happens that the fairness tilt can shift into a positive feedback loop of inequality. The loop does not result from our greed, luck or differing ability. These are ever-present in the “water”, and they contribute to an “acceptable” level of inequality at all times. That does not mean, however, that they are responsible for the “phase shift” to steam. Something else has to change to create that shift.

The question is, what is it about market price information compression that can produce, naturally, an inequality feedback loop?

Network scientist Laszio Barabasi tells us that randomly connected networks generate unequal distributions. That is, a small percentage of the hubs receive most of the connections. Twitter is a great example. Kim Kardashian’s big Twitter following sends a signal to other members: “she’s worth it to follow”. The more members follow her, the more her value to potential followers increases. The rest of us are left to tweet in near obscurity regardless of our tweeting skill. In other words, Twitter inequality results not from differing tweet ability but from another phenomena. Barabasi calls it preferential attachment. It occurs in systems as diverse as how proteins attach in cells and how people attach to cities.

Followers beget followers.  The rich have access to more opportunities to build wealth, and so get richer.  Preferential attachment is a type of positive feedback loop. The question Barabasi poses about this loop is central to our understanding of inequality. “Is preferential attachment rooted in pure chance or in some form of optimization”? He tells us this question is still a matter of debate amongst scientists, but that the debate is starting to tip in favor of “by chance”.

“By chance” means questions of “fairness”, “skill” and “greed” are misplaced. Inequality just happens. It is a phase, an emergent property. This is not to wipe away fairness as a human value. Just the opposite; some of us want to achieve fairness. We can best do this by stripping inequality of its values baggage and laying bare its underlying dynamic. That way, perhaps, we can use our agency to tweak the system, bring it back to its fairer tendency.

Braking the Inequality Feedback Loop

Positive feedback loops run away until something stops them. This changes the focus. If the loop were our car, we would pay much more attention to the brakes than the “stuck” accelerator.   We would run down our options as our speed mounted: “step on the brakes, pull the parking brake, shift into low gear…“

In the same way, our market price information compression mechanism needs to have “brakes” in order to stem inequality and promote cooperation. If it did not evolve those brakes, it would eventually disappear as people exited the system. The problem, as we mentioned above, is that some brakes can kick in soon and at little cost, and some are like the truck off ramp, a risky last resort that the system may not survive.

Our brake pedal, the most convenient and least disruptive brake, is economic competition.

Preferential attachment sparks our self-interest. We may not aspire to be Kim Kardashian, but we do pay attention to success. The most basic way to bend it in our direction is to mimic the strategy that produced it. Mimicry is also a way to respond to non-price signals. When someone is looking at the same prices we are but having more success, we can just forget the prices and copy their actions.

Some amount of inequality is always with us. Levels are less important than changes. Changes, particularly ones that appear to snowball, are a sign that a positive feedback loop is at work. This looks to be the case today. It means our competition brake pedal failed. Something changed recently to damage it.

Corporate profits are at peak levels to GDP. This means the level of corporate competition is at trough. 1000-page legislative bills help keep mimicry at bay since new entrants lack the armies of lobbyists necessary to navigate them. The financial crisis harmed new entrants’ access to financing, while the Federal Reserve’s zero-rate response allowed large firms to borrow for next to nothing.

Even where corporate mimicry has increased, it has reduced competition. Money managers reward CEO’s that buy back shares rather than expand. As all firms mimic each other in pulling back from expansion, they step on each others toes less often.

There are also recent barriers to individual economic competition. Most are aware that CEO’s make much more than line workers. Less obvious is that their pay is now multiples of their immediate subordinates’. These capable, ambitious executives would gladly take the CEO’s job for much less money. Why don’t corporate boards ask them? One reason, again, is mimicry. Board members themselves earn more money than ever. To arrive in the Boardroom and stay there, they mimic the behavior of those around them and acquiesce to out-sized CEO pay.

Competition also affects the other half of the equation: worker pay. Opening up India and China’s vast labor pools has helped keep wages low. We should not overstate its contribution, though. Those country’s workers compete with our manufacturing labor. Manufacturing is less than 15% of GDP. That leaves depressed service wages unexplained. Again, corporate competition is the more likely culprit. Less competition means firms cut costs without passing the savings on to customers, most of who are workers. If firms competed more, real wages (wages adjusted for lower prices) would be higher.

Our inequality parking brake is politics, and competition affects it too.

Democratic politics evolved to reduce inequality when it threatens cooperation. Similar to market prices, democratic votes compress vast amounts of information about preferences. All politicians need to know is if inequality will cost them the majority vote in an election. They then compete for votes in part by promising to contain it. The problem is that political competition can also falter. When it does, politicians have less incentive to promise fair outcomes. Voters end up having to choose between candidates that differ little in their inequality commitments.

Something like this is happening today. It is also related to the lack of corporate competition described above. Corporations have more profits with which to buy influence.  Politicians see that corporate campaign money helps win elections, and they mimic the behavior of successful pols that take that money. Again, mimicry results in less competition rather than more.

Our inequality last-resort brake, the dangerous truck ramp, is a financial crisis.

Most unequal wealth is stored in the form of financial assets. Those assets crash periodically, lessening the preferential attachment of the wealthy and reducing inequality.  Ecologist C.S. Hollings describes this same dynamic in forests. As these ecosystems mature, the best-adapted trees thrive. Stability favors them. They enjoy preferential attachment, and they gain resources at the expense of others. When a disruption hits, they are also the least adaptable to change. Because they are so dominant, their failure reverberates through the forest, even causing its complete failure. Out of this death emerges a new forest, a more dynamic one with a fresh set of adaptations and a level playing field. Then, the process starts all over again.

Hollings’ “death/rebirth” ecological dynamic sounds very Schumpeterian and disruptive. We would rather see financial crises avoided and the truck ramp unused. The problem is that promoting stability leaves the inequality feedback loop intact. This is what happened in 2008, when firms used their political clout to ensure that bailouts would keep the system from crashing. The inequality loop’s momentum means we may need another, perhaps worse, crisis to stop it. This would be disruptive not only of the economy but also our political process. Populist parties are already gaining votes after the last crisis, and a second one might fuel the popularity of the more extreme ones. Better to act to increase competition now than to risk that outcome.

Ant colonies teach us self-organization stems from an adaptation that compresses information about the environment. Our economy and political system are similar forms of information compression.  Their ability to ward off the threat of non-cooperation depends on a working set of brakes on inequality. These brakes have in common one attribute: their effect on competition within the system. Unfortunately, today’s debate over inequality does not revolve around competition. Perhaps, if ants could consciously secrete a helpful pheromone trail, they might deposit one that told policy makers, “more competition this way.”

2016 March 7


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  • Swami

    I certainly agree that more economic competition is good, that over-legislating and over-regulating is counterproductive and hinders market entry, and that politicians bailing out financial companies had adverse consequences.

    However, a bit of a reality check….

    Globally it is well known that inequality levels are at unprecedentedly low levels and dropping (for the modern era). Inequality is not at historic highs, but historic lows and dropping globally. This is well known and not disputed among economists.

    Within country inequality is rising as you say, but is not at historic high levels. As Pikety’s recent book illustrated, inequality is still well below what it was at start of the 20th C (a time of extremely fast median growth). In addition, inequality tended to go down in times of crisis such as depressions and wars.

    Finally, I think you oversimplify the effects of globalization on developed nation median wages. The effects reverberate beyond manufacturing and export industries. See Autor, Dorn and Hanson’s latest for details. Don’t get me wrong, I am strongly for globalization, competition and creative destruction, and I see the recent reduction in global poverty (coming from globalization) as the greatest moral trend in human history. However, it has been a partial brake on statistical median wages (as has immigration, which I also support in moderation).

    Just keeping it real….

    • Jan de Jonge

      Swami. You write that inequality is at a historic low level and you refer to Piketty. When I look at his figure1.1 (page 24), where he shows the share of the top decile in National Income 1910-2010 in the USA, you see that the top level was 50% in 1929 and the share dropped till 35% in 1942 and remained at this level till 1980 ad then climbed to 50% in 2008. Thus the share of the top decile was as high in 2008 as in 1929. Thus, not at a historic low level but at a historic high level. Within the top decile inequality has probably grown. Not so long ago (20 years maybe?) the 500 richest persons in Forbes were for the first time all billionaires. Traditionally they were millionaires. In the past (1950-1980) a CEO of a large company earned 30 times the salary of the medium member of the company, nowadays this has risen to 300 times. I think you suffer from wistful thinking.

      • Swami

        No, I said GLOBAL inequality is at a low level for the modern era.

        I said within country inequality (implying US and other wealthy western nations) is lower now than at the START of the 20th C. I said nothing about 1929. I am well aware that it is currently rising within countries. That is how supply and demand work, and should work (normativelynspeaking we should be thankful that they do so)

        I do not see the high salaries of CEO’s, surgeons, athletes and entertainers as a serious problem, as it is pretty much explained via superstar phenomena as larger global markets drive up demand for scarce positions of high value. I suppose it is a minor problem though, and easily fixed if we have a will to do so. Recommendations available upon request.

        Let me restate my main point. The world has never been better. Not even close. A billion people emerged out of extreme poverty and GLOBAL inequality has dropped as markets have extended to China and SE Asia. This process HAS increased inequality over the last generation in developed nations. Inequality within nations is, like creative destruction, an externality of the greatest improvement of all time in human welfare.

        • Jan de Jonge

          You have a point. I overlooked that you wrote that globally inequality is low. I apologize. I had fixed my eyes on what you said about Piketty. You wrote that inequality is well below at what is was at the start of the 20th century. No, not at all. The share of the top decile in the USA in 1910 was about 40%, in 2008 it was 50%. Thus 10% higher then a century ago! Progress! Then it fell with two points in 2010. That fits your argument that inequality decreases in times of crisis. But after 2010, when the recession had not finished at all, it started to rise again. Minimum wage declined.
          You write that inequality is an externality. It happens. But in Germany the share of the top decile in 2010 was 36%, almost 10% lower than in 1910!
          And 15 points lower than in the USA. The minimum wage in the USA is on average 25% lower than in North- and West-Europe. It just happens.
          A prolonged rising inequality (it already lasts 35 years), because of a rising share of the top 20 percent and stagnant average wages, will be a threat to society at a certain critical moment, and when you have ideas to solve it you better hurry to make it public.

          • Swami

            I didn’t say I have recommendations to reduce inequality, I do not, nor do I think that would be wise. I have no issues with inequality, I only have issues with rule unfairness (these are not the same way, but can of course overlap). I said I had recommendations to reduce superstar salaries in sports, entertainment and industry. I guess these might play out to minor reductions in overall inequality, but that too would be a side effect, not my goal. Nor do I see it as a reasonable goal, though I respect that you probably do.

            Again, my point is that globalism is enriching hundreds of millions of people’s lives and leading to increases in both in state inequality and it is slowing down increases in median income for unskilled labor in rich countries. This isn’t a bad thing overall, it is the most important and indeed the best event in our lifetimes.

            But enough about me. Why do you think inequality threatens to become a threat to society? I am genuinely interested to hear your opinion (and anyone else agreeing).

          • Jan de Jonge

            Piketty writes (315) that in all English speaking countries the primary reason for increased inequality in recent decades is the rise of salaries for supermanagers. You write this can be easily fixed. And as this is not a minor issue, go ahead.
            As to answer your question. Why don’t read some books? For example “The Unwinding” by George Packer or “Deep South” by Paul Theroux.
            Or the article of Thomas Kochan in the International Labor Relation Review, april 2013, who writes about the ‘broken social contract’. Social mobility is very low in the USA compared to many European countries.
            The broadcasts about the republican preliminaries send a message of polarization. The Republican Party has already achieved that your
            government is lame.These are all bad signals.
            You don’t seem to realize it, but many of your countrymen think that the USA is a divided nation.

          • Swami

            I read many books, but have never seen a good response to my question. I was hoping you could be the first, but you seem to just be skating it. Please be specific, why is inequality threatening society?

            Again, I am not asking why rent seeking, or privilege, or cronyism or poverty or unfair rules or even propagandizing about inequality (inciting envy in the masses) are a threat. These are all clear to me. I am asking you to explain in simple terms why inequality in and of itself is a threat.

            Social mobility is also a different topic. It is not the same as inequality. On this topic, I will just say that I do not know what the right measure of social mobility is, just that it should be fair and impartial. If “dumb” (sorry for the technical term) people have babies out of wedlock and raise kids and never read to them or stress the value of hard work, honesty, playing by the rules and thrift then I expect inter generational mobility will pretty much suck. Especially if they send them to public schools run for the bureaucracy of the school rather than for the kids. The above is certainly unfortunate and the solutions are kind of obvious (re-establish social norms for women to marry, get an education, invest in their kids and regain control of their schools, etc).

            As for my recommendations on superstar salaries, it is simply for important parties (such as the president or a leader in the business) to establish a social movement to ask the firms involved to agree to a voluntary cap on base salaries with amounts above that based upon proven longer term performance above their peer group. For example, a basketball player or CEO could be capped at $5 million with any additional amount above that based upon proven performance above competitors (points scored compared to peers or stock price appreciation compared to industry). If I was President I would consider doing something similar, though as I said it would not be a priority.

            I certainly agree that Trump is lame as is any party which would put him in any position of power. I think you are projecting though to blame this on inequality (absent caveats above). I agree that the US is a divided nation, this is exactly how it was designed to be by Madison and the founding fathers.

          • Jan de Jonge

            When you have read many books, but never got an answer to your question, then there are several possibilities: you put the wrong question; you just disagree with the author; you haven’t understood the book or you have never read the right books. I have given you some suggestions, without success alas. A basic mistake of people is to read only those books with which they a priori agree. You never get wiser that way.

            You seem to ask a simple question: why inequality in itself is a threat? But that is the wrong question. If I have the choice between a completely equal society and a society with inequality, I will choose the latter. I hope I don’t have to explain why. If inequality is increasing because the top earnings increase faster than the lower incomes, but the boat is lifted up for everyone, then the situation maybe is not ideal but not unacceptable because everybody becomes better off.

            I spoke about a prolonged increase of inequality over a long period (1975-2016), in which the share of the top decile has reached the same level (50%) as in 1929. When top incomes accelerate and the average wage is stagnating for such a long period (see Alan Blinder in Newsweek 1/2/15) then it is bad for the economy (see S&P’s Global Credit Portal 5/8/14), it decreases the opportunities for the children of lower class families (this is called “The Great Gatsby Trap”, see M. Corat, “Income Inequality, Equality of Opportunity and Intergenerational Mobility”, in the Journal of Economic Perspectives, 2013, 27/3), it creates the feeling to be cheated (see Kochan and the “broken social contract”), and it weakens democracy and the rule of law (Stiglitz, “The Price of Inequality”).

            You can ignore this and I’m afraid you will. You already wrote that inequality is not a problem in your view and neither is reduced social mobility. You know the solution: kids should be better raised. You don’t give me the impression that you know what is going on in low-income families. The single, Afro-American mother, who neglects her children, is not representative for single Afro-American mothers, and neither for poor families (again read Packer).

            To conclude: you write that the USA is indeed a divided nation and that is what it has to be. I doubt that Madison talked about a ‘divided nation’ in the spirit I have done. I simply don’t know. I think we should end our discussion. It has no added value. You simply deny or ignore what I say. My feeling about this conservation is: ‘you can bring a horse to the water, but you cannot make it drink’.

          • Swami

            I am just being Socratic, but I already got you to concede the point… all else equal you agree that inequality is actually better. The reason is obvious to even a child… People have different goals abilities, skills and tradeoffs and as such they will naturally achieve different goals and success. In the end the only way to ensure absolute inequality is via coercion and goal reduction. A totally equal society would be a living hell. See also my comment below on types of equality and fairness.

            In the next paragraph though you lapse and go back to the habit of substituting the term inequality for other potential ills, real or imagined.

            First you introduce “wage stagnation”. This is a real thing (median wages have grown slower than the recent past in developed nations), and is certainly problematic. Above I am pretty sure I explained that wage stagnation in developed nations though is a factor of creative destruction and increased competition with a BILLION previously impoverished people entering the work force. This is a billion steps way forward at the cost of a hundred million or so smaller than normal steps forward. This is exactly what basic economics suggests will happen until the market restabilizes. But the point I am making is that inequality is not the problem, wage stagnation is. Two different things and if you think they are the same, you got some serious explaining to do.

            Next you mention decreased opportunity for the children of the lower class. Again, a potentially real problem. But, as before, this is not synonymous with income inequality. They can overlap of course, but confusing the one for the other is not very logical.

            Then you discuss the “feeling of being cheated”. Once again a concern, but once again not synonymous with inequality. The logical failure here is to assume that fairness has a single dimension. It doesn’t. There are multiple types and they are mutually incompatible:
            There is proportionate outcomes (the simplest and most intellectually primitive version)
            There is outcome proportionate to need
            There is outcome proportionate to effort
            There is outcome proportionate to benefit delivered (which may not match effort at all)
            There is outcome proportionate to hierarchy (captain gets double booty share on pirate ship based upon his position

            To clarify, I am a strong proponent of fairness and not cheating people. But the challenge is that failure on any dimension can seem unfair. Society has to balance these. Juvenile shouts of “inequality” primarily aimed at the first definition is insulting to all involved. Indeed it is clearly aimed at inciting envy and animosity and is morally reprehensible.

            Finally, you get to the “biggie” that the propagandists of inequality peddle. Inequality threatens democracy and the rule of law. This one is especially despicable, because it is the proponents of inequality who are shouting it like a town crier from every rooftop. If they are worried about it so much, why do they build it as a rallying cry in their political platforms?

            I disagree that inequality contributes to fraying of the social fabric. I agree that inviting envy like Stiglitz, Sanders and Trump do frays social fabric. I agree that poverty frays it. I agree that systemic unfairness as above frays it. I even agree that a lack of good social safety nets and lower economic growth can fray it. But inequality in and of itself, nope. I will gladly debate Stiglitz on the topic. I am familiar with his arguments and they are weak.

          • Jan de Jonge

            In my previous comment I told you two things. First that the question whether inequality is a bad thing and thus equality is a good thing is a silly rhetorical question and you have just demonstrated this in the first paragraph. Second, that I wanted to discuss whether a prolonged increase in inequality in which the rich get richer and the living standard of large groups of the population stagnate over a long period may have several kinds of negative side effects and I referred to several researchers who have investigated some of these negative consequences. You do not seem particularly interested in the validity of the results of these investigations.
            And you twist the effects. When I refer to the paper of Kochan and his idea of a ‘broken social contract’ than I do not discuss some outcome proportionate to….
            Instead of taking my question serious you become agitated and reproached me for substituting inequality for these (potential) negative effects. It looks as if you try to circumvent the question and try to reframe the discussion as an emotional and disturbed quarrel about fairness and inequality in which envy plays an important role.
            While I simply ask your opinion on things that concern me and/or are things i am curious to know more about. If you think that, for example, Stiglitz is grossly overstating his case, then all I ask is that you explain this to me. I like to know! But the only thing you do is fulminating against people who are worried about what they see as threats to democracy.
            Just taking someone’s question serious and trying to find the arguments that support your case and undermines his; so difficult can it not be.
            Not for Socrates anyway, he thought that this was the only way to enrich the knowledge of all participants.

          • Swami

            Please reread my response. I clearly and repeatedly stated that stagnation, lack of opportunity, privilege and such are negative and or problems. It is simply sloppy (or deceptive) to state that an abstract statistical relationship called inequality is causing these. Inequality can be an artifact of these things (or these can occur with no impact on overall inequality), but inequality is not the cause of stagnation, lack of opportunity, and so forth. It can cause envy though, and I do suspect that is why so many authors write about “inequality” rather than the true or root problems. They don’t want to either highlight or address the core problems, instead they want to rally tribal us-vs-them political animosity and obscure the issues.

          • Jan de Jonge

            Our discussion began by accident. I thought you were talking about inequality in the USA. You corrected me and I apologized. But I was also curious to know your opinion on the effects of prolonged increase in inequality in the USA.

            Your position is clear to me. You look at global developments. And you say globalization knows winners and losers. The winners are the billions in developed countries who have been raised from poverty and the losers are the millions in the developed countries who suddenly lost their jobs or who have to compete globally. This has increased inequality but this is an externality of the great improvement of human welfare globally.

            I doubt that this is the whole explanation. In the first place because I think that the economy of the USA is relatively self-supporting. Export is circa 13% of GDP and import is somewhat more (you have a negative balance of trade). Thus the effects of globalization are not huge. Second, “America’s current level of inequality is unusual. Compared with other countries and compared with what it was in the past even in the United States, it’s unusually large, and it has been increasing unusually fast.” (Stiglitz) Stiglitz explains the existing inequality as the result of rent seeking.

            I have not said that inequality is the cause of stagnation, lack of opportunity etcetera. I have said the opposite: I referred to a situation in which the rich get richer and the living standard of large groups of the population stagnates over a long period (40 years). I have suggested that the resulting and increasing inequality may have several kinds of negative side effects and reinforce the trend to increasing inequality and I referred to several researchers who have investigated some of these negative consequences and published this in respected Journals, Weeklies, Reports and books. You have not taken the trouble of reading/consulting any of these investigations and discussing them publicly. Instead you produce an ad hominem argument that these authors suffer from envy or are distributing political animosity.

            I think it is time to stop our discussion, continuing it will only result in a repetition of arguments.

  • “That leaves depressed service wages unexplained.”

    Too many people. Not enough jobs.

    For the feedback to work properly you always have to have more jobs than there are people.

    People have to get hired to live. Businesses only need to hire if there is a profit to be made.

    • Swami

      Not following you….

      People don’t have to get hired to live. They can become self employed. Carpenters, lawn service, uber driver, surf instructor, child care, maid, hair stylist… I can go on for hours. My son has always preferred to be self employed, and always finds a way to do so when he needs it.

      Second, assuming the person can do anything of value, then the company can make a profit by hiring them to do so. Thus the people create the possibility of jobs and the market simply actualizes it. I can certainly envision shocks to the system where the feedback doesn’t work well, but that is why we have safety nets in the economy (which also take care of those not able to add value to others).

      • “People don’t have to get hired to live. They can become self employed. ”

        Some people can. Most people do not have the capacity to do that because they don’t have that sort of personality.

        The myth that everybody is a self-starter is just that – a myth. As tens of millions of people across the globe show.

        There are those of us who can start things and there are those who need a job. Time to cater for the latter.

        “Second, assuming the person can do anything of value, then the company can make a profit by hiring them to do so”

        So if they can’t do anything ‘of value’ you advocate terminating them?

        Value is in the eye of the beholder, and again the myth that somebody will make a profit doing that is nonsense. You have to have somebody willing to buy, somebody willing to lend and a whopping great risk premium before the bridge will be created. None of those are in place.

        • Swami

          Seriously? It is as if you read one line at a time and ignore the greater context. My final line addressed the need for safety nets for those unable to add value, immediately before that I addressed jobs for those unable to manage self employment (mowing lawns, driving an uber, and maid service are soooo challenging for non-self starters). Your response was just dust kicking.

          As for your final comment, you have again just kicked up economic and philosophical dust. More people are employed globally now than any time ever. More people are covered by safety nets than at any time ever. If someone values a service or a product, then an opportunity is created for a person or employer to fill that need. The capital markets are working quite well and global prosperity is higher today than at any time since the Big Bang. More people. More jobs AND more prosperity.

          • “If someone values a service or a product, then an opportunity is created for a person or employer to fill that need.”

            Supply side bollocks. People without money can’t demand what they want. They can only desire it.

            You have put forward no mechanism, other than woo, to break that deadlock.

            Money matters.

          • Swami

            This isn’t that difficult…

            People can cooperate to create value for each other. When I became 18 I offered my services to employers (I chose not to pursue self employment as above.). In exchange for the value I offered the employer, they paid me something called dollars, which are fungible units of value. I used them to buy things I want, which required other people to build. This process can self amplify without limit based upon the ingenuity, division of labor, capital investment (also a form of reciprocating cooperation) and productive potential of the cooperative parties.

            Three hundred years ago, there were less than a billion people, poorly interconnected and not very cooperative. Today there are over seven billion, with incomes over ten times higher than pre-market integration. In the last generation alone, about one billion additional people got jobs, and started buying things, and started cooperating and producing value for their fellow humans.

            Every capable human is both a source of solving problems for others and a demand for goods and services. The trick is creating institutions which enable people to use their ingenuity to find ways to cooperate. Markets, supported by government and science, do this. It is why you are able to type on a computer and buy food and shelter.

          • MikeM

            And it goes faster and faster… Inefficiencies in the market are being swept aside (peer to peer lending, Uber, etc etc ) so that more of what people do create value rather than take a slice of someone else’s value (banks are a transaction tax, for example). Starting an enterprise costs less and less, and can be funded without need of large institutions.

          • MikeM

            Yup, and we are wealthier that we ever were (not all of us, but enough for it to work).

          • MikeM

            How true!
            I firmly believe work is all around us- if you really want to earn you can. There is no minimum wage for self-employed, so no limit to the work available.

        • MikeM

          In the past almost everyone was self employed. Most were agriculture ‘day’ labourers.
          Not making a value judgement here- it was not a good life.
          ‘Need a job’? so employment is a social service- companies should hire based on the employees need, rather than ability? Good job yours is a minority view…
          BTY why not just say ‘we need communism’- it would be a simple substitution for most of your blogs.

          • ‘Self-employment’ in a monetary economy is different from self-sufficiency. The two are not the same.

            If you want something more than a feudal system, then you have to accept monetary economies, advanced robotics and the changes that makes to the system. Primarily that there are more people than there are sensible incoming earning jobs for them in the private sector.

            The job of the private sector is to put everybody out of work with automation and productivity improvements.

            That’s the paradox of productivity.

            The Job Guarantee addresses that by finding people who don’t have the capability to sell themselves or don’t like to do that, a socially useful job they can do that other approve of.

            That way they earn a wage, which they spend and that means businesses sell more units, make more profit and importantly amortise their fixed costs across more units – which reduces the prices for all of us.

            It’s a win-win all round.

          • MikeM

            It is make-work.
            If you really what to address the problem that the wealth is increasingly being created by a reducing number of the population, then how about this-
            At birth, you are given a number of shares in ‘UK plc’. This is your birthright. They pay dividends, based on the output of the country. You do not need to ‘work’, unless you can/want to. If so, any income is added to your dividends. Sweep away a large part of government as no longer needed (work and pensions, welfare, etc).
            Everyone gets a ‘fair share’, Those that want to do work ‘for the public good’ can do so, unencumbered by employment.
            Not a new idea, has been explored in speculative fiction many times. As has all the other Utopian solutions…

    • MikeM

      The UK currently has more vacancies than work seekers. So?
      Real reason- just pay minimum wage, the tax-payer will make it up…

      • “The UK currently has more vacancies than work seekers. So?”

        Not really.

        I keep the stats here: http://www.3spoken.co.uk/2016/01/uk-vacancy-ratio-and-people-wanting.html

        The workers to vacancy ratio is about 5, but that’s largely irrelevant. The list of vacancies is the *unmatched* list – jobs requested for which there is no match. It’s like the list of share offers on the stock market for which there is no bid.

        The Job Guarantee solves the matching problem by coming up with jobs that match the people that want them – taking them as they are.

        • MikeM

          You are miscounting ‘workers’.
          There are no ‘share offers for which there is no bid’. There is a bid & offer price (the spread) at which you can always buy or sell. The price moves to match the buyers/sellers. That is the whole point.
          A job guarantee would mean no-one to fill any vacancy… And no market in salary. But I forget- you believe in a planned economy. Because that has done so well elsewhere- not.

          • “You are miscounting ‘workers’.”

            I’m not. They are from the Office of National Statistics.

            “There are no ‘share offers for which there is no bid’.”

            There are. Go look at the Level 2 system and how it works. What you call the ‘price’ is determined from the list of bids and offers. Many bids and offers are unfilled (that’s what limit orders are). A deal is only struck when there is a bid come in for offers that exist below that price, or vice versa. When you buy at ‘market price’ you’re saying take the lowest offer(s) available – similarly when you sell you say take the highest bids available.

            When the bids and offers separate then the spread widens and the liquidity vanishes. If you trade on alternative markets without market makers they are often stuck in a ‘no deal’ land where the bids and offers necessary to make a trade don’t exist. That’s what a ‘thin market’ is.

            You have the same with labour markets. Hence why you have a list of vacancies and a list of people, but no deals.

          • MikeM

            You do not seem to know what ‘jobbers’ do. They will quote a price without knowing if you want to buy or sell. Illiquid shares have a bigger spread, but there is ALWAYS a trade. (unless you are holding out for a price. That has nothing to do with the market)
            Alternative markets- the clue is in the name.

          • I know what jobbers do.

          • MikeM

            Good!

          • “A job guarantee would mean no-one to fill any vacancy”

            There is a guaranteed bid at the living wage for any spare hours you have, for which you work for the public good.

            The market in salary is then an up bid from that. So to get any staff you have to beat the standard offer.

            That solves the power imbalance problem where people have to get hired to eat and live, whereas businesses only have to hire if there is a profit to be made.

          • MikeM

            All paid for by what?
            And you think businesses should not make a profit- so where do taxes come from?

          • Taxes come from prior government spending. Government spending increases the inputs and taxes decreases the output by not quite as much. The result is greater turnover dynamically creates more profit by producing units that wouldn’t otherwise get made.

          • MikeM

            Only if the government spending is worth the money spent. Rare (IMHO).
            If it were true, countries with the highest spend ratio would have the strongest economies. Greece anyone?
            Another problem is that people are not buying the stuff- not because they cannot afford it, but because they do not feel a need for it. There comes a point where one has enough stuff to satisfy ones wants. Even with negative interest rates (many countries) people refuse to spend their money. Ever increasing GDP is a goal for governments, who need it to fund ever increasing debt.

        • MikeM

          Current job seekers = 634K
          Current vacancies = 758K

          official figures.

          • Sigh.

            The sequences you are looking for are MGSC (ILO Unemployment Level Ages 16-64 – Quarterly seasonally adjusted), LFM2 (Inactive – wants a job – Quarterly seasonally adjusted) and YCCX (Part time workers – reason for working part time, could not find full time job – Quarterly seasonally adjusted)

            If you refuse to accept the official figures, then I can only mark you down as a troll stuck in a particular mindset and we’ll end this discussion here.

          • MikeM

            Nope- I believe the figures to use are job-seekers and jobs available. You have your reasons for using other figures, that does not negate mine.

          • It does. You are curve fitting to a belief.

          • MikeM

            Nope. I just looked up the figures. And two points do not make a curve…
            And do not forget that the vacancy number is only that of published employee requirements. They exclude self-employed ‘vacancies’ (there is work that could be done) and informal vacancies.

            You, of course, do not have beliefs that colour your judgement- you are coldly logical with extensive knowledge and experience. I stand in awe. Not.