Although harder to measure, wealth inequality has a greater impact on well-being. All other forms of inequality are really just wealth inequality; either because wealth has been exchanged for some item (like resources or education), or because the unequal item (like opportunity or talent) can be exchanged for wealth. In this sense, income inequality is similar to a nominal variable, while wealth inequality is similar to real inequality. Unequal incomes do not really have any meaning in themselves, because what matters is the ratio at which income is turned into welfare—that is, the price of items that bring welfare. When the welfare is derived FROM the unequalness of incomes, though, is a special case that I will address later, in Chapter 4.
Amartya Sen writes of the importance of capabilities, and argues that the type of inequality that matters most is unequal capabilities. Sen’s capabilities consider individual skill and the resources made available to the individual, which are combined to produce “functionings,” which can be described as outcomes generated. “Capability is, thus, a set of vectors of functionings, reflecting the person’s freedom to live one type of life or another.” Thus, those with more freedom to live desired types of life have higher levels of well-being, and achieving equality along some metric such as a particular resource might produce little change in the well-being of those being brought under this equality.
The prevailing focus on income inequality is reflective of two things: the relative ease with which income information is captured, and a lack of serious reflection on the source of welfare and the role of money in its procurement. In that sense, the general public suffers from a different type of “money illusion.” Instead of mistaking changes in nominal variables for changes in real variables, as is the case in the standard form of money illusion, this type mistakes changes in money for changes in welfare. If welfare comes from things, and things can be bought with money, then money is the means to welfare. However, as Sen’s work on capabilities shows, what matters is functionings, and “in so far as functionings are constructive of well-being, capability represents a person’s freedom to achieve well-being.”
If there is less coherence in talking about types of inequality, there is a plethora of sources advanced as the cause of inequality. At its simplest, inequality arises when primitive society begins to value aggression over community benefit, says Thorstein Veblen, which then produces a sort of contest to demonstrate a lack of beneficial effects from one’s behavior, which is the goal of the leisure class. For others, such as Karl Marx, it wasn’t until the rise of capitalism that harmful levels of inequality emerged. The ability of the capitalist to gather the benefits of production which had previously been dispersed across countless economic actors allows for accumulation of resources on a scale previously unavailable.
Some say that inequality comes from assortative mating, that like marries like, and we end up with economic power couples, where both partners have advanced degrees and high-wage jobs. It is said that the incidence of couples marrying outside their educational tier has declined dramatically. Also of interest is the rapid increase in the creation of couples online. Meeting through friends, work, family, and church is quickly becoming outdated, replaced by meeting online. This should be expected to exacerbate the problems of assortative mating through self-selecting online communities. We now tailor our social circles to create interactions with only the type of people we want to meet. Whereas before I might have fallen in love with someone from a very different educational or social background who I met randomly, I can now reduce the chances of this by only interacting with people online whose personae fit my desired type.
Another theory has it that inequality grows with time spent out of the labor force. Picture two workers in the same job when a recession leads to the firm laying off a portion of the workforce. One worker keeps her job, while the other is let go. Because money illusion fuels resistance to nominal wage decreases, the still-employed worker maintains her nominal salary, while the price level falls to clear the resource market. This creates a real-wage increase. Meanwhile, the out-of-work worker must accept lower wage offers to get back to work. This new, lower nominal wage maybe maintains his real purchasing power, but still lag behind the real-wage increase received by the worker who kept her job. What’s more, while out of work, the laid off worker’s skills are atrophying, and so the real value of his labor is declining. At the extreme, he is effectively disabled when his structural unemployment becomes insurmountable. But even if we returns to work, his stale skills might result in a real-wage decrease. If losing work in a recession were a random occurrence, it would not matter much; everyone would end up with an equal amount of time on the winning side. However, workers with gaps in their resumes are more likely to be let go in the next recession, repeating the process. Thus someone who keeps her job throughout succeeding recessions is moving up the economic ladder, but someone who loses his job in each recession is staying in place or falling slowly behind.
A final anthropogenic cause to mention is technological progress. Innovation continues and increases, as machine learning allows for automation of jobs that humans can’t quite figure out how to automate on their own. A recent example is the development of new engineering advancements by an algorithm that was fed a series of technological papers to analyze for connections. Tyler Cowen writes about “zero-marginal-product employees,” whose skillset has been entirely automated. Technology is either labor-enhancing or labor-replacing. Those whose jobs have labor-enhancing technology move forward economically, but those who have their labor replaced by technology then experience the problems of the unemployed outlined above. In the past, it was assumed that such workers would be retrained and return to the work force in a different role, but if the pace of automation exceeds the rate at which a worker can learn a new trade, or if the level of intelligence automated exceeds that of the worker, workers might never return to the labor force. Presidential candidate Andrew Yang is among those arguing that we might be rendering some workers permanently unemployable with our technological progress.
Technology is not necessarily inequality-inducing.
[Next: Visions of the robot future; no one is advocating marriage or lay-off lotteries or caps on new tech]