An argument for NOT caring about Inequality

(* Excepted from a post titled Scale, Profits, and Inequality by Dietrich Vollrath, Ph.D., Associate Professor of Economics, University of Houston)

After my post last week on inequality, I got a number of (surprisingly reasonable) responses. I pulled one line out of a recent comment ... because it encapsulates an argument for *not* caring about inequality.

“Gates and the Waltons really did probably add more value to humanity than the janitor at my school.“

The general argument here is about incentives. Without the possibility of massive profits, people like Bill Gates or Sam Walton will not bother to innovate and create Microsoft and Walmart. ... But if we take seriously the incentives behind innovation, then it isn’t simply the genius of the individual that matters for growth. The scale of the economy is equally relevant. ...

People like Gates and the Waltons earn profits on the scale effect of the U.S. economy, which they did not invent, innovate on, or produce. So the “rest of us”, like the janitor mentioned above, have some legitimate reason to ask whether those profits are best used in remunerating Bill Gates and the Walton family, or could be put to better use. ... Investing in health, education, and infrastructure all will raise the aggregate size of the U.S. economy, and make innovation more lucrative. Even straight income transfers can raise the effective scale of the U.S. economy be transferring purchasing power to people who will spend it.

Can we argue about exactly how much of the profits are due to “genius” (the markup) and how much to scale? Sure... But you cannot dismiss the idea of taxing high-income “makers” because their income represents the fruits of their individual genius. It doesn’t. Their incomes derive from a combination of ability and scale. And scale doesn’t belong to individuals.

The value-added of “the Waltons” is particularly relevant here. ... Alice Walton is worth around $33 billion. She never worked for Walmart. She is a billionaire many times over because her dad was smart enough to take advantage of the massive scale of the U.S. economy. I’m not willing to concede that Alice has added more value to humanity than anyone in particular. So, yes, I’ll argue that Alice should pay a lot more in taxes than she does today. And no, I’m not afraid that this will prevent innovation in the future, because those taxes will help expand the scale of the economy and incent a new generation of innovators to get to work.

(* Cross-posted by Mark Thoma on Saturday, October 25, 2014 | Permalink | Comments)

Also by Dietrich Vollrath