Stop Pretending Anybody Wants Exactly Equal Wealth

Millions of people have seen a great 6-minute video that explains research about inequality by Michael Norton of Harvard Business School and Dan Ariely of Duke [pdf].   Unfortunately, the video propagates a common misleading trope by claiming that a perfectly equal distribution of wealth is the “dreaded socialism”.  In reality, no socialist nation ever tried to create a perfectly equal distribution of income nor wealth.

Socialism has always produced unequal income for two reasons.  First, perfectly equal income would not be fair to people who do unpleasant, difficult work like cleaning sewers.  People who do unpleasant work must be compensated with more income than people who do more pleasant work like playing music.  Unequal pay creates more equitable well-being that way.  Secondly, the video claims that a society that is as equal as socialism “won’t work”, and it is probably true that perfect income equality won’t work, but there are numerous socialist countries and they generally worked better than colonialism for their residents.  Some socialist countries have been socialist for decades without any sign of collapse.

It is hard to pin down exactly what different people really mean when they say ‘socialism,’ but Sweden is often cited as a real-world example.  Sweden’s economy is flawed, but it works much better than most countries in the world.  It turns out that the actual distribution of wealth in Sweden is less equal than what Americans said is ideal. Communist countries were even more egalitarian than Sweden, but the Soviet Union’s central planners still had considerable wage inequality.  Some people probably earned over ten times more than others.  Without paying some people a lot more than others, the USSR would not have been a superpower that rivaled the combined might of the allied capitalist nations of the world for seventy years.

True: a perfectly equal distribution of money would NOT work.  That is why nobody who has thought about it for more than a few minutes thinks it is a good idea.  For example, Rawlsians are some of the most egalitarian people that have ever existed.  Their “difference principle” roughly seeks to maximize the wellbeing of the poorest person. In other words, they don’t even care about anyone except whoever is the worst off at any given moment. You might think that this would produce perfect equality, but even Rawlsians recognize that inequality is necessary to maximize the production of the goods and services to benefit the poorest person.

For example, the poorest person, like everyone, needs doctors.  Doctors need to be compensated for the sacrifices they made to go to medical school or else we won’t get enough doctors.  If fast-food workers and doctors were paid the same wage, the doctors would have lower lifetime earnings because they had to give up a lot of time and money to go to medical school.  Doctors would actually be poorer than fast-food workers.

Similarly, the poorest person, like everyone, needs sewage systems.  People who risk their health cleaning out and repairing sewage mains also need a higher hourly wage than fast-food workers to compensate them for the difficulty and danger in the work that they do too.

Wage inequality is necessary to create more equality in true well-being (or ‘utility’ as economists like to call it) and utility is what really matters, not money.  When we pay doctors and sewage workers a higher wage than a fast-food worker, we are compensating them for the greater disutility they suffered to be able to produce the services we need. The extra money helps them raise their utility up to be more equal with the utility of the fast-food worker and it gives more incentive to do more difficult jobs.

These compensating wage differentials create unequal wages but they reduce true inequality because true inequality is measured in utility, not dollars.  Unfortunately, this reason is not the only source of inequality.  Some is due to power differentials caused by sociological factors like race, gender, or politics.  And the video doesn’t mention Thomas Piketty’s thesis that the biggest cause of rising inequality over recent decades has nothing to do with wages.  It is due to the rise in capital incomes for the richest 1%.  It is much harder to justify the increasing dominance of capital earnings and inherited wealth among the top 1% than it is to justify the small rise in wage inequality among the bottom 99%.

I have edited the conclusion of the video so that it  represents real-world socialism rather than fairy-tale socialism:

“We certainly don’t have to go all the way to socialism [perfect equality] to find something that is fair for hardworking Americans.  We don’t even have to achieve what most of us consider might be ideal [–greater equality than Scandinavian socialism].”

Here is a graph of the data that the video was based upon

The bottom 2/5 poorest Americans have essentially zero wealth and the top fifth has 84%.  Americans estimated that wealth was much more equally distributed and the average American thought that nearly equal wealth would be ideal.  There was remarkable agreement among Republicans, Democrats, men, women, the rich, and the poor:

In Sweden, the wealth distribution is actually about as unequal as in the United States despite their socialism, but the income distribution is much more equal:

This is still much LESS equal than most Americans thought was ideal according to the poll.

Update: Also see more comprehensive information about the equity-efficiency curve and a follow up parable about equality, plus an inequality infographic at the link.