Inequality VS Inequality


Inequality and Skin in the Game

2 Types of Inequality

  • Inequality people tolerate:
    • Deemed heroes like Einstein or Michelangelo to whom one has no difficulty acknowledging
    • Applies to entrepreneurs, artists, soldiers, heroes like Bob Dylan, Socrates, celebrity chef, Marcus Aurelius – one can naturally be a “fan”, may like to imitate them, but you don’t resent them
  • Inequality people find intolerable:
    • Subject appears to be just like you, except that he has been playing the system and has acquired privileges that are not warranted
    • Although he has something you would not mind having, you cannot possibly become a fan – includes bankers, bureaucrats who get rich, chief executives who wear ties, and talking heads on TV making outsized bonuses
    • You don’t just envy them, you take umbrage at their fame, they make you feel smaller, and you feel bitter
  • Systematic interview of blue collar Americans found present a resentment of professionals but unexpectedly, not of the rich
  • All public despise salarymen who make a lot of money but hold rich entrepreneurs and people who have derived their celebrity by other means with respect
  • In countries where wealth comes from political patronage and regulatory capture, wealth is seen as zero-sum; someone getting rich is doing so at other’s expense
    • In countries like US, people can see that someone getting rich is not taking dollars from your pocket
    • On the other hand, inequality, by definition, is zero-sum

Skin In the Game

  • What people SHOULD resent is the person at the top who has no skin in the game
  • He doesn’t bear his allotted risk and is immune to the possibility of falling from his pedestal
  • When Donald Trump was a candidate, by advertising his episode of bankruptcy and personal losses of close to a billion dollars, people removed the resentment
    • There is something respectable about losing a billion dollars, provided it is your own money
  • Corporate executives without skin in the game are paid according to some metrics that do not necessarily reflect the health of the company – he can manipulate, hide risks, get the bonus, then retire and blame his successor for subsequent events
  • “True equality is equality in probability” and “Skin in the game prevents systems from rotting”

The Static and the Dynamic

  • Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life
    • About 10% of Americans will spend at least a year in the top one percent and more than 50% of Americans will spend a year in the top ten percent
    • This is visibly not the same for the more static but nominally more equal Europe
  • Dynamic inequality takes into account the entire future and past life
    • You do not create dynamic equality by raising the level of those at the bottom but rather by making the rich rotate – forcing people to incur the possibility of creating an opening
  • Mathematically perfect ergodicity and absorbing state are:
    • Perfect ergodicity: out of, say, a century, an average of 60 years in the lower middle class, 10 years in the upper middle class, 20 years in the blue collar class, and 10 years in the one percent
    • Absorbing state: person gets rich by some process, then having arrived, he stays rich; if someone enters the lower middle class, will never have a chance to exit
  • Way to make society more equal is by forcing the rich to be subjected to the risk of exiting from the one percent (through skin in the game)

Pikketism and the Revolt of the Mandarin Class

  • French economist Thomas Pikkety:
    • The book, Capital in the 21st Century, made aggressive claims about the alarming rise of inequality, added to a theory of why capital commands too much return in relation to labor and absence of redistribution and dispossession would make the world collapse
  • Methods Pikkety used were flawed: tools did not show what he purported about the rise in equality
  • Any form of control of the wealth process – typically instigated by bureaucrats – tended to lock people with privileges in their state of entitlement
    • So the solution was to allow the system to destroy the strong, which worked in the US
  • Inequality is the disproportion of the role of the tail – rich people; the more inequality, the more the winner-take-all effect

Cobbler Envies Cobbler

  • Envy does not travel long distance, or across many social classes
  • Aristotle postulated that envy is something you encounter in your own kin: lower classes are more likely to experience envy towards their cousins or the middle class than towards the very rich
  • Envy-driven feelings do not originate from the impoverished classes, concerned with the betterment of their condition, but with that of the clerical class
    • As with all communist movements, it is often the bourgeois or clerical classes that buy first into the argument
  • If you were to ask blue-collar men what they want, they would ask for a new dishwasher, or faster train for their commute, not to bring down some rich businessman invisible to them
  • People can frame questions and portray enrichment as theft, as it was before the French Revolution, in which case the blue-collar class would ask for heads to roll

Ethics of Civil Service

  • People who like bureaucracies have trouble understanding that having rich people in the office is very different from having public people become rich – it’s the dynamics and sequence that matter
  • Rich people in public office have shown some evidence of competence – success may come from randomness but we have a hint of some skill in the real world and evidence that the person has dealt with reality
  • Good rule for society is to oblige those who start in public office to pledge never subsequently to earn from the private sector more than a set amount – this will ensure sincerity in “service”, where employees are supposedly underpaid because of their emotional reward from serving society
    • Prove that you do not become a Jesuit priest because it may help you get hired by Goldman Sachs later
  • Currently, a civil servant can make rules that are friendly to an industry such as banking and then go off to JP Morgan and recoup a multiple of the difference between current salary and the market rate (regulators have an incentive to make the rules as complex as possible so their expertise can later be hired at a higher price)
  • Bill Clinton or Tony Blair use the fame that the general public gave them to make hundreds of millions in speaking fees – for these fellows, public service was the most effective step towards enrichment
    • Difference between salesman and charlatan is that the latter doesn’t deliver what he claims to be selling; ironically, the pair Clinton-Blair appeared less greedy than the typical ego-driven businessman who seeks election
Image source: Medium (Silicon Valley, Mad Men)

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