Why inequality is a red herring by Russ Roberts

Inequality is a red herring. Or maybe a poisonous herring. It is the symptom, not a disease, and misunderstanding it leads to bad medicine. Here is Alex Tabarrok on what he and others call Winner-Take-All economics:

J.K. Rowling is the first author in the history of the world to earn a billion dollars. I do not disparage Rowling when I say that talent is not the explanation for her monetary success. Homer, Shakespeare and Tolkien all earned much less. Why? Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening’s entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn’t have to be at the theater to earn. Shakespeare’s words were leveraged.

Tolkien’s words were leveraged further. By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year – more than have ever seen a Shakespeare play in 400 years. And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare (Shakespeare incidentally also owned shares in the Globe.)

Rowling has the leverage of the book but also the movie, the video game, and the toy. And globalization, both economic and cultural, means that Rowling’s words, images, and products are translated, transmitted and transported everywhere – this is the real magic of Ha-li Bo-te.

Rowling’s success brings with it inequality. Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component. Thus, greater leverage brings greater inequality. The average writer’s income hasn’t gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires. The top pulls away from the median.

The same forces that have generated greater inequality in writing – the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization – are at work throughout the economy. Thus, if you really want to understand inequality today you must first understand Harry Potter.

This is actually an old post of Alex’s. He dredged it up to respond to an observation by Ezra Klein:

The top 1 percent, for instance, has gone from capturing about 8 percent of the national income to 18 percent. But there’s no obvious skills differential between workers in the top 1 percent and the workers directly beneath them. It’s not like hedge fund managers are the only guys able to use Excel.

Alex’s point is that excellence gets leveraged. Taleb makes the same point between the 14 minute mark and the 25th minute of this podcast. I think he writes about it in the Black Swan.

That’s why focusing on inequality per se is so poisonous. Would the world be a better place if JK Rowling hadn’t dared to write the Harry Potter series–if she’d given up and waited on tables instead of risking so much? Would the world be a better place if Sergey Brin and Larry Page had never created Google? Would the world be a better place without LeBron James? All of these people create inequality. They also make the world a better place.

Klein might be right about some of the high returns of finance. So let’s get rid of the policies that make their returns high but not socially productive. But inequality is not the problem.

My only quibble with Alex is that it’s not really a winner-take-all world. It’s more of a winner-take-lots kind of world. If LeBron James had decided to be a social worker, yes, someone else (Kobe, maybe) would be considered the best player alive and that person would get some extra rents for being the best. But LeBron’s grace (and sometimes lack of it off the court) is unique. The creator of the best search engine gets lots of rents but that creates tremendous opportunities for so many others. JK Rowling’s success opened the door to many other fantasy series (Pendragon for one) that would have been less successful. People still enjoy the second best fantasy series. And some disagree that Harry Potter is the best.