On income inequality

Your ability to make money depends on your ability to predict the future. Furthermore, it scales with:
How many different outcomes you can think of
How well you can determine the likelihood of each outcome
How many people are affected by your predictions

Note that being able to think of a specific outcome doesn’t mean that you can take advantage from it. Sometimes, you won’t be able to do anything about it. Sometimes it won’t make sense to prepare for that outcome, because it is either unlikely or it would cost too much to prepare for it.

Being able to think of all the possibilities isn’t enough, you need to be able to gauge somewhat accurately how likely they are. Being wrong at the most likely scenario can be very costly. In addition, a low probability event can be devastating so you must be prepared for it not matter how low. You must prevent being wiped out.

Let’s take a very good hairdresser. They can predict the effect of their handiwork, one person at a time. They have a certain number of clients who come on a regular basis. But they are just one person, affecting the haircut of just their clientele. Very difficult to scale. The salon owner, on the other hand, knows which hairdressers to hire. Each of which have their own clientele. The owner’s income will scale with the number of stylists that work for him. And then the owner can open multiple locations, and repeat ad nauseam. If he opens too many locations and can’t keep track of all of them, his ability to predict how well the whole operation does worsens and he starts making less money.

In my opinion, the rise of income inequality is caused mostly due to globalization. Before the advent of the internet, it took quite a bit of work to find out about companies selling a product you were interested in. You had to go to a brick and mortar store. Several if you want to comparison shop. But the internet made it possible to easily find suppliers over the whole world. Which means that the company that provides the best value can now have a customer base many times the size of what it would have been without the internet. The company hires additional workers, each of which gets the same salary they would have made without all these new customers. They’re doing the exact same work, so there is no reason that the company would need to start paying more. But the company now makes much more profits, which should go to the owners/management. They are the ones who tool the risk of all the additional capital expenditure, additional inventory, additional advertising, additional salaries. I don’t think that’s unfair at all.

Where it does get unfair is when companies take advantage of what’s called “regulatory arbitrage”, where they escape the burden of adhering to environmental and labor laws by outsourcing to countries where these aren’t in effect. You could argue that it’s the other country’s problem, however, if your country cares about its environment and its labor force, it should care about other countries’ also, and impose tariffs on goods produced under those circumstances. But this is far from cut and dry, and you could argue either side.

In short, income inequality is real, but it exists for logical reasons, and it doesn’t necessarily mean someone is taken advantage of.

Leave a Reply