Risk Markets And Politics

Wednesday, June 21, 2006

Infrastardom in America

This week's Economist piece on inequality in America shows why "minimizing variance in wealth" is an incomplete caricature of (left-leaning) distributive justice:
Inequality is not inherently wrong —— as long as three conditions are met: first, society as a whole is getting richer; second, there is a safety net for the very poor; and third, everybody, regardless of class, race, creed or sex, has an opportunity to climb up through the system.

I fretted over the first criterion in the last post, where I also cited Robert Shiller's proviso, "We will tolerate substantial income inequality. What we surely do not want is gratuitous, random and painful inequality." I take "painful" inequality literally, to mean lack of habitable shelter, food and basic healthcare. This is essentially The Economist's second criterion, although the healthcare aspect isn't clear and merits a separate discussion. The Economist's third criterion stresses meritocracy. This is also what Shiller is aiming at with his reference to "gratuitous, random" inequality, although he is likely saying something stronger. "Gratuitous" suggests that more than just equality of opportunity is required, and that outcomes should be commensurate with merit. It implies, for instance, that if human abilities or propensity to work are normally distributed, there is something objectionable about wealth tending towards a Pareto distribution. This is a more precise characterization of left-leaning distributive justice than "minimizing variance in wealth".

America is a major engine of entertainment in the world (sports aside), an area where income seems to be particularly disproportionate to innate talent. A number of papers have examined the winner-take-all aspect of stardom. In 1981, Sherwin Rosen observed that, "small differences in talent become magnified in large earnings differences, with greater magnification of the earnings-talent gradient increasing sharply near the top of the scale." Moshe Adler later argued that superstars may emerge even among the equally talented. His work and others stress the role of the public in the production of stardom, where the social dimension of consumption means that, all else being equal, one will prefer what others prefer. This can cause initial random advantages in popularity to snowball. We can see why anyone who clings to the intrinsic theory of value would find this frustrating. (By the way, what is the intrinsic value of watching soccer compared to its social value?) More recently, in a strange and original paper, "Untalented but Successful", Olivier Gergaud and Vincenzo Verardi test these claims by considering the prices of Pokemon game cards. Their findings corroborate Adler.

2 Comments:

  • On the last paper, a hat-tip to Chris Dillow at Stumbling and Mumbling.

    By Blogger Jason Ruspini, at 6:19 PM  

  • Thanks for posting this, these articles are interesting and insightful in helping me understand why some no-talents reach the popularity they do. It also helps me understand how to better utilize my business' marketing plan to reach out to the public.

    By Anonymous Anonymous, at 2:44 PM  

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