Tuesday, May 6, 2014

A distributional question

I have been under the weather for a bit (thus no posts) but I wanted to share a thought I have been having in reaction to the minimum wage discussion on the west coast.  People have tended to be worried about these increases, with much concern about economic damage.

However, income and wealth in the United States are distributed with an extremely heavy tail, especially in terms of growth in the last 30 years.  This sort of growth, presuming a perfect market, is quite odd as I had always presumed human ability has a normal distribution.  The normal distribution is continuous and naturally presents several people of nearly the same ability behind the exceptional person (at least at the top end).  We can ignore the odd outlier -- if there was only one billionaire in the United States and they had had risen from poverty then we'd exclude them from any realistic analysis. 

But if we want to argue that current economic trends represent fairness, it turns out that we have some steep assumptions and observations to explain. These turn out to be crucial.

For example, when top wages are so high, why don't the companies hire the "next best executive" and split the surplus?  If ability is an innate (as opposed to learned ability), why don't we outsource all CEO jobs immediately to China (which would have more top performers as a function of a larger population)?  But this sort of wealth distribution seems like an odd way to end up given a normal distribution of ability, presuming one is talking about some sort of meritocratic environment.

Or how do we know we have an ideal marketplace now?  There have been a lot of commercial structures over history.  What makes us different than: a) Plato's Athens, b) the Roman Empire, c) Medieval England (say the anarchy period), or d) the Song dynasty in China?  They had markets too -- where the results of such markets just?  If the difference is due to corruption, government interference, and rent seeking, do we have a better balance now?  And how would we know, without making a consequentialist argument? 

It is actually a pretty deep question.

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