Technological Inheritance, Income Inequality, and Universal Basic Income

September 8th, 2017 | Categories: economy | Tags:

I argue that the system of meritocratic inheritance of technology coupled with economies of scale is a possible reason for income inequality, and I provide a philosophical justification for a universal basic income in the current system.

Introduction

The political discourse about income inequality and universal basic income (UBI) has revolved around the idea of fairness in a free market system. On the left, a high income inequality is seen as a symptom of an unjust system that rewards a few, and a UBI is seen as a restoring act that ensures that no one is left behind. On the right, a high income inequality is seen as incentivizing hard work, and a UBI, at best, is seen as an anti-coercion agent that can prevent exploitation. Today’s high income inequality has been partly blamed on educational disparity. The economic productivity of educated individuals is extremely high, and thus, they command proportionally high incomes. I will argue that the high productivity is not entirely due to the chosen individuals’ hard work and intellect. A substantial portion of the productivity is inherited from scientific advances made by people before us. I believe that such an inheritance ought to be distributed “fairly” and that the exiting system has failed to account for it. Therefore, I argue that a UBI may have a philosophical justification.

Statistics About Income Distribution

Meritocracy has driven the evolution of ideas about distributive justice for a long time. It is apparent that our social, political, and economic systems have heeded this call. The richest people in the world are mostly those who lead state-of-the-art industries, and those who have inherited their wealth are small in number (link). Even in the general population, studies have shown (link; see figure 3.5) that the expected income increases with higher qualifications. It might be tempting to welcome such a trend as it incentivizes people to be highly educated and, consequently, more productive. This point of view, however, assumes that productivity of an individual is proportional their industriousness and intellect. A closer inspection reveals that they are only weakly related, and the lack of a strong relation is a result of selective technological inheritance.

Studies in Economics

Nobel Laureate Robert Solow (link) and Trevor Swan (link) developed an economic model (link) to study the long term growth of economies. Using their mathematical model, they concluded that about 80-90% of productivity growth is a direct result of cumulative technological progress, not industriousness or intellect. Even a “rival” model (link) attributes our economic growth to technological progress.

In their book, Unjust Desserts (link), the authors have studied this phenomenon and have provided a detailed analysis of technological progress and its implication on income and wealth distribution. One of the authors’ blog post (link) provides identical arguments as this post, and a talk (link) by the other author makes the same case. They provide numerous examples to embolden their case, and I will add more below.

Anecdotal Examples

At the industry level, the CEO pay has increased ten fold in the last thirty-forty years (link). Is this because the CEOs of today are ten times more productive? Or is it because the companies today are ten times more productive? It is likely the latter, and the reason for the high productivity of industries today is the technological growth in the last few decades. The CEOs are only partly responsible for the growth, but they are paid as if they are solely responsible for the growth. Even among companies today, those who are at the top of the technology “food chain” seem more profitable on a per man-hour basis. Although the data is not very conclusive (link , link), the trend is noticeable. Qualcomm consumes ATT’s products, and Qualcomm is more profitable than ATT.  In turn, Samsung consumes Qualcomm’s product, Android (Alphabet) consumes Samsung’s products, and Angry Birds consumes Android’s product. The per-man-hour revenue for these companies are strongly linked to their place in the technological food chain (or network) and how much they inherit.

At an individual level, for instance, the inventors of fast Fourier transform made less money than someone who simply uses it today. A broadway actor makes more than a movie actor. A software engineer earns more than someone in the service industry. These facts about individual incomes are not accidental. They are directly correlated to how strongly individuals leverage technology to be highly productive, i.e., to reach more customers, viewers, or clients. For instance, a movie actor, unlike a broadway actor, can simultaneously perform in front of millions of people. I should emphasize that knowing how to leverage technology is a skill that needs to be proportionally rewarded. Our system, however, rewards groups of individuals disproportionately by being oblivious to what was inherited or leveraged. A natural question arises: how should people be rewarded?

Political Philosophy, Fairness and Free Market

Political philosophy has handled this question about a fair compensation for more than two millennia. Many would agree that a “fair” system should satisfy a couple of objectives: a) it should pay more for a harder (intellectually or physically) task, and  b) it should pay more if you are more “productive”. One can argue in favour of a free market system because the compensation is a function of the supply and demand, which satisfies both the objectives.

In theory, the supply of labour for the task is indicative of how hard the task is; greater the supply, easier the task. If a technology may be easily inherited, there will be a greater supply of workers, engineer, or doctors, so their compensation will be correspondingly lower. In theory, a demand for the product is indicative of the how productive one is after the task is completed; greater the demand, more productive one can claim to be. In tandem, one can argue that a free market system leads to a fair outcome. In fact, one can further argue that it incentives higher efficiency because it is oblivious to the means of production.

In practice, however, does the supply of more and more industries and workers correct the advantages of selective technological inheritance? No, It does not seem so (going by the data above). The likely reason for this is that the economies of scale (link) is at odds with greater competition. There is also a high barrier to enter an industry due to the technical know-how involved. Those who get to lead established and newer industries will be rewarded for all the productivity, and the reward will be oblivious to inheritance. The tree analogy below provides a simple (though not a complete) explanation.

The Tree Analogy

Our technological progress is like a tree that been grown for generations together. Those who know how to climb the tree deserve more fruits than those who do not. But do they deserve all the fruits? No! Yet, our system rewards the few people at the top as if they are responsible for the growth of the tree because they have the access to the fruits. Training more climbers (more competing industries) might mitigate or eliminate the income disparity issue, but the system’s fundamental issues of economies of scale, high entry barrier, and obliviousness to inheritance remain.

Universal Basic Income

I have argued that our wealth is mostly an inheritance from the people who came before us. Although the current system is meritocratic, it fails to account for the fact that our productivity is mostly an inheritance. While it is important that we have to ensure that people have to be incentivized to work hard and carry on the progress, it is also important to fairly distribute the inheritance. A UBI is an excellent way to satisfy both the objectives.

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