Income inequality as symptom

by Rob Horning

10 May 2007


Economists Gary Becker and Kevin Murphy recently mounted a defense of income inequality on the grounds that it is a sign of increased returns to human capital—in other words, better-educated and higher-skilled people made more, which is as it should be. Hence they view progressive taxation as being tantamount to a tax on ability.

For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same indi­viduals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.

This seems hardly an exact analogy. Those in favor of progressive taxation would likely favor redistributing some of that money so that others could afford to acquire the skills and education that created the gap in the first place.

But the underlying question of whether an egalitarian distribution of outcomes rather than opportunities is possible (and desirable) remains—can these concepts be neatly separated, as is often the tendency? Becker and Murphy’s argument relies on the idea that merit is on the whole rewarded and they have an impressive battery of graphs and statistics to support that case that I’m not remotely qualified to critique. The implication that we live in a merit-rewarding society seems to require many codicils and exceptions and hedges, most of which revolve around what constitutes merit (being born rich and connected—this has obvious value and constitutes a kind of human capital; is it being lumped in with the human capital of education? If this kind of old-boys network facilitates productivity, should it be condemned or does it have merit, by that definition?) So my mind turned to a more abstract question: Is inequality a matter of the return coming from relative differences in skills in a population, or is the return absolute to the skills themselves, no matter how widely they are distributed? If the former is the case, then this would ultimately impinge on equal opportunity, as those with advantages will in accordance with rationally seek to consolidate them rather than let others catch up. Those left behind initially will remain behind, because the meaning and value of the skills they acquire is always defined in relation to those ahead of them, who are presumably maintaining their skills lead.

This is especially the case with education, where the abilities acquired are less significant than the signaling value of the institutions involved. At the Economist‘s blog, Will Wilkinson, citing Bryan Caplan, makes the point

that university diplomas mostly function to signal prior competence, and that time and money spent in school is largely wasted. If [Caplan]‘s right, Becker and Murphy’s emphasis may be misguided, and I suspect Bryan may in fact be right, despite the fact that he’s never won a Nobel or Clark prize and wears shorts in the winter. In which case it strikes me that there is a huge entrepreneurial opportunity for whomever can come up with an alternative scheme of credible human capital certification.  Who cares if people develop their skills by attending classes at their local college, listening to free lectures from MIT, learning on the job, or by sitting in their mom’s basement gaining mad hacking skilz? I don’t. But employers do.


The point is, signaling communicates relative rather than absolute values—the Harvard degree has more credibility than the State U. degree, and if we made it such that everyone could get a Harvard degree, some new elite institution would arise to take its place. Whereas the human capital that enhances productivity and quality of life relates not to the signals, which preserve class distinction, but to the actual skills—the ability to build useful machines and develop useful medicines and so on. The question then becomes do we need the class system to motivate people to pursue the skills, and does coasting on the signaling power at one’s disposal—the habitus and social capital and networking connections—inhibit the development of their actual capabilities such that they are incompetent when they wind up in power (a certain North American world leader comes to mind). All of this makes me wonder if an alternative human capital certification program is even possible given our current set of social relations—the University of Phoenixes of the world don’t seem in any danger of supplanting Princeton and Yale anytime soon, but the blogosphere may prove a viable arena for autodidacts to build their reputation. (Or destroy it.)

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