Thursday, January 25, 2007

More on Relative Wealth

An interesting article in the New York Times by Tyler Cowen, Incomes and Inequality: What the Numbers Don’t Tell Us, addresses the causes of inequality. It also touches on the more important question of why and if we should worry about it.

"Happiness, possibly the most relevant variable for a study of inequality, is also the hardest to measure. Nonetheless, inequality of happiness is usually less marked than inequality of income, at least in wealthy societies. A man earning $500,000 a year is not usually 10 times as happy as a man earning $50,000 a year. The $50,000 earner still enjoys most of the conveniences of the modern world. Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness. . . .

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people."

Cafe Hayek notes that the marginal value of money falls rapidly after a certain point. This means that taking $100,000 from Bill Gates and giving it to me will not make Bill any less happy, but will significantly improve my state in life.
However, "given that Bill Gates almost surely has a greater talent for contributing to the happiness of humankind than I have [evidenced by his wealth], it's especially important that he continue to confront keen incentives to continue contributing to that happiness. Precisely because an extra dollar in Gates's wallet means less to him the more dollars he earns, he needs to earn ever-more dollars per year in order to keep keen his incentives to innovate and produce and sweat the details of satisfying consumer demands."

Which leads to the interesting thought that Windows Visa sucking can be blamed on taking a large portion of the money Gates would have made, which removed "his incentives to innovate and produce and sweat the details of satisfying consumer demands." If you want a flawless, less broken OS, let Gates keep the money.


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