Inequality and Incentives
Some people believe that fighting economic inequality by curbing the wealth of the very rich is a bad idea because it would limit the incentives for progress that drive the capitalist system. This is not true.
The most traditional and common sense way to counteract the enormous accumulation of wealth by the very richest people in the world is to tax it away, and redistribute it down the economic food chain, either indirectly (by using it to build a social safety net) or directly (through cash transfers like tax credits to the poor). One benefit of this method, for those who are passionate about free market capitalism, is that it doesn’t stop people from making money—it just takes some of it back, when people are very rich. Nevertheless, taxing the rich is routinely criticized as something that kills the incentives for innovation and productivity that provide the broader economic and social benefits of capitalism. If a very rich person can’t keep all of their income, this argument goes, they lack an incentive to do good work.
I could tell you that this is horse shit, but that is not particularly eloquent. Instead, try this a brief portion of a longer interview with philosophy professor Elizabeth Anderson on the topic of inequality. One virtue of philosophy professors is that they tend to be skilled at distilling arguments into their most rational forms. Here she addresses the point in question. Bolding ours:
That objection depends on unrealistic ideas about how incentives work. Current justifications for extreme inequality of income and wealth grossly exaggerate their positive incentive effects, and underestimate their negative effects. Consider the fact that top German and Japanese executives earn far less than their counterparts in the U.S. or U.K., but their firms are just as productive. Even within the U.S., there is virtually no correlation between pay and performance for top executives. Studies show that excessive incentives for work requiring innovative thinking can actually depress productivity by focusing people’s minds on money rather than the task at hand.
On the bottom end, outright cash transfers to the poor have been found to be hugely successful in promoting productivity in many places, including Brazil, Kenya and even North Carolina. Far from making them lazy, the poor use the extra resources supplied by cash transfers to enhance productivity. They improve their parenting, advance the education of their children, and give them more nutritious food. High inequality, if anything, has negative effects on economic growth, by making the economy more vulnerable to crises and long recessions, and by corrupting the political process. When the rich capture politics, they mainly use their influence to limit competition from below and extract rents from everyone else. This depresses growth.
Nobody needs ten million or a hundred million or a billion dollars to have an “incentive” to do a good job. Ninety nine point nine nine percent of us do just fine on regular salaries. Don’t believe the hype.
