On Inequality
As the Belgian election campaign draws to an end, it’s appalling to see political parties competing on programs—those ideas they think will be implemented if they win. They act as if these ideas will immediately come to fruition regardless of future circumstances. They believe that once elected, they will run the show and do whatever they want. This is pathetic. It’s not rocket science to know that winning parties will need to build coalitions with other parties that have their own programs. This is where the first dilution happens. Negotiations will occur, and new programs will emerge. But that’s only a minor issue.
It’s naïve to think that the marketed ideas during the campaign will be easily implemented and lead to the planned outcomes. I’ve mentioned this determinism several times in the past, and it is still widespread among politicians. Take the “tax the rich” idea, for example, which, according to the left, would bring a fixed amount of euros to the government. Let’s assume for a moment that the policy is implemented. Do you think the wealthy will stand still and allow their wealth to be reduced? They will most likely find ways to escape the new taxes even before the policy is implemented, leading to second-order consequences. One should think dynamically, not statically. When you change a major variable in a complex system, not only will the planned outcome evade you, but you will also end up with a series of unsought consequences that can be severe.
Regarding the “tax the rich” idea, one can understand the rationale. The goal is to decrease the level of inequality in our society through a redistribution mechanism. This looks good and beautiful on paper. However, it’s one of those things not well understood even among economists. Equality is conventionally measured by the GINI coefficient, which, according to Nassim Taleb—proved through theorems—is ill-suited for fat-tail variables like wealth, which tends to concentrate among the few. Remember, wealth begets wealth. Does that mean inequality is not increasing? I believe it is, although I don’t have a proper metric to show it. But this is not the problem. I think inequality is not the real problem. If it were, having some individuals with many connections or friends would also be a problem. I can’t imagine what policy would be required to redistribute unequal friendships. This is because concentration in wealth and friendships is all part of the same phenomenon stemming from the network nature of our society.
Consider the following thought experiment: if you drop 100 people on a desert island, give them each 100 euros and some food, and allow them to trade, a year later you will probably find that a few individuals will have most of the money. Another consequence is that people will form clans, and the few will likely become the most popular. This concentration is a major feature of social systems, and the resulting inequality is an emergent phenomenon. Adam Smith called it the invisible hand back then.
Capitalism produces wealth, increases GDP, and fights poverty, but it also creates inequalities, not to mention other major externalities such as environmental issues and climate change. Ignoring these dynamics and proceeding with simplistic policies is not only foolish but can lead to iatrogenic consequences. What should be done about inequality? Shouldn’t we fight it? The question is much more subtle.
Inequality becomes a true problem when people are locked in their social classes with no way out. It’s an issue when the wealthy hold on to their privilege with no risk, becoming rent-seekers, to use Nassim Taleb’s phrase. The key concept here is mobility. You want a society that allows social mobility across classes. You want the poor to have more opportunities to climb up the ladder, and the rich to put their wealth to use and take the risk of staying at the top. Whether this can happen through tax increases is questionable. Instead of taxing the rich, why not encourage or even require them to invest part of their wealth in impactful causes that advance society and improve people’s well-being, while allowing them to make their own investment decisions?
Initiatives already abound. Many of the wealthy already invest their money in new ventures, impact investments, and donate almost their entire wealth through their foundations to advance science or combat poverty. These initiatives didn’t wait for policy implementation. They have bubbled up organically from the bottom. Why not foster this trend, institutionalise it, and develop an ecosystem around it, with capital on one side and projects aimed at increasing social mobility on the other? Authorities can play a major role in governing this ecosystem, facilitating the exchange of value. In doing so, both the fortunate and the less fortunate can benefit.
