Sunday, September 28, 2014

Inequality, moral and immoral

One point about inequality protects the right to get rich by creating social wealth. If Walmart perfects its operations until the customer pays the lowest retail price ever, then Sam Walton becomes ethically unequal. Simply because he destroyed a real waste and pocketed a fraction of the resources saved.

Attitudes to redistribution are based on the same idea of honestly earned fortunes, in contrast to expropriation via taxes. The opposite is the story about exploitation by the elites. Again, assuming that wage earners have their "fair" contribution mismatching actual wages.

The relationship between "real contribution" and "reward," whether wages or profits, is the central point in the debates about inequality. But at the same time, it's the weakest one. A "real contribution" is impossible to calculate in a modern economy.

It's customary to take the market value of a company as a proxy for this company's contribution to the economy. Owners and managers running the company can make the company more expensive or less, and that would be their contribution.

Take Facebook, which did a decent job in improving personal communications. Its $200 bn. market value may be its gift to society. However, this value is not the net contribution. People contacted each other before Facebook. The means were different. They paid more to AT&T for phone calls and texting. AT&T had a higher market price, which was considered its contribution to society.

Facebook offered something better and took over AT&T's clients, meanwhile capturing some of AT&T's market value. The Facebook market cap contains both newly created value and the value that existed before its inception.

But maybe Facebook created more value than its current market cap. The market cap reflects a company's expected private cash flow. And the private cash flow is what remains after customers got their services. It's possible that users got much more from Facebook, while Facebook itself charged them a little amount. (Yeah, technically, the network is free, but users pay for it with higher retail prices of products advertised on FB.)

The story about individual wealth gets even more complex. Earnings by owners and top management rise and fall after the stock market. The stock market consists of thousands of entangled stories like that of Facebook, and the traces of "individual contributions" are lost in deals between individuals, financial institutions, and governments. The sames goes for the averages.

You can't make a plausible case about "fair" or "unfair" inequality out of the get-what-you-earned theory. There's just no fairness to measure.

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