Here's yet another post on the inequality article from the St. Louis Post-Dispatch that I blogged about previously here, here, and here.
While the rest of America rolls its eyes at such injustice, a spate of new studies and statistics throws a spotlight on just how concentrated the world's wealth has become. The richest of the rich are getting much richer, and ascending quicker, than are the merely wealthy.
But why is income inequality increasing? Differences in productivity are part of the story (as are the things that drive differences in productivity - technological and human capital progress, and the like). But one shouldn't forget consumer willingness to pay for what is being produced.
Most readers of this blog know what marginal revenue product (MRP) is, but for those not familiar with this bit of jargon, MRP is the added income a business receives when it hires a resource, puts it to work, and sells the stuff it makes. MRP therefore has two components: the additional output (marginal productivity or MP) of the resource and the additional revenue obtained when the additional output is sold (marginal revenue or MR): MRP = MP*MR. So if a resource that makes soda produces, say, 10 cases of soda at the margin and each case sells for $5, then the resource's marginal revenue product is $50 (MR*MP). In competitive resource markets, the average resource is paid pretty close to its MRP.
By the MRP explanation, rising incomes are a result of increased productivity at the margin, higher willingness to pay by consumers for the resulting output, or a combination of these two factors. If everyone produced stuff for which consumers had the same willingness to pay, then differences in income can be completely explained by differences in marginal productivity. But if people are equally productive, differences in consumer willingness to pay for the added productivity would drive incomes to diverge. Moreover, this is not a bad thing. The higher the willingness to pay suggests people find the stuff to be more valuable.
Lastly, if those who are more productive are also producing things for which people have a higher willingness to pay, income inequality would grow even more. Why, then, is income inequality such a bad thing?
Comments