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May 2004  
  
When people care enough about something to do it well, those who do it best
tend to be far better than everyone else. There's a huge gap between Leonardo
and second-rate contemporaries like Borgognone. You see the same gap between
Raymond Chandler and the average writer of detective novels. A top-ranked
professional chess player could play ten thousand games against an ordinary
club player without losing once.  
  
Like chess or painting or writing novels, making money is a very specialized
skill. But for some reason we treat this skill differently. No one complains
when a few people surpass all the rest at playing chess or writing novels, but
when a few people make more money than the rest, we get editorials saying this
is wrong.  
  
Why? The pattern of variation seems no different than for any other skill.
What causes people to react so strongly when the skill is making money?  
  
I think there are three reasons we treat making money as different: the
misleading model of wealth we learn as children; the disreputable way in
which, till recently, most fortunes were accumulated; and the worry that great
variations in income are somehow bad for society. As far as I can tell, the
first is mistaken, the second outdated, and the third empirically false. Could
it be that, in a modern democracy, variation in income is actually a sign of
health?  
  
**The Daddy Model of Wealth**  
  
When I was five I thought electricity was created by electric sockets. I
didn't realize there were power plants out there generating it. Likewise, it
doesn't occur to most kids that wealth is something that has to be generated.
It seems to be something that flows from parents.  
  
Because of the circumstances in which they encounter it, children tend to
misunderstand wealth. They confuse it with money. They think that there is a
fixed amount of it. And they think of it as something that's distributed by
authorities (and so should be distributed equally), rather than something that
has to be created (and might be created unequally).  
  
In fact, wealth is not money. Money is just a convenient way of trading one
form of wealth for another. Wealth is the underlying stuff—the goods and
services we buy. When you travel to a rich or poor country, you don't have to
look at people's bank accounts to tell which kind you're in. You can _see_
wealth—in buildings and streets, in the clothes and the health of the people.  
  
Where does wealth come from? People make it. This was easier to grasp when
most people lived on farms, and made many of the things they wanted with their
own hands. Then you could see in the house, the herds, and the granary the
wealth that each family created. It was obvious then too that the wealth of
the world was not a fixed quantity that had to be shared out, like slices of a
pie. If you wanted more wealth, you could make it.  
  
This is just as true today, though few of us create wealth directly for
ourselves (except for a few vestigial domestic tasks). Mostly we create wealth
for other people in exchange for money, which we then trade for the forms of
wealth we want.   
  
Because kids are unable to create wealth, whatever they have has to be given
to them. And when wealth is something you're given, then of course it seems
that it should be distributed equally.  As in most families it is. The kids
see to that. "Unfair," they cry, when one sibling gets more than another.  
  
In the real world, you can't keep living off your parents. If you want
something, you either have to make it, or do something of equivalent value for
someone else, in order to get them to give you enough money to buy it. In the
real world, wealth is (except for a few specialists like thieves and
speculators) something you have to create, not something that's distributed by
Daddy. And since the ability and desire to create it vary from person to
person, it's not made equally.  
  
You get paid by doing or making something people want, and those who make more
money are often simply better at doing what people want. Top actors make a lot
more money than B-list actors. The B-list actors might be almost as
charismatic, but when people go to the theater and look at the list of movies
playing, they want that extra oomph that the big stars have.  
  
Doing what people want is not the only way to get money, of course. You could
also rob banks, or solicit bribes, or establish a monopoly. Such tricks
account for some variation in wealth, and indeed for some of the biggest
individual fortunes, but they are not the root cause of variation in income.
The root cause of variation in income, as Occam's Razor implies, is the same
as the root cause of variation in every other human skill.  
  
In the United States, the CEO of a large public company makes about 100 times
as much as the average person.  Basketball players make about 128 times as
much, and baseball players 72 times as much. Editorials quote this kind of
statistic with horror. But I have no trouble imagining that one person could
be 100 times as productive as another. In ancient Rome the price of _slaves_
varied by a factor of 50 depending on their skills.  And that's without
considering motivation, or the extra leverage in productivity that you can get
from modern technology.  
  
Editorials about athletes' or CEOs' salaries remind me of early Christian
writers, arguing from first principles about whether the Earth was round, when
they could just walk outside and check.  How much someone's work is worth
is not a policy question. It's something the market already determines.  
  
"Are they really worth 100 of us?" editorialists ask. Depends on what you mean
by worth. If you mean worth in the sense of what people will pay for their
skills, the answer is yes, apparently.  
  
A few CEOs' incomes reflect some kind of wrongdoing. But are there not others
whose incomes really do reflect the wealth they generate? Steve Jobs saved a
company that was in a terminal decline. And not merely in the way a turnaround
specialist does, by cutting costs; he had to decide what Apple's next products
should be. Few others could have done it. And regardless of the case with
CEOs, it's hard to see how anyone could argue that the salaries of
professional basketball players don't reflect supply and demand.  
  
It may seem unlikely in principle that one individual could really generate so
much more wealth than another. The key to this mystery is to revisit that
question, are they really worth 100 of us? _Would_ a basketball team trade one
of their players for 100 random people? What would Apple's next product look
like if you replaced Steve Jobs with a committee of 100 random people? 
These things don't scale linearly. Perhaps the CEO or the professional athlete
has only ten times (whatever that means) the skill and determination of an
ordinary person. But it makes all the difference that it's concentrated in one
individual.  
  
When we say that one kind of work is overpaid and another underpaid, what are
we really saying? In a free market, prices are determined by what buyers want.
People like baseball more than poetry, so baseball players make more than
poets. To say that a certain kind of work is underpaid is thus identical with
saying that people want the wrong things.  
  
Well, of course people want the wrong things. It seems odd to be surprised by
that. And it seems even odder to say that it's _unjust_ that certain kinds of
work are underpaid.  Then you're saying that it's unjust that people want
the wrong things. It's lamentable that people prefer reality TV and corndogs
to Shakespeare and steamed vegetables, but unjust? That seems like saying that
blue is heavy, or that up is circular.  
  
The appearance of the word "unjust" here is the unmistakable spectral
signature of the Daddy Model. Why else would this idea occur in this odd
context? Whereas if the speaker were still operating on the Daddy Model, and
saw wealth as something that flowed from a common source and had to be shared
out, rather than something generated by doing what other people wanted, this
is exactly what you'd get on noticing that some people made much more than
others.  
  
When we talk about "unequal distribution of income," we should also ask, where
does that income come from?  Who made the wealth it represents? Because to
the extent that income varies simply according to how much wealth people
create, the distribution may be unequal, but it's hardly unjust.  
  
**Stealing It**  
  
The second reason we tend to find great disparities of wealth alarming is that
for most of human history the usual way to accumulate a fortune was to steal
it: in pastoral societies by cattle raiding; in agricultural societies by
appropriating others' estates in times of war, and taxing them in times of
peace.  
  
In conflicts, those on the winning side would receive the estates confiscated
from the losers. In England in the 1060s, when William the Conqueror
distributed the estates of the defeated Anglo-Saxon nobles to his followers,
the conflict was military. By the 1530s, when Henry VIII distributed the
estates of the monasteries to his followers, it was mostly political.  But
the principle was the same. Indeed, the same principle is at work now in
Zimbabwe.  
  
In more organized societies, like China, the ruler and his officials used
taxation instead of confiscation. But here too we see the same principle: the
way to get rich was not to create wealth, but to serve a ruler powerful enough
to appropriate it.  
  
This started to change in Europe with the rise of the middle class. Now we
think of the middle class as people who are neither rich nor poor, but
originally they were a distinct group. In a feudal society, there are just two
classes: a warrior aristocracy, and the serfs who work their estates. The
middle class were a new, third group who lived in towns and supported
themselves by manufacturing and trade.  
  
Starting in the tenth and eleventh centuries, petty nobles and former serfs
banded together in towns that gradually became powerful enough to ignore the
local feudal lords.  Like serfs, the middle class made a living largely by
creating wealth. (In port cities like Genoa and Pisa, they also engaged in
piracy.) But unlike serfs they had an incentive to create a lot of it. Any
wealth a serf created belonged to his master. There was not much point in
making more than you could hide. Whereas the independence of the townsmen
allowed them to keep whatever wealth they created.  
  
Once it became possible to get rich by creating wealth, society as a whole
started to get richer very rapidly. Nearly everything we have was created by
the middle class. Indeed, the other two classes have effectively disappeared
in industrial societies, and their names been given to either end of the
middle class. (In the original sense of the word, Bill Gates is middle class.)  
  
But it was not till the Industrial Revolution that wealth creation
definitively replaced corruption as the best way to get rich. In England, at
least, corruption only became unfashionable (and in fact only started to be
called "corruption") when there started to be other, faster ways to get rich.  
  
Seventeenth-century England was much like the third world today, in that
government office was a recognized route to wealth. The great fortunes of that
time still derived more from what we would now call corruption than from
commerce.  By the nineteenth century that had changed. There continued to
be bribes, as there still are everywhere, but politics had by then been left
to men who were driven more by vanity than greed. Technology had made it
possible to create wealth faster than you could steal it. The prototypical
rich man of the nineteenth century was not a courtier but an industrialist.  
  
With the rise of the middle class, wealth stopped being a zero-sum game. Jobs
and Wozniak didn't have to make us poor to make themselves rich. Quite the
opposite: they created things that made our lives materially richer. They had
to, or we wouldn't have paid for them.  
  
But since for most of the world's history the main route to wealth was to
steal it, we tend to be suspicious of rich people. Idealistic undergraduates
find their unconsciously preserved child's model of wealth confirmed by
eminent writers of the past. It is a case of the mistaken meeting the
outdated.  
  
"Behind every great fortune, there is a crime," Balzac wrote. Except he
didn't. What he actually said was that a great fortune with no apparent cause
was probably due to a crime well enough executed that it had been forgotten.
If we were talking about Europe in 1000, or most of the third world today, the
standard misquotation would be spot on. But Balzac lived in nineteenth-century
France, where the Industrial Revolution was well advanced. He knew you could
make a fortune without stealing it. After all, he did himself, as a popular
novelist.   
  
Only a few countries (by no coincidence, the richest ones) have reached this
stage. In most, corruption still has the upper hand. In most, the fastest way
to get wealth is by stealing it. And so when we see increasing differences in
income in a rich country, there is a tendency to worry that it's sliding back
toward becoming another Venezuela. I think the opposite is happening. I think
you're seeing a country a full step ahead of Venezuela.  
  
**The Lever of Technology**  
  
Will technology increase the gap between rich and poor? It will certainly
increase the gap between the productive and the unproductive. That's the whole
point of technology. With a tractor an energetic farmer could plow six times
as much land in a day as he could with a team of horses. But only if he
mastered a new kind of farming.  
  
I've seen the lever of technology grow visibly in my own time. In high school
I made money by mowing lawns and scooping ice cream at Baskin-Robbins. This
was the only kind of work available at the time. Now high school kids could
write software or design web sites. But only some of them will; the rest will
still be scooping ice cream.  
  
I remember very vividly when in 1985 improved technology made it possible for
me to buy a computer of my own. Within months I was using it to make money as
a freelance programmer. A few years before, I couldn't have done this. A few
years before, there was no such _thing_ as a freelance programmer. But Apple
created wealth, in the form of powerful, inexpensive computers, and
programmers immediately set to work using it to create more.  
  
As this example suggests, the rate at which technology increases our
productive capacity is probably exponential, rather than linear. So we should
expect to see ever-increasing variation in individual productivity as time
goes on. Will that increase the gap between rich and the poor? Depends which
gap you mean.  
  
Technology should increase the gap in income, but it seems to decrease other
gaps. A hundred years ago, the rich led a different _kind_ of life from
ordinary people. They lived in houses full of servants, wore elaborately
uncomfortable clothes, and travelled about in carriages drawn by teams of
horses which themselves required their own houses and servants. Now, thanks to
technology, the rich live more like the average person.  
  
Cars are a good example of why. It's possible to buy expensive, handmade cars
that cost hundreds of thousands of dollars. But there is not much point.
Companies make more money by building a large number of ordinary cars than a
small number of expensive ones. So a company making a mass-produced car can
afford to spend a lot more on its design. If you buy a custom-made car,
something will always be breaking. The only point of buying one now is to
advertise that you can.  
  
Or consider watches. Fifty years ago, by spending a lot of money on a watch
you could get better performance. When watches had mechanical movements,
expensive watches kept better time. Not any more. Since the invention of the
quartz movement, an ordinary Timex is more accurate than a Patek Philippe
costing hundreds of thousands of dollars.  Indeed, as with expensive cars,
if you're determined to spend a lot of money on a watch, you have to put up
with some inconvenience to do it: as well as keeping worse time, mechanical
watches have to be wound.  
  
The only thing technology can't cheapen is brand. Which is precisely why we
hear ever more about it. Brand is the residue left as the substantive
differences between rich and poor evaporate. But what label you have on your
stuff is a much smaller matter than having it versus not having it. In 1900,
if you kept a carriage, no one asked what year or brand it was. If you had
one, you were rich. And if you weren't rich, you took the omnibus or walked.
Now even the poorest Americans drive cars, and it is only because we're so
well trained by advertising that we can even recognize the especially
expensive ones.   
  
The same pattern has played out in industry after industry. If there is enough
demand for something, technology will make it cheap enough to sell in large
volumes, and the mass-produced versions will be, if not better, at least more
convenient.  And there is nothing the rich like more than convenience. The
rich people I know drive the same cars, wear the same clothes, have the same
kind of furniture, and eat the same foods as my other friends. Their houses
are in different neighborhoods, or if in the same neighborhood are different
sizes, but within them life is similar. The houses are made using the same
construction techniques and contain much the same objects. It's inconvenient
to do something expensive and custom.  
  
The rich spend their time more like everyone else too. Bertie Wooster seems
long gone. Now, most people who are rich enough not to work do anyway. It's
not just social pressure that makes them; idleness is lonely and demoralizing.  
  
Nor do we have the social distinctions there were a hundred years ago. The
novels and etiquette manuals of that period read now like descriptions of some
strange tribal society. "With respect to the continuance of friendships..."
hints _Mrs. Beeton's Book of Household Management_ (1880), "it may be found
necessary, in some cases, for a mistress to relinquish, on assuming the
responsibility of a household, many of those commenced in the earlier part of
her life." A woman who married a rich man was expected to drop friends who
didn't. You'd seem a barbarian if you behaved that way today. You'd also have
a very boring life. People still tend to segregate themselves somewhat, but
much more on the basis of education than wealth.   
  
Materially and socially, technology seems to be decreasing the gap between the
rich and the poor, not increasing it. If Lenin walked around the offices of a
company like Yahoo or Intel or Cisco, he'd think communism had won. Everyone
would be wearing the same clothes, have the same kind of office (or rather,
cubicle) with the same furnishings, and address one another by their first
names instead of by honorifics. Everything would seem exactly as he'd
predicted, until he looked at their bank accounts. Oops.  
  
Is it a problem if technology increases that gap? It doesn't seem to be so
far. As it increases the gap in income, it seems to decrease most other gaps.  
  
**Alternative to an Axiom**  
  
One often hears a policy criticized on the grounds that it would increase the
income gap between rich and poor. As if it were an axiom that this would be
bad. It might be true that increased variation in income would be bad, but I
don't see how we can say it's _axiomatic._  
  
Indeed, it may even be false, in industrial democracies. In a society of serfs
and warlords, certainly, variation in income is a sign of an underlying
problem. But serfdom is not the only cause of variation in income. A 747 pilot
doesn't make 40 times as much as a checkout clerk because he is a warlord who
somehow holds her in thrall. His skills are simply much more valuable.  
  
I'd like to propose an alternative idea: that in a modern society, increasing
variation in income is a sign of health. Technology seems to increase the
variation in productivity at faster than linear rates. If we don't see
corresponding variation in income, there are three possible explanations: (a)
that technical innovation has stopped, (b) that the people who would create
the most wealth aren't doing it, or (c) that they aren't getting paid for it.  
  
I think we can safely say that (a) and (b) would be bad. If you disagree, try
living for a year using only the resources available to the average Frankish
nobleman in 800, and report back to us. (I'll be generous and not send you
back to the stone age.)  
  
The only option, if you're going to have an increasingly prosperous society
without increasing variation in income, seems to be (c), that people will
create a lot of wealth without being paid for it. That Jobs and Wozniak, for
example, will cheerfully work 20-hour days to produce the Apple computer for a
society that allows them, after taxes, to keep just enough of their income to
match what they would have made working 9 to 5 at a big company.  
  
Will people create wealth if they can't get paid for it? Only if it's fun.
People will write operating systems for free. But they won't install them, or
take support calls, or train customers to use them. And at least 90% of the
work that even the highest tech companies do is of this second, unedifying
kind.  
  
All the unfun kinds of wealth creation slow dramatically in a society that
confiscates private fortunes. We can confirm this empirically. Suppose you
hear a strange noise that you think may be due to a nearby fan. You turn the
fan off, and the noise stops. You turn the fan back on, and the noise starts
again. Off, quiet. On, noise. In the absence of other information, it would
seem the noise is caused by the fan.  
  
At various times and places in history, whether you could accumulate a fortune
by creating wealth has been turned on and off. Northern Italy in 800, off
(warlords would steal it). Northern Italy in 1100, on. Central France in 1100,
off (still feudal). England in 1800, on. England in 1974, off (98% tax on
investment income). United States in 1974, on. We've even had a twin study:
West Germany, on; East Germany, off. In every case, the creation of wealth
seems to appear and disappear like the noise of a fan as you switch on and off
the prospect of keeping it.  
  
There is some momentum involved. It probably takes at least a generation to
turn people into East Germans (luckily for England). But if it were merely a
fan we were studying, without all the extra baggage that comes from the
controversial topic of wealth, no one would have any doubt that the fan was
causing the noise.  
  
If you suppress variations in income, whether by stealing private fortunes, as
feudal rulers used to do, or by taxing them away, as some modern governments
have done, the result always seems to be the same. Society as a whole ends up
poorer.  
  
If I had a choice of living in a society where I was materially much better
off than I am now, but was among the poorest, or in one where I was the
richest, but much worse off than I am now, I'd take the first option. If I had
children, it would arguably be immoral not to. It's absolute poverty you want
to avoid, not relative poverty. If, as the evidence so far implies, you have
to have one or the other in your society, take relative poverty.  
  
You need rich people in your society not so much because in spending their
money they create jobs, but because of what they have to do to _get_ rich. I'm
not talking about the trickle-down effect here. I'm not saying that if you let
Henry Ford get rich, he'll hire you as a waiter at his next party. I'm saying
that he'll make you a tractor to replace your horse.  
  
  
  
**