Sunday, December 7, 2014

Tyler Cowen Reframes The Inequality Debate Away From Thomas Piketty

Tyler Cowen is an economics professor at George Mason university and a director of the Mercatus Center which is affiliated with George Mason.  Other directors on the Mercatus board include Charles Koch the founder of Koch Industries and Richard Fink who is a senior executive at Koch Industries.  The Mercatus Center  focuses on libertarian solutions to our economic problems.  It is highly critical of government regulation especially when it interferes with the free operation of the energy industry.

In this article, Cowen argues that technology and free market innovations will ultimately reduce income inequality.  Unequal access to technology is partially responsible for inequality today because it has not advanced to the point in which it easy to use by unskilled workers.  Highly skilled workers, such as hedge fund managers, earn high incomes because they are able to use technology to outperform less skilled workers.  That advantage will dissipate over time as artificial intelligence makes it easier for less skilled workers to increase their productivity.  This explanation for inequality fits nicely into classic economic theories which assume that incomes are based upon one's marginal contribution to revenue.

Innovation also plays an important role in reducing income inequality.  According to Cowen, America has been a provider of innovations to consumers which increase their utility.  Apparently, reducing the utility gap between high and low income households is an alternative to reducing income inequality.  Wages have been depressed by the globalization of the labor market, especially for manufacturing workers, but consumer utility has been increased because the prices for many products manufactured in low wage countries have declined.  Even better,  low wage countries like China will become innovation centers over time.  In the long run, they will produce products that also increase consumer utility and reduce utility inequality much like the US has done.

Cowen acknowledges that his ideas about technological innovation are speculative and that they only provide a long term solution to growing income inequality.  The intent of his argument, however, is to reframe the inequality debate which has been popularized by Thomas Piketty who argues that the source of income inequality is the gap between the return on capital and the return on wages.  Since the ownership of capital is highly concentrated, and an important source of income,  it follows that income inequality will continue to grow as long as the return of capital exceeds the return on labor.  According to Piketty tax polices which reduce the net return on capital is the best way to reduce the growth in income inequality.  Cowen claims that this is the wrong approach because it would limit the growth in technical innovation, which according to his analysis, provides the means for the reduction in income inequality.

Piketty's focus on wealth taxation may be futile because it would be opposed by powerful people like those who fund the Mercatus Center at George Mason University.  On the other hand, there is no reason to believe that higher taxes on capital will reduce innovation, or that increases in consumer utility via product innovation, and lower prices, is a good substitute for greater income income equality as Cowen assumes.  Cowen has done his job, however, if he succeeds in reframing the debate the debate on income inequality.  That, of course, is what he is paid to do.  Curiously, his income is not dependent upon the use of advanced technology.  He was gifted with high intelligence which he has been able to sell at a high price to those who can afford to purchase and shape the uses to which intelligence is applied.

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