Inequality and Growth

Quick post to get feedback on an idea.

I am beginning to think that inequality, in and of itself maybe an important component in at least the level of economic activity if not the rate of growth.

Why?

Well, traditional economic theory is based on the idea that people either work or not. If they work they get the prevailing wage. Higher wage can potentially encourage people to work more but even this is controversial since higher wage people don't "need" to work as much.

The thing is work is not work is not work. That is, the same person doing two different jobs could enjoy radical differences in productivity and hence income.

For example, it is not uncommon for an investment banker to be paid on the order of $500 an hour. Unless we think that the investment bank is in the business of giving away profits we have to concede that she is then producing at least $500 in value for the firm.

Suppose that same women were to become a cashier at the local dollar store. Now, no doubt she will be a great cashier. She will probably be faster and make fewer errors than the typical cashier but how productive could she be really? Could she produce ten dollars an hour, maybe at the outside fifteen dollars an hour worth of economic product.

Lets say she produces ten dollars an hour. Then the choice of this young woman to become a cashier rather than an investment banker will cost the economy $490 per hour of output. That's the same as if 49 cashiers had become unemployed.

Therefore, it much more important that we get this young woman to work in the correct field than it is that we get her to work at all.

Getting her to work in the right field doesn't depend so much on what the average wage is, or what the average tax rate is for that matter. It depends on the inequality in after tax wages between fields.

One thing that is striking about Europe is the intellectualism of the working class. Waiters on Champs-Elysees are able to and interested in discussing all manner of geopolitical issues. Socialist tend to applaud this as a mark of France's egalitarian nature. Even the wait staff are literate members of the body politic.

Yet, I am struck by the economic waste. If this person is both capable of and interested in geopolitics then they should be assisting the world in geopolitical decisions, not serving baguettes.

If it turns out that we can both educate and interest everyone in geopolitics, finance and the like, then no one should be employed as a waiter. After all, its not that difficult to grab your own baguette.