Boris Johnson has got into trouble for his statement that it is “surely relevant to a conversation about equality” that just 2 per cent of “our species” has an IQ over 130. Over the past couple of years, the Occupy movement has made headlines by attacking the top 1 per cent.
The summer 2013 edition of the top American Journal of Economic Perspectives focuses specifically on the “Top 1 Per Cent”. This is written almost exclusively in English rather than maths, and top economists debate a range of intriguing questions.
Gregory Mankiw of Harvard has a piece entitled simply “Defending the One Per Cent”. Mankiw points out that IQ is “about as heritable as many medical conditions”, as are factors such as self-control and interpersonal skills. Taking this into account, America is truly an equal opportunity society. The specific family environment itself counts for very little. Further, the tax system in the US is very progressive. The poorest fifth pays 1 per cent of its income in federal taxes, the middle fifth 11.1 per cent, and the richest 1 per cent pay 28.9 per cent.
That said, Britain’s Tony Atkinson, with his colleagues, point out that changes in the share of income going to the top 1 per cent have been very different in the Anglo-Saxon economies than in those of Continental Europe. Over the past century, in the US, UK, Canada and Australia the share has followed a U-shape. It was high, fell, and is now back where it was early in the 20th century. In Europe, it looks much more like an L-shape. There has been some increase in recent decades, but the rise is small. They conclude that specific institutional factors must be responsible, since all the developed countries have all faced the same global economic environment.
The Labour Party’s old Clause Four promised to “secure for the workers by hand or by brain the full fruits of their industry”. It seems to me that in the Anglo-Saxon economies, many “brain workers” have been practising socialism in the most unlikely settings. In Silicon Valley, for example, almost all the value of high-tech start-ups is embodied in their key personnel, who have not been shy of taking large equity stakes. The successful companies generate enormous wealth for a small group. In hedge funds and banking, the “workers” have certainly seized the full fruits. It is precisely in these sectors of the economy where the Anglo-Saxon countries are strong. Hence we see a sharp increase in the share going to the top 1 per cent.
One of the papers raises the question: why has democracy not slowed rising inequality? People like Steve Jobs are seen as deserving their success because it is based on merit, whereas bankers are vilified. But it is fiendishly difficult to legislate between the two. For centuries, England has wrestled with the problem of the deserving and undeserving poor, the “sturdy beggars” of Elizabeth I’s Poor Laws. The same now applies in reverse to the super-rich.
By Paul Ormerod
As published in City AM on Wednesday 11th December 2013