Does our tolerance for inequality make us rich?

In Chapter One, we learn about the importance of incentive alignment: designing organizations so that decision makers have (i) enough information to make a good decision; and (ii) the incentive to do so. But incentives, i.e., linking pay to performance, necessarily creates some inequality as some people work harder or are more productive than others. The Economist notes that this tradeoff is not new.

In 1975 Arthur Okun, an American economist, argued that societies cannot have both perfect equality and perfect efficiency, but must choose how much of one to sacrifice for the other.

However, political views on this tradeoff diverge:

Views of income inequality are divisive. Leftists blame uneven distribution on outside factors, such as poor education and corporate misconduct. Conservatives, meanwhile, tend to view these differences as a fair consequence of an individual’s choices and abilities.

Views on income inequality diverge across countries as well.

Today, Americans seem far more willing to tolerate inequality than people in most rich countries. “In the United States”, reflects Mr Monks, “nobody minds Bill Gates making $49 billion. He is an American hero. There's no sense of the virtue of a homogenous culture.”

Bottom line:

Countries, like companies, will remain free to engineer greater or lesser degrees of equality. But there will be a price—as Sweden is discovering, and as Germany has already noticed. As the market for top talent grows more international, so it may force greater tolerance for inequality on countries that have spent half a century trying to root it out.

HT: Bill Wilson