We're in for a wild ride. Exponentially accelerating technological, cultural, and socioeconomic evolution means that every year will see more developments than the previous one. More change will happen between now and 2050 than during all of humanity's past. Let's explore the 21st century and ride this historic wave of planetary transition with a confident open mind.

Thursday, December 2, 2010

Maximum Wage and the Limits of Human Inequality

Pegging the rise of maximum compensation to the rise in the minimum will go a long way towards avoiding global disruptions

The appropriate maximum wage that society should have will be a critical issue in this century. It is generally agreed upon at this point that a neurosurgeon should get compensated more than a tour guide. The Soviet experience of a relatively narrow gap between highest and lowest compensation (top company manager officially earning 3-5 times the entry level worker) shows that society's progress stagnates if tangibly unequal abilities and contributions are rewarded with compensation that's perceived as relatively equal. Yet various banana republics (United States included) around the world demonstrate that stagnation also sets in when wage inequality gets sufficiently monstrous.

It is not enough to look at relatively egalitarian societies like Japan or Sweden to try to find some golden maximum/minimum ratio. What is needed is a common sense and/or philosophical framework that 1) justifies a certain income ratio
and 2) creates conditions compatible with human nature and self interest that allow the set ratio to be maintained.

1) Justification for capping the difference between top and bottom incomes should be grounded in reality and pragmatism and not idealistic popular desires of how a world should be. Theorists like Nietzsche spent considerable time elaborating that humans aren't equal. Yet in an ironic twist, the same reasons (that he gave for not having a leveling system where everybody is assumed to have the same value) can be used to set limits to difference in valuation.

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Like many characteristics of a population, the natural abilities to be exchanged for money are spread along a bell curve. Natural ability is anything that gives a physiological edge in addition to training. An example would be the hyper sensitive and rare taste buds of a top chef or a fighter pilot with remarkable reflexes and fast twitch muscles. If you take a person with poor taste buds and a person with exceptional ones and provide both with identical intensive high quality training on food preparation, there will be a certain intangible limit to how much better one chef is than the other. This applies to all professions. What is known for sure is that one is not 1000 times better chef after the training (or 100 times). Such numbers are simply ludicrous mathematically.

Napoleon Bonaparte is not 100 times superior person to say, a gas station manager and neither does Napoleon deserve 100 times more cars, 100 times more houses, 100 times better quality food, 100 times the salary, 100 times the size of personal land, etc. Think about it. Even without the leveling of military training, if you take the brain of the gas station manager and multiply its function by 10, the gas station manager would give Napoleon a run for his money in most if not all areas of life. Whether intelligence, speed, personality, patience, if you take an ability on one low end of the bell curve and multiply it by no more than 10, you automatically get to the other end of the bell curve (ex: IQ of 30*10=300).

I am using a multiple of 10 for simplicity here since the actual difference cannot be readily quantified (one perhaps can argue better for 15, 20, or 8). Considering the outrage over the bankster bonuses in the last 2 years, it appears the general public intuitively knows that there are limits to salary compensation. What remains to be done is to draw some line in the sand. A person earning 10 times as much as somebody earning 50 grand a year is getting half a million and automatically gets into top 1% income bracket. 10 times the compensation is an enormous leap. This perhaps sounds shocking, the way explaining that a duke does not have divine right to all the local land might have sounded shocking 300 years ago.

"But isn't compensation also determined by social importance of an ability (usually allocated by market forces)?"

As far as social importance, it is a very valid point. In today's absurd dying socioeconomic system, we don't see prime ministers and military generals receiving the same incomes as Lloyd Blankfein or other wall street criminals. We also don't see the operators of nuclear missile submarines getting 400 times the amount a waitress or a new army recruit gets (the way a modern CEO does compared to entry level workers in his/her organization).

Certainly the argument from social importance would indicate societal leaders, augmenters, and protectors to be the most vital. It is a tricky subject which should be properly studied with in depth examination of what professions benefit society the most (hint: engineers and scientists in political power). There are various ways of determining social importance with length and difficulty of educational training being one of them and critical examination of what makes real physical economy grow being the other (to filter out people who spent 13 years in intensive study of psychoanalysis or Gregorian chant from the top compensations).

This leads us to the idea of a free market competition, a concept as utopian and disconnected from reality as pure communism. The unregulated "market" is and will remain a diverse collection of political power centers that evolve the rules of the global private casino as they see fit. The obvious examples of the market giving top rewards to athletes, pop stars, and organized crime (Citigroup, JP Morgan Chase, etc) shows that it is a very poor determining mechanism of socially important tasks. This is where we see a difficult social divergence happening between perceptions of important jobs (nuclear power plant director) and consumer determined rewards for not-so important jobs (national talk show host). Obviously we'd like for both the public and infrastructural demands (that allow the public to live) to have a say in compensation without too much divergence.

If incomes could be broken into 10 levels, it very well could be that a top entertainer should be a level 7 worker (earning 7 times more than the minimum income of level 1) while the nuclear power plant director gets to be level 8. This will be up to the politicians and the needs of the crowds as long as they maintain the ratio system (in this case, based on maximum wage difference of bottom income multiplied by 10).

2) How does one make the maximum wage system stable and compatible with human nature? The simplest solution is to make the rise in maximum salary dependent on the rise in minimum salary. This means that if level 1 worker earns 100 units a day while the top level 10 worker earns 1000, the level 10 would only be able to get a raise of 10% to 1100 units if the salary of level 1 goes to 110. If you are beginning to suspect we are moving beyond capitalism to a more high tech welfare system of the future, then you are correct. Notice how the maximum salary gets to grow while being tied up to the minimum.

Pegging the material progress of the highest compensated to the material progress of the poorest can easily work within the capitalist system but it begins to work even better in a post-monetarist technocratic system. The strongest and richest must be given a personal incentive to improve the lives of the weakest and poorest through an income peg. They will still remain 10 times better off (10 times the cars, 10 times the living space, 10 times the clothing) but at the same time, if they work in their self-interest they will be lifting all boats. This dynamic inevitably puts more technically oriented people into top positions of society where they are most needed anyway. We're talking people who understand how to improve infrastructure, logistics, and basic structural economic welfare provision.

These matters will continue being a major concern as we gradually transition to a post scarcity transhumanist world of the future. It is important that we start discussing the limits to human inequality early on before social disturbances on a planetary scale have a chance to really develop.

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  1. The disparity between 'should' and 'is' is unfortunately quite vast.

    At present the incentives do not encourage egalitarian behavior.
    Those at the top have the power to pay themselves disproportionately. Therefore they do.

    Such avaricious behavior may entail significant long term consequences, but the elites can just skip town and set up shop somewhere cheaper if they ever feel the need.

    I suspect internationalism is connected to our present predicament.
    The nobles are now in the habit of playing a clever game of arbitrage across political boundaries to maximize their personal profits and minimize the amounts they have to give back.

    So far as I know, Carnegie never really entertained the idea of going back to Scotland or of fleeing of to the French Riviera with all his earnings.
    It seems he had a sort of almost paternal sense of obligation to the society in which he made his fortune.
    This was not an uncommon attitude for the time. Even Rockefeller seems to have felt the same way.

    We have robber baron philanthropy in our own day, but it would seem the Gates foundation is heavily fixated on Africa, a locale where most of those precious dollars will either fund corruption of spur further unsustainable population growth.
    Even the philanthropists are now citizens of a world that lies at their feet, not of the countries in which they made their fortune.

    In such a climate, there can at this time be no policies of equity within the individual nations.
    The nobles can always take their capital elsewhere if conditions are not precisely to their liking.

  2. The issue of how to squeeze resources out of the globalist oligarchs is a very important one. Thanks for bringing it up. So far there are very few ideas concerning it such as the Tobbin tax on movement of transnational capital investments. A lot of the richest Americans aren't even nationals anymore since they got rid of their citizenship to be citizens of tax havens like Cayman Islands. They can certainly be hounded by major Western home countries, be publicly humiliated and character assassinated, and their domestic assets frozen and seized but we'll never fully get them. I think I'll devote an article on how to systematically bring them down to size internationally

  3. An inseparable part of the problem here:

    If it's the oligarchs who are in power, who's going to tax their assets and restrict their movement?

    Even if these oligarchs don't actually fill the positions of power, they have plenty of influence over those who do.

    As income disparity continues to grow, the higher the payoff for supporting the oligarchs over the populace.
    The present need for millions of dollars and mass media to be viable for political office ensures that the halls of power are likely to be a carefully planted oligarchic garden.

    Who in power gains from opposing the oligarchs? Where are the incentives for holding them to account and reducing their power?

    If all the Cayman Islands and Monacos in the world were subjected to new international tax laws, soaring demand would ensure their rapid replacement in other parts of the world. The incentive for some place in the world to defect would just be too high.
    Indeed, prohibition never really works if the demand is still there.

    Viable policy is made by those who are mindful of where the incentives lie.
    As you've mentioned in previous posts: it's an engineering problem.

    How to realign a self-perpetuating system besides waiting for nature to take its course.

  4. Well historically, a lot of social change occurred when a reformist (kinder masters) faction of the oligarchy sensed popular anger and rode it to overpower the more conservative older entrenched oligarchs (cruel masters). They've done it strategically and out of sense of self preservation since they knew that if the old system continued unchanged, the poor would take everything violently. The New Deal is an example.

    The global system they built has been collapsing on itself for some time now and they'll have to buy off the peasants via more bread stamps, circus stamps, shelter stamps, etc in the near future. We can expect them to try to change the rules of the casino they created since current rules are backing them into a corner. Younger smarter oligarchs sometimes realize it is better to give some money away to buy off the poor in order to not have their throats slit. When they make their move, the global oligarchy in general will be vulnerable.

    During this transition period of kinder masters struggling with the cruel masters, the peasants should wage all out financial warfare (causing a run on the banks, targeting specific banking structures, shorting the dollar by buying gold/silver) and informational warfare (collapsist, neofeudalism memes). We can also bypass the politicians since we know who the richest 50,000 planetary oligarchs are and they can be hounded by various publics directly (think demonstrations near places where the rich gather instead of where their political lapdogs gather).

  5. You make compelling points. This country has been overrun by robber barons before.
    Whenever too many millions came to loathe them, they became irresistible fat targets even for the politicians.
    Look at all the mileage Teddy and Taft got out of becoming known as trustbreakers.

    Still, the present situation is worrisome. A recession is fairly good news if you're an oligarch.
    Consider the rise of Carlos Slim in Mexico to the status of world's richest man.

    He basically cashed in on a massive recession, buying up huge amounts of devalued assets. When the dust had settled, he was personally in control of 5% of Mexico's economy.

    You too seem concerned about the plunder that's taking place right now and the feudal redefinition of our class system that comes with it.

    When a nation reaches a certain point, turning back can become difficult.

    Peasants already are bought off with food stamps and welfare. I have little doubt that there would be riots in poor neighborhoods right now if not for these programs.
    The oligarchs already in power are smart enough to realize this.

    Perhaps the most significant danger for our oligarchs is the game of economic brinksmanship that they've been playing to maximize their gains.
    It's been very nice for them, but if they overplay it, it could be disastrous for everyone.
    A big debtor can eclipse its creditor in power since no one wants a showdown that can only end in MAD. But..big bubbles are fragile.