Rolling the Dice for the Haves and Have Nots
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The Fiscal Times
April 10, 2012

I recently discovered that a game I played as a child, Chutes and Ladders, is actually an ancient game from India known as Snakes and Ladders. The original game was interpreted by some as an illustration of fate or destiny. The game is pure luck, there is no skill involved, so a player's destiny depends upon the roll of the dice and the structure of the game. But in another interpretation the ladders represent virtuous choices -- the path to prosperity -- while the snakes or chutes represent vices that lead to ruin. There were more snakes than ladders in the original game to teach that it is harder to stay on the moral path than it is to fall off of it.

There are interesting similarities between these two interpretations of the game and the two most common explanations for the large increase in inequality in recent decades. One explanation for growing inequality relies upon institutional and political factors. For example, proponents of this view often argue that changes in legislation favored by powerful business interests undermined unions. This gave businesses the upper hand in wage negotiations and allowed business owners to capture a larger and unfair share of income.

From the perspective of workers, this is a story where their destiny is partly determined by changes in the rules of the game, and those changes work against them. It's not the individual's poor choices that make it hard to climb ladders, avoid snakes, and reach the top of the board. It’s that those who make it to the top are able to use the power that comes with wealth to change the game in a way that protects their own positions on the board, and this comes at the expense of those who do not have this degree of influence.

The second explanation relies upon increasing returns to education brought about by skill based technical change, winner take all markets that have grown with globalization, and other economic factors to explain rising inequality. This is fundamentally a virtues and vices story. Those who make good choices and have the virtues that society values are appropriately rewarded and they rise to the top, while those who do not stay at the bottom. Manipulation of the game by the powerful has little to do with the outcome.

As society becomes more divided, it becomes more difficult for those at the bottom to make their way to the top if for no other reason than the distance between the two groups is expanding.

What is the solution to the inequality problem? If the widening gap in the income distribution is the result of unfairness, if some people are getting more than they deserve, then the answer is simple in principle but much harder in practice. In the short-run, take from the undeserving and give to the deserving, and in the longer run fix the problems that produce the unfair distribution of income.

But suppose that growing inequality has nothing to do with political power, market power, rules that favor the perpetuation of wealth, and so on. The evidence suggests these are important factors, but suppose the second group is correct. Should we accept that people are getting paid according to their contribution to the social good, conclude that’s fair, and leave it at that?

University of Oregon macroeconomist Mark Thoma writes primarily about monetary policy its effect on the economy. He has also worked on political business cycle models. Thoma blogs daily at Economist’s View.