Average is over
A while back, Tyler Cowen wrote a book entitled “Average is Over“. If my memory is correct, one idea was that technology would allow some people to become much more productive than others, and/or technology would make it easier to identify who has been more productive all along. I’d like to play with this idea using a simple model economy with one firm—a newspaper with 101 journalists.
Let’s say the newspaper pays each journalist $100,000. Yes, some journalists are better than others, but . . . well . . . who’s to say how productive each journalist is? It’s simpler to just pay them all the same.
Now assume an innovation called “substack” comes along, which makes it possible to identify the productivity of each journalist. It turns out that one journalist is far more productive than the others, and sets up his own company, which generates $1,100,000/year in revenue. Since he’s still doing the same work as before, the total productivity of the journalism industry has not increased. That means the remaining 100 journalists at the original firm must take a pay cut equal to the star’s pay increase—a $1,000,000 cut spread out over 100 journalists. So their pay is cut to $90,000/year. How should we think about this change?
One answer is that the society in this tiny economy becomes more unequal. But let’s make the society a tad more realistic. In addition to the 101 journalists, there are 20 poor people with no jobs, who live off private charity and public assistance programs. How do they feel about the extra inequality produced by this “substack” invention?
If we assume that substack doesn’t impact total GDP, then the poor are likely to benefit if the total consumption of the 101 workers declines when society becomes more unequal. And that seems likely to me. The talented reporter will probably consume somewhat more, but the cut in consumption of the other 100 reporters is likely to be even larger, in aggregate.
If the consumption of the 101 working people declines, then one of two things could happen. First some of that consumption might be directly transferred to the poor. That might occur because the rich have a higher propensity to give to charity, or face higher marginal tax rates—giving the government more money to redistribute. But in a sense the exact mechanism doesn’t matter, all that matters is whether the 101 working people consume less in aggregate.
A second possibility is that the lower consumption of working people leads to more investment. At first glance that might not seem to help the poor. In fact it does. The poor sacrifice nothing to boost investment in this case, but gain from living in a more productive society for the same reason that you’d rather be a poor person in Switzerland than in Uzbekistan. Even people with no jobs have a much higher living standard in rich countries than in poor countries. One implication of this is that poor people with no jobs might be skeptical of socialist candidates who threaten to “kill the goose . . . “, and lean more toward “left neoliberals”, those who favor a highly productive market economy combined with redistribution to the poor. And I’ve seen some polling results to support that claim.
If my hypothesis about inequality leading to less consumption by workers is accurate, you might also see substack putting downward pressure on interest rates.
I’m a proponent of the “rational expectations hypothesis”, which is often said to imply that the agents in the economy understand the underlying model. (That’s not actually the implication of ratex, but let’s go with the idea for a moment.) Since my toy model assumes that one journalist is especially talented, then he should understand what I am saying here. In that case, he’d also be a “left-neoliberal”, for exactly the same reasons that the poor in this economy hold that perspective. He would favor capitalism plus redistribution. A big goose, with the golden eggs being redistributed.
You might argue that someone making $1,100,000/year should oppose redistribution. But this journalist is likely to be an idealistic utilitarian. Why else would someone that talented take a lousy journalism job paying $100,000/year when he could have worked on Wall Street? No, money is not his primary motivation. (In any case, even if he weren’t idealistic, there’d be no cost in pretending to be, and a big benefit.)
This post might seem rather abstract and unrealistic, but I’m quite serious about the ideas. Bill Gates earned more than $100 billion from middle class consumers of Windows, and plans to redistribute almost all of that wealth to the world’s poor, as well as other charitable causes.
PS. Substack might slightly boost total GDP, but that strengthens my argument in this post.
PPS. Another implication of this post is that (nationalistic) progressives will huff and puff about the “obscene” profits earned by companies that rely on intellectual capital, but they won’t try to do anything to make the industry less profitable (before taxes.) That’s because US companies dominate these industries at a global level. The profits earned overseas on films like “Dune” can be taxed and redistributed to Americans.
Sep 17 2021 at 9:20am
And foreign countries impose a tax of sorts on American IP businesses by turning a blind eye to piracy (Yulia Timoshenko, former Ukrainian PM, made her initial fortune in pirated DVDs), but that surplus cannot be easily redistributed.
Sep 17 2021 at 10:47am
Good post. One other aspect of this scenario deserves attention: The highly productive journalist would almost certainly become much more productive when he/she started making 11x what he/she was making before substack . The journalist would become more productive directly by responding to the increased incentives to make more good stuff and also indirectly by using some of that money to buy services that would free up more time, some of which could then be re-allocated towards the productive journalism.
I do get that the purpose of this post is to make a more narrow point about the material standard of living of the poor in advanced economies – thus the stipulation about fixed GDP. Not every post should be comprehensive. Just pointing out that, also, GDP probably goes up in this substack scenario.
Sep 17 2021 at 11:36am
That is a great point that I would not have thought of.
Sep 17 2021 at 12:17pm
Not just the poor.
Some middle class guy in an unrelated field also benefits. The increased investment makes his costs decrease and/or creates job opportunities that increase his salary.
Sep 17 2021 at 1:37pm
It is going to be interesting to see how Substack evolves. I have two subscriptions I pay for from established writers who I have read for many years and to me are known quantities and have good content. This seems about right to me and getting more content will just suck time away from the day.
Sep 17 2021 at 2:07pm
In a world of self-curated content and plethora of de-centralized content providers, the limited time of the reader is essential to consider.
For example, I have subscribed to the free versions of many substacks, but I have not yet seen the value of paying for more content from any one of them. IMHO, the whole reader use-case for substack consists in the ability to gather a wide range of independant voices – an advantage that increases with the number of subscriptions. But I only have so much time to read. Paying for more content from a few providers, which commits me to spending a higher proportion of my time on those few providers, therefore limits my ability to take advantage of the viewpoint diversity that makes substack so worthwhile.
The end outcome, then, is that I often prefer the conciseness of the free versions to the content volume of the paid versions anyway. That is, even if both the abbreviated and the full version were free, I would very often chose the abbreviated version. Heck, I might even pay a (small) amount for the abbreviated version over the longer version. This seems like a rough position for content providers, then, who are trying to charge for the longer versions.
It will be interesting to see how substack providers figure out the productization of their content over the long term.
Sep 17 2021 at 3:29pm
Scott appears to be accepting the labor theory of value in his example. If the enterprising journalist can generate $1.1M, he/she must have done _something_ to make his/her content more valuable. Thus, his productivity did in fact increase, somehow.
Sep 17 2021 at 4:39pm
100 journalists are also going to be on public assistance if they can’t find something more productive to do than continue to be journalists who make 10k a year
Sep 17 2021 at 6:04pm
Where did that come from? He suggested that they would be cut by $10,00.00 a year, not to $10,000.00 a year. They are still at $90,000.00 a year.
Sep 17 2021 at 10:46pm
Ah I misread. Although they should be at $91k ($10.1m-$1m is 9.1m).
Sep 18 2021 at 12:48pm
Wrong again. 10.1 million minus 1.1 million is 9 million.
Sep 18 2021 at 12:24am
So why should the 100 reporters who take a pay cut be happy about this? Why shouldn’t they (being the majority of voters in this 121 person economy/nation) just vote to tax the bejesus out of the 1%er? I would think that you might need Chinese levels of improvement in material standards of living to convince people that it is true that “some people will get rich first”, as opposed to a Luke 12:48 economy?
It seems like a tough sell, even if it is true, especially for countries that are already developed and in which the benefits of increased inequality are likely to be difficult to discern in the course of ordinary daily life.
Thomas Lee Hutcheson
Sep 18 2021 at 9:25am
High marginal rates of taxation of income (or even better of consumption) is the political economy way to make extreme before tax inequality palatable.
Sep 18 2021 at 12:49pm
We all benefit from inequality, which is a spur to wealth creation.
Sep 18 2021 at 4:44pm
Scott, what’s the mechanism from inequaltiy -> wealth creation? Is it greater investment because the wealthy consume a smaller portion of their income? Or is it incentives? I.e. If you can’t get rich (thus creating inequality), you won’t try.
Sep 19 2021 at 1:02pm
Sep 20 2021 at 9:25am
Both, I would think. Although even the investment is due to incentives, so yeah, it all comes back to incentives.
Thomas Lee Hutcheson
Sep 18 2021 at 9:08am
This makes sense to me and the implications I draw is that it is a good idea to carry out reforms that raise productivity and tax some of the increase for redistribution. Things like
1) cutting taxes on business and making up (more than making up if there is structural deficit) with progressive taxes on personal consumption.
2) taxing net emissions of CO2 and redistributing the revenue
3) shifting from a tax on wages to a VAT for financing pensions and subsidizing medical insurance
4) returning to multi-lateral reductions in trade restrictions but focusing our ask on reduction in restriction on US exports rather than enforcement on US trademarks.
Sep 20 2021 at 9:27am
You shifted to a consumption tax in #1 and you want to add another consumption tax in #3? Why two separate ones, that makes no sense?
Plus, just say no to hidden taxation.
Sep 18 2021 at 6:38pm
I reckon that your toy model is very vague on the amount of redistribution the poor get. But i think you presume three factions: The poor, the ~100k journalists, the ~1M journalist. Does inequality increase in the whole society (in every applicable inequality measure) or does it only increase in the journalist subgroups ? I imagine this would be quite important to verify it empirically. A second point is about Bill Gates redistributing his wealth. Doing so won’t make Microsoft go away. So the damage is done and lasting :-). Power matters.
Sep 19 2021 at 3:33am
Your analysis is a bit too optimistic about voting and politics.
Conapre the Myth of the Rational Voter.
Sep 19 2021 at 1:02pm
Which specific claim is wrong?
Thomas Lee Hutcheson
Sep 19 2021 at 6:58am
Is the point of the model just that an increase in inequality that leaves total income the same can be beneficial to “all” if aggregate savings and investment increases just as if there were an increase in taxation and investment? This sounds just like the old “growth” models of the ’50’s and ’60’s.
Sep 19 2021 at 7:46am
I agree with everything except one little wrinkle in this, which is the idea that our putative journalist’s “quality” can be judge by how well she does when she moves onto Substack. I don’t think that the fact she does better on Substack proves that she is “good,” (still less that she was always better than her colleagues back when they all worked at the Daily Times). It just shows that she’s found a position that works really well for her.
But I certainly agree that on average, this kind of change is good for the economy, and that the inequality it brings is… not bad.
(Also, Substack is great)
Sep 19 2021 at 8:59pm
Technology can make markets more unequal by expanding the size of markets as well, in a way that’s actually Pareto efficient. I imagine with substack there are now more journalists (depending on how you define the term) than there used to be. They may make very little money, but they be happier making 40k a year as a mildly successful substacker than 50k a year at some boring job they hate.
This reminds me of an (IMO, bad) argument Matt Stoller made against YouTube. It used to be that only a few millionaires made music and we were stuck listening to those few millionaires. Now, there are still a few millionaires, but there are also a ton of garage bands who achieve moderate success broadcasting their music to niche audiences on YouTube or other new media. If you look at the income distribution among musicians, it may be more unequal, with a lot more paupers, but that’s not just because greater competition enriched the very best, it’s also because it made it much easier to make a living by appealing to a niche audience. Some trades used to be such that, if you weren’t good enough to get hired by a major record company or a newspaper, you couldn’t be in that trade. Very little ground between ‘good enough to be in the big leagues’ and ‘find another job.’ That middle ground has grown for many such professions, which seems like a good thing, even if the Gini coefficient in those professions higher.
Grand Rapids Mike
Sep 20 2021 at 9:36am
Interesting. If you look at Major league Baseball current contract with the Players union it in a way mirrors you post. For 6 years MLB players are not allowed to be free agents, but their salary can increase thru arbitration. After 6 years that they can earn as much as the market will allow, resulting in some very productive players getting mega contracts. One interesting feature of this contract structure is reduction of average player time as a MLB player. So the huge rewards go to the few mega productive players, while the average or below average have a reduced playing lifespan.
Also of interest is that the MLB Players union have done nothing to increase salaries of minor league players, who in general make minimum wages except for those drafted in early rounds for 1 time bonuses.
Sep 20 2021 at 11:37am
As unions go, the MLB is one of the best. Not perfect, but a good model for other unions to consider following.
My biggest criticism of them is their refusal to expand to cover all professional baseball players, as you point out.
Sep 20 2021 at 10:54am
We don’t need Substack for this thought experiment, do we? Haven’t the labor markets for artists, novelists, musicians, actors, and athletes always worked like this (and to a greater extent)? Even for journalists, this doesn’t seem to be a big change. T There have been highly-paid, syndicated columnists for a century at least. How much did H L Mencken earn compared to the average journalist?
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