Against the Grain: Silicon Valley, Steve Jobs and the economics behind the Top One Per Cent

 
Paul Ormerod
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BORIS Johnson has got into trouble for his provocative argument 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 the headlines by attacking the top 1 per cent, criticising a concentration of wealth and income among a small proportion of the population.

The summer 2013 edition of the top US Journal of Economic Perspectives focuses specifically on this “Top 1 Per Cent”. It is written almost exclusively in English rather than maths, and top economists debate a range of intriguing questions.

Gregory Mankiw of Harvard, for instance, has a piece simply entitled 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, he suggests. 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 and 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 compared to 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 twentieth century. In Europe, it looks much more like an L-shape. There has been some increase in recent decades, but the rise is small. The authors conclude that specific institutional factors must be responsible, since all the developed countries have faced the same global economic environment.

So what is happening? 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 Anglo-Saxon economies, many “brain workers” have been practising socialism in the most unlikely of settings. In Silicon Valley, for example, almost all the value of high-tech startups 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. Many vilify bankers, however, because they wrongly assume their success is not. 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.

Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Why Most Things Fail: Evolution, Extinction and Economics.

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