The winner takes it all (part two)

Consistently rewarding winners with the ability to keep winning exacerbates social divisions

This article follows on from 'Winner takes all (part one)'

For unto every one that hath shall be given, and he shall have abundance: but from him, that hath not shall be taken away even that which he hath. And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth - Parable of Talents Matthew 25:14–30

The Matthew effect, named after the Bible verse above, suggests that success begets success. Given a certain advantage, the owner of that advantage will be able to compound and leverage that advantage, making their lead that much more unassailable. We see the Matthew effect of accumulated advantage across many facets of society. That is not automatically a bad thing. This is not a jealous rant against high achievers. However, there are negative social implications to the Matthew effect that are worth discussing. That is the point of this follow-on article to 'The winner takes it all (part one)' - to consider what it means for the losers and expand on other areas where the 'winner keeps winning' nature of the economy creates problems. Inherent to this notion is competition - the basis for the market.

Early achievement leads to better economic outcomes that perpetuate

From an early age, children who excel are considered high achievers and receive extra opportunities. That could mean being streamed into classes with other high achievers, scholarships or extension classes to stretch their abilities. High achievers receive public recognition and reinforcement of their achievements giving them the confidence to do more. A report card reading "A+" signals intelligence and is a meaningful credential. Early educational success matters for future earnings so we can't expect that these differences will just balance out. Those without the abilities of high achievers receive a more standard education and limited recognition. While there are initiatives like remedial classes to help those who are left behind, it isn't comparable to the opportunities for the elite.

Early success gives children a massive head start for their adult lives. Success at school supports attendance at top tertiary education providers which further distinguishes people. Higher education is a gamechanger with those who complete higher qualifications earning much more and having lower rates of unemployment, regardless of the economic cycle. Those with high-level qualifications also have a lower probability of long-term unemployment - that's really important in scenarios like a COVID-19 recession. There is a bit of 'correlation, not causation' in this. Not everyone who attends university is destined for greatness (and vice-versa). However, it's fair to say that tertiary education success yields better employment outcomes and higher incomes on average. Better graduate jobs lead to more opportunities and more successful professional careers. The dividend from experience pays off and perpetuates.

Better economic outcomes support continued success for current and future generations. Winners are more likely to date and marry other winners, and raise little future winners. The additional income they have to raise their children provides opportunities that can make the Matthew effect roll across generations. Over the course of someone's personal life, the ability to win and keep winning becomes 'baked in' from a very young age. That doesn't mean success is guaranteed, there is a lot of randomness, but it certainly helps.

None of this is a bad thing automatically, it reflects philosophy around competition, meritocracy and reward. But is it fair?

Catch up is unrealistic when the winners keep winning

Social mobility and equality of opportunity are critical to what constitutes a fair society but if the successful keep getting more successful, catch-up is unrealistic. To be clear, the problem here is not so much with meritocracy as it is with equality of opportunity. It's appropriate to be meritocratic, but opportunities to level the playing field need to be available for all.

The consequence of the Matthew effect is entrenched inequality and poorer outcomes for those with fewer opportunities to learn and earn income. The son of a high-income father is expected to earn about 50% more than a low-income father in the United States, United Kingdom, Vietnam and Italy. Available data is skewed towards men which is problematic, but it clearly illustrates that there is a cycle. Inequality due to parental wealth and income is just one part of the issue - others include different levels of education, classism, racism and health differences, among others. Even if society is meritocratic, it's a pretty hollow meritocracy if people aren't getting a reasonable shot to begin with.

What can we actually do? Welfare, tax, wage and education policies are the usual answers. However, catch up mechanisms are weak compared to those that help winners keep winning

Catch-up mechanisms are weak compared to mechanisms that support continued success. Sure, scholarships and retraining opportunities exist. Government redistribution measures through tax and welfare are also helpful. Tax policy is usually progressive - the rate of tax increases as income grows. Minimum wages help ensure people aren't exploited and address inequality somewhat. However, these measures are weak compared to the economic benefits from, for example, compounding rates of return, risk premiums, elite education and ongoing professional development.

If catch-up measures balanced out the Matthew effect, we wouldn't expect widening inequality in many countries and low social mobility. The Gini Index illustrates this growing inequality nicely. The Gini Index is a measure of inequality based on income distribution, it increases with higher rates of inequality. With complete inequality the index would be 1, suggesting all the wealth is owned by a single person. To illustrate, between 1990 and 2015:

  • In the United States, it increased from 38.2 to 41.5.

  • In China, it increased from 34.9 to 49.5.

  • In India, it increased from 29.7 to 35.2.

  • In New Zealand, it increased from 30.2 to 35.

A simpler to understand measure is the percentage of people living below specified poverty lines. In New Zealand, the proportion of people living on less than 50% of the average income after housing costs has increased from 8% to 16% between 1986 and 2018. Overall, the United Nations (UN) notes that inequality is growing for more than 70% of the global population.

If the economy was more balanced, success wouldn't be so dependent on socio-demographic factors and inequality would be less entrenched. Those at the bottom would have a better chance of reaching the top. We can't just blame markets for this, ineffective government and corruption are also to blame.

Much of what allows winners to keep winning is actually baked into the economic system. Wealth trickles to the top as money makes money. To truly shift the Matthew effect, the economic paradigm would have to radically shift. The mechanisms that allow winners to keep winning would need to be balanced out by the support mechanisms in the economy. That could mean greater investment in education to create similar opportunities for all students, addressing the flow of wealth to the elite (e.g. wealth taxes) and reconsidering how the economy recognises the economic value of labour. How can society retain meritocratic principles while also creating equivalent opportunity?

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© Byte Size Story / Byte Size Economics 2020

A New Zealand based politics and economics blog

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