The rich owe it to themselves to become obscenely rich — by any means necessary.

Apologists for the growing level of income inequality in America defend this trend as inescapable, irrelevant or both. Relatively speaking, the rich are getting richer — indeed, exceedingly so. But what of it?  That’s their business. (See this paper by the Cato Institute’s Will Wilkinson for a compelling, articulate example of one such apology.)

Though concepts like “skill-biased technical change” and “increasing returns to education” are often invoked, the argument for being indifferent to income inequality tends to be rooted in the age-old defense of laissez-faire capitalism: Self-interested actors we are, we inevitably produce social good as a kind of by-product; further, if we intentionally try to improve society directly with state intervention, we’ll produce perverse unintended outcomes that leave everyone worse off. (State regulation = ineptitude; entrepreneurial innovation = genius.)

Unimpeded, most of capitalism’s arrangements, the argument goes, can be seen as win-win. Sometimes Pareto optimality is invoked, which some equate with social justice plain and simple. Pareto optimality is an equilibrium in which no one can be made better off without making someone else worse off. The idea is that deliberately redistributing wealth or utility interferes with market outcomes (which are always approximating that equilibrium) that have rewarded economic actors according to the value of their contributions. The upshot: the rich have earned their place in the income distribution, or at least there is no clear basis from which to argue they haven’t. The meaning of “merit” can prove sufficiently flexible.

And further, it is supposedly short-sighted to regard most aspects of economic growth as a zero-sum game — rising tides raise all the boats, productivity growth benefits society as a whole and raises general living standards (i.e. less inequality in goods consumption), even if the monetary gains from that growth are not meted out evenly between labor and capital. Rich and poor alike, for instance, can afford as much of the same cheap entertainment as they want, so income in excess of that sort of minimal expenditure isn’t especially significant, right? Plus, the wealthy are spending more for their chosen bundle of goods and services, while thanks to Wal-Mart, the poor are paying less for theirs. So while income inequality has grown, experientially, in “real” terms, the classes have allegedly come closer together. Never mind that few who enjoy the rich bundle of services would be eager to swap it for what the poor can secure.

The baubles and gee-gaws of contemporary consumerism serve to distract us from what most of us don’t have: power, autonomy, self-determination, security, leisure, class mobility, meaningful work, and the opportunity to assure a wider scope of opportunities for our children.

Obviously, the kind of “optimality” betokened by supposed convergence in consumption equality will seem more like justice to those who are already well-off in the given dispensation, the top tenth of a percentile, the power elite that Wright Mills described in their nascence in the 1950s. The rest of us, often in debt and insecure in our job prospects, with little to expect from the fraying social safety net, will wonder about the fairness of a system that lets the initial advantages of some be leveraged to produce even greater income inequality. The game may come to seem so loaded that the losers will give up trying, which may take the precise form of their devoting resources to consumption and consumer goods rather than spending on education or other means for improving earning potential. As Mike Konczal noted, “it may be better to just sit back and buy the Ikea refrigerator instead of trying to invest that money in oneself to move into the middle-class,” especially if maintaining middle class status entails diving into debt to keep up and taking on bourgeois prejudices and insecurities.

The point is that there is more to inequality than what goods we can lay our hands on: the baubles and gee-gaws of contemporary consumerism serve to distract us from what most of us don’t have: power, autonomy, self-determination, security, leisure, class mobility, meaningful work, and the opportunity to assure a wider scope of opportunities for our children. Income matters for those things too. (Though if you accept Wilkinson’s argument, flawed institutions TK are the real problem. It would seem, however, that income converted into political influence would still play a role in the continuing dysfunction.)

Shakedown street: financial sector's instruments a capital offense.

But before we start playing Robin Hood, shouldn’t we consider whether there is a trickle-down effect in … er … effect, one in which frivolous competitions and conspicuous consumption among the rich create compensatory opportunities for the lower orders? It’s possible that while the wealthy struggle for existentially meaningless badges of distinction, they create real work and benefits for everyone else in a more natural and freedom-respecting fashion than the state expropriating their excess funds and commanding how it should be spent. Wilkinson, in his paper, cites John Nye, who argues that “the spending by the wealthy on many positional goods acts as a curious sort of natural taxation. The richest (or most ambitious) must work harder and pay more for virtually the same goods as yesteryear while their productive investments (necessary to stay on top of the income distribution) benefit the entire economy.”

That assumes, however, that the “productive investments” actually confer social benefits. Wilkinson notes hopefully that “allowing profit-seeking innovators to compete on price and quality, and thereby to put better and more affordable vital services within reach of the poor, might make some people really, disgustingly rich. And it might also make a healthier, better-educated, more egalitarian America.” But the problem with the recent bubble economy that so enriched the upper percentiles is that (pace Daniel Gross) the financial innovation it relied upon was, by and large, socially useless. In his New York Times column on Sunday, Paul Krugman supplied a few illustrative examples: He examined the some of the recent successes for Wall Street’s denizens, questioning whether their proprietary trading practices and purely speculative activities indeed merit rewards. “Even before the crisis and the bailouts, many financial-industry high-fliers made fortunes through activities that were worthless if not destructive from a social point of view,” he argues. “And they’re still at it.”

The rich are getting richer for no good reason.

Krugman cites Goldman-Sach’s high-speed trading operation and the commodities speculation of Citibank trader Andrew Hall as examples of using information or procedures not available to the public to profit at its expense. Though the wealthy may face “natural taxation” through their consumption activities, Krugman argues that at least some of them impose a de facto tax on the rest of us through their productivity:

For example, high-frequency trading probably degrades the stock market’s function, because it’s a kind of tax on investors who lack access to those superfast computers — which means that the money Goldman spends on those computers has a negative effect on national wealth. As the great Stanford economist Kenneth Arrow put it in 1973, speculation based on private information imposes a “double social loss”: it uses up resources and undermines markets.

Krugman also cites a 1971 paper by Jack Hirshleifer. In it, Hirschleifer demonstrates that incentives exist for using resources to generate private information for profitable ends, without “socially useful activity” ever taking place — an insight that disturbs the free-market truism that profits are the mark of socially necessary endeavor. The panoply of hedge funds and new financial instruments created during the recent boom to deal with the crisis in asset management (how can big piles of money call forth bigger piles of money once the money has outstripped the productive capability of the economy it’s attached to) suggests those incentives have been acted upon. (They may also have wasted resources that may have benefited society on unnecessary price discovery. Hirshleifer: “With inhomogeneous beliefs, individuals with differing opinions will tend each to believe that revelation of new information will favor his own speculative commitments. Hence a group of such individuals might willingly cooperate in making expenditures far in excess of the social value of the information to be acquired.”)

So Wilkinson’s “profit-seeking innovators” may just turn out to be predators, exploiting their advantages in resources to develop ways of protecting their interests at the expense of the general well-being. This underscores the reason that increasing income inequality is troubling. It suggests that those who are rich are channeling their riches into expanding their advantage through this sort of socially destructive innovation. That is to say, the rich are getting richer for no good reason.

Rob would love to hear from you. Drop him a line at horninggenbub [at] gmail [dot] com.