I would like to take the conversation in different direction. Earlier this year, I, like Richard, had a chance to read Ed’s review of Tom Friedman’s book where he, like Richard, worried about the possibilities of extreme income inequality in a post-industrial, creative class world. From what I can tell, both Richard and Ed are assuming that this is the market outcome and we just have to live with it.
In reality, we are always willing to restrain the market when the situation suits us. Consider professional sports. A free market league would allow any team spend what it wanted with predictable results: with rare exceptions, only big city/big market teams would be competitive and the league would be a joke.
To avoid this result, the NBA, the NFL, and most recently the NHL have adopted salary caps and the leagues utilize some degree of revenue sharing (e.g. television revenue) as well.
My colleague Peter Temin and I suspect that something very much like this described the U.S. economy in the 1950s and 1960s. The translation of that period’s rapid productivity gains into broad-based income gains was not a pure market outcome. Rather, it was a market tempered by a number of institutions. While many of those institutions do not exist today, they will return if public sentiment is strong enough.
If the U.S. were the size of Monaco, we would, of course, have to live with the market and the fact that the biggest creators would leave town. But the size of our markets gives us a certain ability to extract rents and my guess is that rent extraction will become one brake against unbridled inequality.