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Justin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.
Email Tweet This Post to Facebook Share on LinkedIn PrintMartin Sorrell, the CEO of advertising and public relations giant WPP, was just at the Sundance Film Festival, where he saw a documentary called The Flaw. The title comes from Alan Greenspan's now-famous admission to a Congressional committee in 2008 — "I have found a flaw in the model that defines how the world works" — and as best I can tell it posits that extreme income inequality was a precipitating factor behind the financial crisis.
It certainly left an impression on Sorrell. "Wealthy people invest in financial assets; they create asset bubbles," he said this morning. When wealth is distributed more equally, he went on, you get more sustainable growth.
Sorrell is a wealthy man, and he said all this while at the front of the room at one of the opening events of the World Economic Forum's annual meeting in Davos, one of the world's great gatherings of those near the top of the wealth pyramid. It seemed like a significant moment.
Jim Turley, the CEO of Ernst & Young, immediately went and ruined it by changing the subject to the decline in business-bashing in the U.S. But then Zhu Min, a top IMF official and former central banker in China, brought it up again: "Increasing inequality is the biggest challenge the economy faces for the whole world — not just advanced economies," he said. "We cannot let the income disparities increase further."
Time's Michael Elliott, who was moderating the session, then cited Chrystia Freeland's Atlantic cover story on "The Rise of the New Global Elite" and Michael Porter and Mark Kramer's HBR cover story on "Creating Shared Value" as evidence of a new mood. "I have a feeling that inequality is going to one of the key words of Davos this year," he concluded.
Well, I don't know about that. Elliott's words inspired me to search the Davos program on the keyword "inequality." No results. That doesn't mean the subject won't be talked about here — Arianna Huffington, who just wrote a book about it, will surely make some noise. But it's hard to imagine major progress on the subject of economic inequality being made over cocktails at ski resort.
This underscores a bigger dilemma facing the business community. The big rise in economic inequality over the past four decades is partly the result of impersonal economic forces — technological change, mostly — but political decisions have played a crucial role as well. Financial market deregulation, tax-code changes, and all manner of other policy choices in the have promoted inequality in the U.S., as Jacob S. Hacker and Paul Pierson demonstrated pretty convincingly in their 2010 book Winner-Take-All Politics. And similar moves were made in much of the rest of the world.
Who pushed for these changes? Well, businesspeople, of course. Often for very good reason: to spur economic growth, to increase a particular country's economic competitiveness, even to promote personal freedom in the face of a stifling government. But pendulums always swing too far. Economist Mark Thoma put it well earlier this month: There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive — the most unequal distribution of income imaginable — will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.
Assuming we're near or have passed that growth-maximizing level of inequality, in the U.S. at least, the business community as a whole would be better off if the trend toward inequality slowed or reversed. But business people are accustomed to pushing for policies that tend to increase inequality, and are loathe to reverse their stances on tax rates, free trade, and free financial markets. As a result, businesspeople who worry about inequality have over the years tended to focus on improving educational opportunities. But you can't say those efforts have made a noticeable dent in the inequality trend.
Business folks would seem to be stuck. They need a more equal distribution of wealth and income to continue thriving. But it doesn't seem to be in any businessperson's immediate interest — and in many cases contradicts deeply held beliefs — to make the sort of decisions or support the sorts of government policies that might halt the trend toward more inequality.
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It certainly left an impression on Sorrell. "Wealthy people invest in financial assets; they create asset bubbles," he said this morning. When wealth is distributed more equally, he went on, you get more sustainable growth.
Sorrell is a wealthy man, and he said all this while at the front of the room at one of the opening events of the World Economic Forum's annual meeting in Davos, one of the world's great gatherings of those near the top of the wealth pyramid. It seemed like a significant moment.
Jim Turley, the CEO of Ernst & Young, immediately went and ruined it by changing the subject to the decline in business-bashing in the U.S. But then Zhu Min, a top IMF official and former central banker in China, brought it up again: "Increasing inequality is the biggest challenge the economy faces for the whole world — not just advanced economies," he said. "We cannot let the income disparities increase further."
Time's Michael Elliott, who was moderating the session, then cited Chrystia Freeland's Atlantic cover story on "The Rise of the New Global Elite" and Michael Porter and Mark Kramer's HBR cover story on "Creating Shared Value" as evidence of a new mood. "I have a feeling that inequality is going to one of the key words of Davos this year," he concluded.
Well, I don't know about that. Elliott's words inspired me to search the Davos program on the keyword "inequality." No results. That doesn't mean the subject won't be talked about here — Arianna Huffington, who just wrote a book about it, will surely make some noise. But it's hard to imagine major progress on the subject of economic inequality being made over cocktails at ski resort.
This underscores a bigger dilemma facing the business community. The big rise in economic inequality over the past four decades is partly the result of impersonal economic forces — technological change, mostly — but political decisions have played a crucial role as well. Financial market deregulation, tax-code changes, and all manner of other policy choices in the have promoted inequality in the U.S., as Jacob S. Hacker and Paul Pierson demonstrated pretty convincingly in their 2010 book Winner-Take-All Politics. And similar moves were made in much of the rest of the world.
Who pushed for these changes? Well, businesspeople, of course. Often for very good reason: to spur economic growth, to increase a particular country's economic competitiveness, even to promote personal freedom in the face of a stifling government. But pendulums always swing too far. Economist Mark Thoma put it well earlier this month: There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive — the most unequal distribution of income imaginable — will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.
Assuming we're near or have passed that growth-maximizing level of inequality, in the U.S. at least, the business community as a whole would be better off if the trend toward inequality slowed or reversed. But business people are accustomed to pushing for policies that tend to increase inequality, and are loathe to reverse their stances on tax rates, free trade, and free financial markets. As a result, businesspeople who worry about inequality have over the years tended to focus on improving educational opportunities. But you can't say those efforts have made a noticeable dent in the inequality trend.
Business folks would seem to be stuck. They need a more equal distribution of wealth and income to continue thriving. But it doesn't seem to be in any businessperson's immediate interest — and in many cases contradicts deeply held beliefs — to make the sort of decisions or support the sorts of government policies that might halt the trend toward more inequality.
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var zflag_nid="675"; var zflag_cid="424/414/391"; var zflag_sid="5"; var zflag_width="300"; var zflag_height="250"; var zflag_sz="9"; Recently from Justin Fox So It Turns Out Technology Really Does Empower Us Jan 27 Why Business is Stuck on Income Inequality Jan 26 The Obligatory Pre-Davos Post! Jan 25 The Real Secret to Thriving Amid Disruptive Innovation Jan 24 Gene Sperling and Wall Street's Giant Sucking Sound Jan 7 Most Read Most Commented From: Last 24 Hours Last 7 Days Last 30 Days All Most Popular » STAY CONNECTED TO HBR Facebook Twitter RSSMartin Sorrell, the CEO of advertising and public relations giant WPP, was just at the Sundance Film Festival, where he saw a documentary called The Flaw. The title comes from Alan Greenspan's now-famous admission to a Congressional committee in 2008 — "I have found a flaw in the model that defines how the world works" — and as best I can tell it posits that extreme income inequality was a precipitating factor behind the financial crisis.
It certainly left an impression on Sorrell. "Wealthy people invest in financial assets; they create asset bubbles," he said this morning. When wealth is distributed more equally, he went on, you get more sustainable growth.
Sorrell is a wealthy man, and he said all this while at the front of the room at one of the opening events of the World Economic Forum's annual meeting in Davos, one of the world's great gatherings of those near the top of the wealth pyramid. It seemed like a significant moment.
Jim Turley, the CEO of Ernst & Young, immediately went and ruined it by changing the subject to the decline in business-bashing in the U.S. But then Zhu Min, a top IMF official and former central banker in China, brought it up again: "Increasing inequality is the biggest challenge the economy faces for the whole world — not just advanced economies," he said. "We cannot let the income disparities increase further."
Time's Michael Elliott, who was moderating the session, then cited Chrystia Freeland's Atlantic cover story on "The Rise of the New Global Elite" and Michael Porter and Mark Kramer's HBR cover story on "Creating Shared Value" as evidence of a new mood. "I have a feeling that inequality is going to one of the key words of Davos this year," he concluded.
Well, I don't know about that. Elliott's words inspired me to search the Davos program on the keyword "inequality." No results. That doesn't mean the subject won't be talked about here — Arianna Huffington, who just wrote a book about it, will surely make some noise. But it's hard to imagine major progress on the subject of economic inequality being made over cocktails at ski resort.
This underscores a bigger dilemma facing the business community. The big rise in economic inequality over the past four decades is partly the result of impersonal economic forces — technological change, mostly — but political decisions have played a crucial role as well. Financial market deregulation, tax-code changes, and all manner of other policy choices in the have promoted inequality in the U.S., as Jacob S. Hacker and Paul Pierson demonstrated pretty convincingly in their 2010 book Winner-Take-All Politics. And similar moves were made in much of the rest of the world.
Who pushed for these changes? Well, businesspeople, of course. Often for very good reason: to spur economic growth, to increase a particular country's economic competitiveness, even to promote personal freedom in the face of a stifling government. But pendulums always swing too far. Economist Mark Thoma put it well earlier this month: There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive — the most unequal distribution of income imaginable — will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.
Assuming we're near or have passed that growth-maximizing level of inequality, in the U.S. at least, the business community as a whole would be better off if the trend toward inequality slowed or reversed. But business people are accustomed to pushing for policies that tend to increase inequality, and are loathe to reverse their stances on tax rates, free trade, and free financial markets. As a result, businesspeople who worry about inequality have over the years tended to focus on improving educational opportunities. But you can't say those efforts have made a noticeable dent in the inequality trend.
Business folks would seem to be stuck. They need a more equal distribution of wealth and income to continue thriving. But it doesn't seem to be in any businessperson's immediate interest — and in many cases contradicts deeply held beliefs — to make the sort of decisions or support the sorts of government policies that might halt the trend toward more inequality.
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Martin Sorrell, the CEO of advertising and public relations giant WPP, was just at the Sundance Film Festival, where he saw a documentary called The Flaw. The title comes from Alan Greenspan's now-famous admission to a Congressional committee in 2008 — "I have found a flaw in the model that defines how the world works" — and as best I can tell it posits that extreme income inequality was a precipitating factor behind the financial crisis.
It certainly left an impression on Sorrell. "Wealthy people invest in financial assets; they create asset bubbles," he said this morning. When wealth is distributed more equally, he went on, you get more sustainable growth.
Sorrell is a wealthy man, and he said all this while at the front of the room at one of the opening events of the World Economic Forum's annual meeting in Davos, one of the world's great gatherings of those near the top of the wealth pyramid. It seemed like a significant moment.
Jim Turley, the CEO of Ernst & Young, immediately went and ruined it by changing the subject to the decline in business-bashing in the U.S. But then Zhu Min, a top IMF official and former central banker in China, brought it up again: "Increasing inequality is the biggest challenge the economy faces for the whole world — not just advanced economies," he said. "We cannot let the income disparities increase further."
Time's Michael Elliott, who was moderating the session, then cited Chrystia Freeland's Atlantic cover story on "The Rise of the New Global Elite" and Michael Porter and Mark Kramer's HBR cover story on "Creating Shared Value" as evidence of a new mood. "I have a feeling that inequality is going to one of the key words of Davos this year," he concluded.
Well, I don't know about that. Elliott's words inspired me to search the Davos program on the keyword "inequality." No results. That doesn't mean the subject won't be talked about here — Arianna Huffington, who just wrote a book about it, will surely make some noise. But it's hard to imagine major progress on the subject of economic inequality being made over cocktails at ski resort.
This underscores a bigger dilemma facing the business community. The big rise in economic inequality over the past four decades is partly the result of impersonal economic forces — technological change, mostly — but political decisions have played a crucial role as well. Financial market deregulation, tax-code changes, and all manner of other policy choices in the have promoted inequality in the U.S., as Jacob S. Hacker and Paul Pierson demonstrated pretty convincingly in their 2010 book Winner-Take-All Politics. And similar moves were made in much of the rest of the world.
Who pushed for these changes? Well, businesspeople, of course. Often for very good reason: to spur economic growth, to increase a particular country's economic competitiveness, even to promote personal freedom in the face of a stifling government. But pendulums always swing too far. Economist Mark Thoma put it well earlier this month: There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. When everyone gets an equal share of income, people lose the incentive to try and get ahead of others. We also know that a society where one person has almost everything while everyone else struggles to survive — the most unequal distribution of income imaginable — will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes.
Assuming we're near or have passed that growth-maximizing level of inequality, in the U.S. at least, the business community as a whole would be better off if the trend toward inequality slowed or reversed. But business people are accustomed to pushing for policies that tend to increase inequality, and are loathe to reverse their stances on tax rates, free trade, and free financial markets. As a result, businesspeople who worry about inequality have over the years tended to focus on improving educational opportunities. But you can't say those efforts have made a noticeable dent in the inequality trend.
Business folks would seem to be stuck. They need a more equal distribution of wealth and income to continue thriving. But it doesn't seem to be in any businessperson's immediate interest — and in many cases contradicts deeply held beliefs — to make the sort of decisions or support the sorts of government policies that might halt the trend toward more inequality.
Posting Guidelines We hope the conversations that take place on HBR.org will be energetic, constructive, free-wheeling, and provocative. To make sure we all stay on-topic, all posts will be reviewed by our editors and may be edited for clarity, length, and relevance. We ask that you adhere to the following guidelines.
All postings become the property of Harvard Business School Publishing
The editors
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