THE ANGLO MODEL:

An Upside To Inequality?: By paying for performance, companies reward the people who really produce (James Sherk, 7/09/07, Business Week)

Is the American Dream dead? Some seem to think so. They point to studies showing that income for the rich is growing faster than for the poor. In this view, we've become a class society where a minority lives in opulence while most struggle with little hope of getting rich themselves. But new research suggests that greater inequality may be both fair and beneficial.

According to a study by the National Bureau of Economic Research, much of the increased inequality in the past generation—including almost all the gains among top earners—occurred because companies upped their use of performance pay. That is, inequality has risen for a good reason: The economy is increasingly rewarding hard work.

Of itself, inequality is neither positive nor negative. What matters is why incomes are unequal. In a class-based society where a few families control wealth through inheritance or coercive means, rising inequality does indeed cause harm. Higher inequality, in 17th century England or in Saudi Arabia today, means increased hardship for most workers.

However, in a society where most wealth is earned, some greater inequality can benefit most citizens. Consider Google Inc. (GOOG )founders Larry Page and Sergey Brin, who each worth $16 billion, thanks to their stake in the search giant. Their success has made America a demonstrably less equal country—who wouldn't want to swap paychecks with them?—yet most people are better off for it. Google's services allow tens of millions of Americans to find what they want fast on the Internet and use a quality e-mail service free of charge. Page and Brin got rich, and thus increased inequality, by improving the lives of others.

That's why it's dangerous for government to intervene when hard work and innovation raise inequality. Instead, policymakers ought to examine what caused inequality before concluding it ought to be rectified.

Liberty requires that every man be treated equally before the law, not on payday.

Posted by Orrin Judd at July 8, 2007 7:44 AM