Is equality better for economy? or for you?
In today's world, we see inequality almost everywhere in the economy. Is this the result of years of economical experiments and evolution, or it is all wrong? Let's explore what math shows us.
Introduction
In today’s world, almost everywhere we look is filled with inequality. There’s
Inequality in access to basic needs such as food, clothes, medicine, sanitation, etc.
Income or wealth inequality (obviously).
Gender and racial inequality (or stereotyping).
and possibly many more.
However, with technological progress, one such inequality that was very much prevalent before but is now reduced is the “inequality in skillsets”. Now, anyone with access to a smartphone and the internet can “google” to learn about new skills, or use “chatGPT” or other smart tools to gain new knowledges about skillsets they lack.
Many believe that this is a “start”. Reducing inequality in skills would make the world a better place. You can see part of this is in the hype that
Many high school students are now taking up computer science and related subjects as their major in college, with the hope of “ease” of getting into a “prestigious” IT job at a software company.
Many colleges have started offering “data science” courses. Private tutors are also selling the idea that “data science” skills are in demand in the market, and taking such a course will boost the students to get a job with a handsome salary.
Are we heading towards a “good” or “bad” future with this hype? Let’s try to perform a small-scale simulation to see how it would turn out.
The Basic Setup
To gain a perspective of what a future with less inequality in skills would look like, we consider a hypothetical world.
In this world, there are 1000 people only. Each person has one of five basic needs (let’s call them N1, N2, … N5), and also have an affinity towards some of these 5 skills (let’s call them S1, S2, S3, S4 and S5). Each of these skills is disjoint, i.e., learning skill SA does not help to gain skill SB. Each of the skills also provides a value that can solve one kind of need, for example, a person with skill S1 can solve another person’s need of N1, a person with skill S2 can solve another person’s need of N2, and so on.
Note: If you’re a movie geek, our setup is similar to the world of the Divergent series.
Each person, obviously, is born with an affinity towards some skills, given by probability distributions over the skill sets. For example, a person with an affinity of 20% for every skill is truly the “jack of all trades”, she does every skill equally well, but is not an “expert” at anything at all. On the other hand, to meet the needs, each person can choose to spend her own time doing the work or can outsource it to someone else for a “reasonable” price.
How is the price determined?
Adam Smith, the founder of modern capitalism and economic theory, says that a “price” is established by two major forces acting against each other, namely the supply and the demand.
The demand curve refers to the quantity of a good or service that the market needs at a specific price point. As the price increases, the demand will decrease, resulting in a downward-sloped curve. For example, there will be more number of people wanting to buy an iPhone at 60,000 rupees than the same iPhone at 80,000 rupees.
The supply curve, on the other hand, refers to the quantity of a good or service that the market produces at a specific price point. The supply curve is generally upward-sloped, as with increase in price, the producers will try to produce more to gain more revenue.
This means, the demand curve and the supply curve intersect each other at a specific price point, say 75000 rupees for the iPhone. Now, if the iPhone is priced at 80000 rupees, then there will be more supply than demand, so some iPhones will not be sold. This will pressurize the producers to possibly lower the prices, and it will come down towards 75000. On the other hand, if the iPhone is priced at 70000 rupees, there will be more demand than supply. Hence, there will be some potential customers left, to whom, the producer can sell the iPhone at a possibly higher price. Hence, the intersection point, 75000 rupees becomes a “reasonable” price for the iPhone.
The “reasonable” price for selling your skill will also be determined in the same way of the supply and demand curve.
How do we get the supply and demand curves?
Let us try to explore now how we can get the supply and demand curves for our specific hypothetical world.
Let’s assume that if a person is 100% skilled at S1, then they can complete the job to solve for need N1 (remember that need N1 requires skill S1 to solve) in one hour. If a person is 0% skilled, it takes them a full day of 24 hours. For other values in between, the time required is determined by a simple unitary method.
Now suppose you are a person in this world, and you are 50% skilled at S1. This means, you require 12.5 hours to meet your own need N1. Since time is “valuable”, and everyone got the same amount of it to begin with, let’s assume that everyone values their time of each hour at $1.
This means, you will be willing to pay up to $12.5 for someone to solve your need of N1.
This is because, let’s say another person says that he charges $12 to meet your need N1. This means, you save up twelve hour's and 30 minutes worth of time, which you can use to do something else valued at $12.5, and you need to only pay $11, with a profit of $1.5. But if the person says he charges $13 for the same, you will probably do it yourself since it is cheaper.
Therefore, to find the demand curve:
Find the proportion of people at a specific price point, who are willing to pay that much money to meet the respective need. Or find the proportion of people whose respective skills are low enough that they need to spend at least that “price” amount of hours to meet their own needs.
Now, let’s look at the other side of the equation: how to find the supply curve? Note that, since you are 50% skilled at S1 and required to spend 12.5 hours of meet need N1, hence you will charge at least $12.5 ($1 for each hour) if you do it for someone else. However, if you get paid $14 instead, it is great! If only $10, you will not be so interested anymore, since it is not worth your time. Therefore, to find the supply curve:
Find the proportion of people at a specific price point, who are spending less than the “price” amount of hours to solve for the specific need.
One more thing is that, if you are skilled enough to solve a need in 4 hours, and you are given $12, then at that price, you can solve the need for 2 more people (totaling 3 persons, 4 hours for each person’s need). Hence at $12, such a skilled person will supply 3 units worth of services.
Let’s do the math now!
Now that we have the basic setup ready, let’s get ready to simulate this.
Scenario 1: Where everyone is a “jack of all trades”
For the first setup, we will consider that all 1000 people in the world are equally skilled at every 5 skills, there is no specialization or concentration of knowledge. So, every person will have a 20% (+ or - some random fluctuation) affinity towards every skill. The following R code simulates the demand and the supply curve for such a world.
The above code:
Simulates 1000 people each with affinity close to 20% towards every skill.
Computes the per-hour value for each person for each skill type.
For a range of price points, calculate the supply and the demand curve.
What the above shows is that, the market forces drive the price to be equal to $19, and approximately 500 units of hours are traded to meet the demands. It also means, there remains a significant part of the population who does not receive any help, and must use their little general skill level to meet their own needs.
Scenario 2: Everyone is a “master of something, bad at everything else”
Let’s consider an opposite world. Where everyone is a master of only a single skill, and has almost no affinity for something else. It’s like the communities of the world of the Divergent series. Each community is specialized at a specific skill, and requires the help of other communities for their other needs.
In the following, we simulate this using R. We assume that the communities are equal in size, the first 200 people are skilled at only S1. This we simulate by taking skill 1’s affinity close to 96%, while the other four skills get an affinity of 1% (with some small random fluctuations).
The resulting demand and supply curve for need 1 looks like:
As you can see now, the matching price comes down to close to $7.5, and the amount of hours traded is close to 800 hours. This means, in this case, people would generally get more skilled workers at a cheaper price, and more people’s needs are taken care of.
Note: If you carefully think about this, the 200 people who are not getting served in this economy are the specialists themselves, to whom, it does not make sense to “outsource” the solution to need N1, as their skills S1 are sufficient to cover it.
So, what does it tell us?
When the world is filled with specialists who are the “masters” of their own crafts but suck at everything else, if the market is free, then it leads to a better economy for everyone living in it. The services will be cheaper, more people can afford it, and also more people will get their needs met. On the contrary, if you have a world filled with people who have access to learning everything all the time, the world gets filled with generalists, and it will lead to higher prices, and a lesser amount of needs fulfilled for the people in that world.
This is possibly very difficult to believe! Right?
Mostly our general perception will tell that in a world filled with specialists, they will jack up the prices for their services so much, just because there are no better alternatives; that the services will become unaffordable. However, there are two often neglected forces that work in the other direction.
Because they are specialists and have a finite amount of time, their affinity for other kinds of skills must be lacking in general. This means, these specialist needs to rely on another part of the community to help them satisfy their other needs. Hence, they know that if they jack up the prices, the same thing can happen to them once they want another service from a specialist.
Because they are specialists, their superb skills allow them to complete tasks faster or more efficiently. As a result, using the same amount of time, they are able to supply significantly more amount of services compared to an unskilled person. Hence, with an increased supply of labour, the prices come down.
As an analogy, think of why a piece of art by a famous painter is so pricey? Because it is “rare”, and it has a limited supply.
Similarly, think of why a bottle of water (while it has so much value as it is key to the sustainability of life itself) is so cheap? Because it has potentially an “unlimited” supply (Just forget the environmental aspects for a moment!)
So, what do we do?
As the above simulation shows, a society full of extreme inequality in terms of skills, may lead to a better and affordable economy for everyone. This means, we need this heterogeneity of skills if we truly want to achieve equal access to resources and wealth.
On the other hand, is the society of generalists truly bad?
Access to all kinds of skills and information helps people to become more aware of other needs, as a result, the possibility of fraud and corruption reduces.
Technological progress requires money, money made is through the trades. If the prices are higher in the society of generalists, may be it will pave an easier path of technological progress. On another thought, technological progress is made by specialists and a society full of generalists will possibly be too content to have novel thoughts to make the breakthroughs.
So maybe, it makes sense for the young students (and their parents) to think about it for a moment, before jumping into getting all kinds of skills through online courses, a random 5-hour YouTube video or stepping into an overhyped job opportunity with the thought of excessive demand of specific skills. Just think,
If my action is going to lead the world to a better future or worse?
Or am I just taking this action as it benefits me in the short run?
Your 5 seconds of thought before taking the action, can change the world!
I want to end this with a quote by Max Roser,
The world is awful. The world is much better. The world can be much better. It is wrong to think these three statements contradict each other. We need to see that they are all true to see that a better world is possible.
Thank you very much for being a valued reader! 🙏🏽
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Until next time.