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Now that we’ve discussed how employees’ skin in the game benefits employers, employees, and consumers, we’ll zoom out and take a look at the role skin in the game plays in building a healthy, wealthy economy.
Taleb argues that wealth earned through skin in the game contributes to society in a healthy way, and that the way to create an ethical and productive economic system is to force top earners to risk their wealth in order to keep it.
In this section, we’ll first redefine economic inequality using skin in the game, distinguishing between two types of wealth and two types of inequality. Then, we’ll examine Taleb’s argument that the free market does the most to reduce economic inequality. Finally, we’ll explain why most opponents of the free market are upper class intellectuals instead of the lower class that would be impacted the most.
Taleb uses the concept of skin in the game to distinguish between two categories of wealthy people: those who built and maintain their wealth through skin in the game, and those who built and maintain their wealth with minimal-to-no risk. Taleb argues that we want more of this first type of wealth and less of the second.
First, let’s discuss wealthy people with skin in the game. These are people who earned money through risky ventures and sacrifice—entrepreneurs, artists, anyone who habitually took risks that eventually paid off. Alternatively, these could be people born into money—kings, heirs—who risked their fortunes, reinvested, and were able to create more wealth.
Importantly, Taleb notes that wealth is not necessarily a zero-sum game. If wealth is correctly invested, it can create more wealth than would have otherwise existed, and distribute some of that wealth to others. Think of Adobe, for example, a company that creates industry-grade creative software (Photoshop, After Effects). By investing wealth in the risky prospect of creating software that people might not want to buy, Adobe enabled millions of its users to create value (appealing graphics, movies with special effects) and earn wealth for themselves (a paycheck for creative work). This new wealth wouldn’t exist without Adobe, and wouldn’t have existed without the wealth of its initial investors. In this way, wealthy people with skin in the game generally use their wealth in ways that better society.
This group of wealthy people isn’t necessarily resented by those poorer than them—on the contrary, they are often admired, and perceived as skilled and hardworking. Beloved actors, famous authors, and bootstrap entrepreneurs are often rich—sometimes outrageously rich—yet they attract adoring audiences. Many would say these people “deserve” their wealth.
In contrast, let’s take a look at wealthy people without skin in the game. These are people who created wealth in ways that don’t contribute value to society—often by taking advantage of others. This group consists of anyone whose income is independent of the value of their work, and as such, is being earned without risk.
Taleb specifically calls out employees in salaried positions that don’t provide value for others, such as predatory gossip bloggers, dishonest lawyers, ineffective government bureaucrats, or corrupt CEOs. Recall that employees are paid for fulfilling job descriptions, and that their work is not necessarily linked to its consequences. A guaranteed salary removes a degree of skin in the game, allowing this second group of people to amass wealth without risking much or generating real value. Taleb states that this second group of people are more resented by the general public, and rightfully so.
These two opposing types of wealth are vital to understanding economic inequality—one kind of wealth is relatively healthy for society, while the other is not.
Most People Don’t Want Equality
Studies have confirmed Taleb’s assertion that most people harbor no resentment toward wealthy people with skin in the game. On average, Americans from all political backgrounds and people from around the world believe that some economic inequality is healthy for the world—although they want far less than there currently is. We want to reward people for making the world better. What people resent is not economic inequality, but economic unfairness—that is, earning money without producing value, giving without taking, having no skin in the game.
The question now becomes: what level of inequality is ideal?
How Much Inequality Do We Want?
Unsurprisingly, this is a politically charged issue and a fierce point of contention among theorists. Opponents of wealth distribution object in the name of economic growth. Reducing the potential income of top earners disincentivizes risky investments (for example, funding a start-up), innovation (funding research and development), and specialized training (going to med school) by limiting the rewards available for such socially constructive behavior.
Additionally, as economist Casey Mulligan points out, publicly-funded “safety net” programs discourage those in poverty from working to improve their lives. Income independent of labor takes skin out of the Game.
On the other hand, Harvard’s Thomas Freeman warns that excessive economic inequality hinders economic growth in its own way. Concentrated wealth enables greater political rent-seeking, as top earners are able to wield disproportionate influence among government officials, earning advantages in policy or unnecessary subsidies at the expense of the rest of society.
Economists from the International Monetary Fund argue that when spent on education and healthcare for the underprivileged, redistributed wealth can even accelerate economic growth by subsidizing the creation of valuable workers, offsetting the cost of reduced incentives for productivity. They also argue that there are ways to redistribute wealth that preserve incentives entirely—for example, cleaning up loopholes in the tax code, or implementing a more aggressive inheritance tax.
Are We Focusing Too Much on Inequality?
Notice that this discussion of inequality is tangled up with a number of adjacent issues and debates—the efficacy of social welfare, how to manage political rent-seeking, how to provide effective opportunities for education, and the ideal tax structure are all at play here. It’s possible that economic inequality isn’t the issue to focus on at all.
Columnist David Brooks argues that outrage over economic inequality is predicated on the false assumption that the poor stay poor as a direct result of the rich getting richer. As Taleb notes, wealth is not a zero-sum game. Instead, we are dealing with “two different constellations of problems”—factors that allow the rich to get richer unethically, for example, their undue influence on politicians, and factors that are causing the poor to stay poor, for example, the disappearance of entry-level jobs. All these problems are valid, but Brooks argues that combining them into one issue labeled “inequality” is a fundamental misunderstanding of the situation.
As we’ll see next, Taleb, too, argues that we are looking at economic inequality the wrong way.