Avoiding a Repeat of The Financial Crisis and Growing Income Inequality as Well: The Necessity of Limiting Income Differentials

At the level of society, the macro-level control would be achieved through the social implementation of values (e.g. sustainability, equity, justice) through institutions imposed at the outset precisely in acknowledgement that these values cannot be simply summed up from micro-level, autonomous, individual behavior, especially as shaped by market forces. With specific reference to discouraging temporal myopia in going after immediate profit and therefore preventing financial crises from the bursting of speculative bubbles, the social institution we are talking about is a limitation of income differential. As a starting measure, the limitation of income differential to ten would seem a good idea since experience from the civil service and the military shows that such an income differential provides sufficient incentive to have all available jobs taken voluntarily. This income differential might be increased to twenty, even thirty, but probably shouldn’t go beyond fifty, at the most, if more incentive were desired. Otherwise, severing violence to bonds of community through engendered resentments and estrangements might transpire.

Not only would such an income differential discourage the risks taken by speculators  and the consequent emergence of self-feeding bubbles of speculative exuberance that eventually collapse, it would also have a salutary effect upon the real economy through the elimination of winner-take-all markets that have been blamed for rising income inequalities even in the real economy. Winner-take-all markets are those in which reward is distributed by relative performance, not by the absolute performance that is the criterion in conventional markets. Accordingly, through unfettered market bidding, even barely discernible differences in performance quality may receive grossly disproportionate rewards. Indeed, even no differences in performance quality as measured by objective tests may still receive grossly disproportionate rewards. Think about two management consulting teams, one of which comes from Ivy League schools and one of which comes from lesser known schools. Both score evenly on objective tests and still the management consulting team from the Ivy League schools wins the contract simply because the long established renown of their schools gives them a self-feeding advantage.

So if government desires to prevent a repeat of the financial crisis as well as a reversal of growing income inequalities (simply because of the cumulative nature of market competition as afforded example above by the management consultant team from Ivy League schools), then the imposition of boundary constraints on income differential is the way to go.