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The chutes and ladders of inequality

April 10, 2012
Nostalgic board game analogies are the new hot fad in economics writing. Or ... at least kinda catching on. On the heels of the inaugural Restoration Calls story last month - in which we explained America's crumbling foundations through the Game of Life - comes a thoughtful piece by University of Oregon economist Mark Thoma on American income inequality, as explained by Chutes and Ladders.

Unlike Life, which we consider a contest of skill and decision-making rivaled only by Battleship and Risk, Chutes and Ladders is all about luck. But as Thoma notes, it is based on an ancient Indian game, Snakes and Ladders, which was interpreted very differently. As he explains:

The original game was interpreted by some as an illustration of fate or destiny. The game is pure luck, there is no skill involved, so a player's destiny depends upon the roll of the dice and the structure of the game. But in another interpretation the ladders represent virtuous choices -- the path to prosperity -- while the snakes or chutes represent vices that lead to ruin. There were more snakes than ladders in the original game to teach that it is harder to stay on the moral path than it is to fall off of it.

There are interesting similarities between these two interpretations of the game and the two most common explanations for the large increase in inequality in recent decades. One explanation for growing inequality relies upon institutional and political factors. For example, proponents of this view often argue that changes in legislation favored by powerful business interests undermined unions. This gave businesses the upper hand in wage negotiations and allowed business owners to capture a larger and unfair share of income.

From the perspective of workers, this is a story where their destiny is partly determined by changes in the rules of the game, and those changes work against them. It's not the individual's poor choices that make it hard to climb ladders, avoid snakes, and reach the top of the board. It's that those who make it to the top are able to use the power that comes with wealth to change the game in a way that protects their own positions on the board, and this comes at the expense of those who do not have this degree of influence.

The second explanation relies upon increasing returns to education brought about by skill based technical change, winner take all markets that have grown with globalization, and other economic factors to explain rising inequality. This is fundamentally a virtues and vices story. Those who make good choices and have the virtues that society values are appropriately rewarded and they rise to the top, while those who do not stay at the bottom. Manipulation of the game by the powerful has little to do with the outcome.

Thoma suggests his own answers, both for which explanation is right, and what to do about it. Give it a full read.

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