Functionality, Rent Seeking, and Government as Determinants of Inequality

Societies benefit from unequal rewards and some system of social stratification, if extraordinary rewards provide signals where more effort is required or where scare talents should go. But these signals cannot avoid some ambiguity. By advertising the availability of extraordinary rewards, it is also advertised that restrictive practices, in particular barriers to entry, are likely to succeed in distorting prices. Inevitably, functional inequality generates dysfunctional inequality. Inevitably, rational actors try to escape from competition and to capture rents. Although the democratic political process should neutralize attempts to escape from competition, it is more likely to reinforce them. Politics is not part of the cure for rent seeking but part of the problem itself.