Authored by Shahid Islam via RealClearMarkets,
Economic debates about inequality usually begin with a familiar question: Who has how much income?
It is an important question. But perhaps it is not the only one we should be asking.
A society can change who becomes rich without substantially changing how unequal the society is. Regulation can weaken one economic elite while creating opportunities for another. Entrepreneurs and investors may lose relative influence while lawyers, compliance specialists, lobbyists, consultants and regulatory experts gain it.
The Gini coefficient may barely notice.
Income distribution and income-source distribution are not the same thing.
Regulation does more than redistribute income. It changes the relative returns to different kinds of knowledge and human capital. And when those returns change, talented people respond.
Elite Substitution
Imagine an economy in which high returns come primarily from producing things consumers voluntarily buy. Entrepreneurs search for new products, engineers improve production and investors search for promising companies.
Now introduce an increasingly complex regulatory system.
Those activities do not disappear. But another set of skills becomes more valuable: interpreting regulations, satisfying disclosure requirements, obtaining government permissions, anticipating political decisions and influencing the rules themselves.
The relevant question is not simply whether regulation reduces inequality. It is what happens to the return from creating
