December 14, 2011 by galudwig
Michael Wilson from northamericaneconomics.com had some interesting things to say about yesterday’s post. While I agree with some of his observations, it also made me reflect on our differences in opinion, which, as I see it, spring from a difference in our perceptions of the nature of economics itself. Quoting from his comment,
Right now, low and unskilled workers have very little say – even democrats put the interests of corporations ahead of those workers. How else can you explain democratic inaction on things like illegal immigration and the Chinese unilaterally setting the exchange rate in their favor? Those things keep workers wages low and corporate profits high – which leads to income inequality.
Although I sympathise with his intent, and agree with his comments on the Occupy Wall Street movement, I cannot but disagree with both the underlying statement (that income inequality is bad) or the reason he gives to support this statement (the non-existence of pro-worker policies keeping wages low which leads to income inequality). I’ll focus on the core issue for now and I’ll talk about my views on exchange rate manipulation, immigration, profits and wage rates later.
Now, don’t get me wrong. Income inequality does exist. Perhaps the gap has gotten bigger in recent years. It is certainly perceived to be a great problem by many, if not most people today and it is a metric which still motivates a lot of individuals, like many of those in the OWS movement, to take to the streets, write inspiring tracts or vote in a certain way. All this, I accept. What I do not accept is that income inequality is a bad thing tout court. For the sake of brevity, I will attempt to enumerate the reasons why I think this in a succinct manner. I might then elaborate on one, several or each of the reasons in further posts. My contention is simple: in a free society, income inequality is not bad, and is actually a good thing, for the following reasons:
- Someone out there earning a million times more than I do (let’s call him Rich) does not mean that I earn less than I would have if Rich were to earn only ten times more. Economics is not a zero-sum game and it is not true that one person can only gain at the cost of another.
- The definition of inequality can be called vague at best. What exactly does “inequality” mean, considering that income equality has never existed at any time in history and that it isn’t even in theory a desirable thing? How much inequality is too much? How much is desirable? Also, income inequality might very well increase even though everyone in society is better off, eg if the bottom 99%’s real income (or purchasing power) doubles, but the top 1%’s increases tenfold.
- If Rich is able to support a much more extravagant lifestyle than I do, then that really only affects me psychologically, in the sense that I might become envious of him and his lifestyle. Or it might drive me to produce goods that consumers demand, more efficiently and qualitatively superior than has been hitherto achieved (a great motivator for production and increase of total wealth in society). But we all find happiness in different ways, not only through status-seeking behaviour. The only constant is that our manifold motivations in life are based on our personal subjective valuations of what is important and what is not.
- We are all born unequal and inequality is a natural fact of life. Our natural inequality is what drives the division of labour and the enormous explosion of wealth this engendered. As Milton Friedman said, it is unfair that Mohammed Ali was born with a skill that enables him to earn a million dollars in one night, or that Marlene Dietrich was born with amazing legs. But it would have been grotesquely unfair if the rest of us had been deprived of their feats because we are all to be equal.
- The luxurious lifestyle of the super-rich and the fact that they have a consumption pattern that differs from the rest of us performs a vital economic function in society. Every product that is currently produced for the masses was at some point in its product history a luxury item, produced for a tiny market of super-wealthy individuals. The willingness of the rich to spend on things which seem superfluous in the eyes of the masses, by virtue of them having more to spend in the first place, in fact drives the process of experimentation and innovation which eventually leads to successful products becoming more commonplace and affordable.
- Finally, the fact that someone possesses extreme wealth can, given the absence of government interference, only be the consequence of this person having contributed to society in his lifetime or of his being the beneficiary of a gift of wealth by their predecessor who in their turn must have contributed to society. This because, in a free market economy, one can only gain profits by doing things better than the competition. Income inequality means that a lot of profit is being made and profits are a sign of entrepreneurial success.
In a nutshell, these are my reasons why income inequality is not necessarily bad, and is in fact vital to the continuance of society. I’ll try to elaborate on them in further posts, giving references that support my case.
Finally, I don’t want to create the impression that I am attacking Michael’s views, because it is obvious that he was not talking about inequality itself as a principle, but rather of the effects of pro-labour policies (or lack thereof) on income distribution, which is of course a wholly different thing. I simply used his comments as a springboard for my own ideas on a different subject.