Income Inequality Arises From Market Forces and Requires Government Intervention
Inequality is everywhere. In a rainforest, mahogany trees take up more water and sunlight than all the other plants and animals. In our economic ecosystems, entrepreneurs and investors control more of the assets than the rest of us do. No one worries about the mahogany trees, and yet there is terrible fretting about the wealthy. In the case of ecosystems and economies, however, there are very good reasons for an unequal distribution of resources.
The sources of some forms of inequality are better than others. For example, inequality produced by crony capitalism—or what Barron’s editor Gene Epstein refers to as “crapitalism”—is surely undesirable. Therefore, it’s important for us to make a distinction between economic entrepreneurs and political entrepreneurs: The former create value for society; the latter have figured out how to transfer resources from others into their own coffers, usually by lobbying for subsidies, special favours or anti-competitive laws.
If we can ever disentangle the crapitalists from the true entrepreneurs, we can see the difference between makers and takers. And inequality that follows from honest entrepreneurship, far from indicating that something is wrong, indicates an overall flourishing. In a system where everyone is made better off through creative activity and exchange, some people are going to get wealthy. It’s a natural feature of the system—a system that rewards entrepreneurs and investors for being good stewards of capital. Of course, when people are not good stewards of capital, they fail. In other words, people who make bad investments or who don’t serve customers well aren’t going to stay rich long.
Whenever we hear someone lamenting inequality, we should immediately ask, “So what?” Some of the smartest (and even some of the richest) people in America confuse concerns about the poor with concerns about the assets the wealthy control. It’s rooted in that old zero-sum thinking—the idea that if a poor guy doesn’t have it, it’s because the wealthy guy does. But one person is only better off at the expense of another under crapitalism, not under conditions of honest entrepreneurship and free exchange.
Unless someone has made lots of money hiring lawyers and lobbyists instead of researchers and developers, wealthy people got rich by creating a whole lot of value for a whole lot of people. Thus, the absence of super-wealthy people would actually be a bad sign for the rest of us—especially the poor. Indeed, it would indicate one of two things: Either very little value had been created (fewer good things in our lives, like iPhones and chocolate truffles) or the government had engaged in radical redistribution, removing significant incentives for people to be value creators and stewards of capital at all.
When resources are sitting in investments or in bank accounts, they are not idle. In other words, most rich people don’t stuff their millions under mattresses or take baths in gold coins. In conditions of economic stability, these resources are constantly working in the economy. In more stable conditions, a portion finds its way to a creative restaurateur in South Carolina in the form of a loan. Another portion is being used by arbitrageurs who help stabilize commodity prices. Another portion is being loaned to a nurse so she can buy her first home. Under normal circumstances, these are all good things. But when too many resources get intercepted by Uncle Sam before they get to the nodes in these economic networks, they will be squandered in the federal bureaucracy—a vortex where prosperity goes to die.
We should also remember that, due to our equal markets, most of us live like kings. Differences in assets are not the same as differences in living standards, although people tend to fetishize the former. Economist Don Boudreaux reminds us that Bill Gates's wealth may be about 70,000 times greater than his own. But does Bill Gates ingest 70,000 times more calories than Professor Boudreaux? Are Bill Gates’ meals 70,000 times tastier? Are his children educated 70,000 times better? Can he travel to Europe or to Asia 70,000 times faster or more safely? Will Gates live 70,000 times longer? Today, even the poorest segment in Western Europe live better than almost anyone in the eighteenth century and better than two-thirds of the world's population.
When we hear people fretting about inequality, we should ask ourselves: Are they genuinely concerned for the poor or are they indignant about the rich? Here’s how to tell the difference: Whenever someone grumbles about “the gap,” ask her if she’d be willing for the rich to be even richer if it meant improved conditions for the absolute poorest among us. If she says “no,” she’s admitting that her concern is really with what the wealthy have, not what the poor lack. If her answer is “yes,” then the so-called “gap” is irrelevant. You can then go on to talk about legitimate concerns, like how best to improve the conditions of the poor without paying them to be wards of the State. In other words, the meaningful conversation we should be having is about absolute poverty, not relative poverty.
In so many of the discussions about income inequality, there is a basic emotional dynamic at work. Someone sees they have less than another, and they feel envious. Perhaps they see they have more than another, and they feel guilty. Or they see that someone has more than someone else, and they feel indignation. Envy, guilt, and indignation. Are these the kinds of emotions that should drive social policy? When we begin to understand the origins of wealth—honest entrepreneurs and stewards of capital in an inherently unequal ecosystem—we can learn to leave our more primitive emotions behind.
Whenever we hear someone lamenting inequality, we should immediately ask, “So what?” Some of the smartest (and even some of the richest) people in America confuse concerns about the poor with concerns about the assets the wealthy control. It’s rooted in that old zero-sum thinking—the idea that if a poor guy doesn’t have it, it’s because the wealthy guy does. But one person is only better off at the expense of another under crapitalism, not under conditions of honest entrepreneurship and free exchange.
Unless someone has made lots of money hiring lawyers and lobbyists instead of researchers and developers, wealthy people got rich by creating a whole lot of value for a whole lot of people. Thus, the absence of super-wealthy people would actually be a bad sign for the rest of us—especially the poor. Indeed, it would indicate one of two things: Either very little value had been created (fewer good things in our lives, like iPhones and chocolate truffles) or the government had engaged in radical redistribution, removing significant incentives for people to be value creators and stewards of capital at all.
When resources are sitting in investments or in bank accounts, they are not idle. In other words, most rich people don’t stuff their millions under mattresses or take baths in gold coins. In conditions of economic stability, these resources are constantly working in the economy. In more stable conditions, a portion finds its way to a creative restaurateur in South Carolina in the form of a loan. Another portion is being used by arbitrageurs who help stabilize commodity prices. Another portion is being loaned to a nurse so she can buy her first home. Under normal circumstances, these are all good things. But when too many resources get intercepted by Uncle Sam before they get to the nodes in these economic networks, they will be squandered in the federal bureaucracy—a vortex where prosperity goes to die.
We should also remember that, due to our equal markets, most of us live like kings. Differences in assets are not the same as differences in living standards, although people tend to fetishize the former. Economist Don Boudreaux reminds us that Bill Gates's wealth may be about 70,000 times greater than his own. But does Bill Gates ingest 70,000 times more calories than Professor Boudreaux? Are Bill Gates’ meals 70,000 times tastier? Are his children educated 70,000 times better? Can he travel to Europe or to Asia 70,000 times faster or more safely? Will Gates live 70,000 times longer? Today, even the poorest segment in Western Europe live better than almost anyone in the eighteenth century and better than two-thirds of the world's population.
When we hear people fretting about inequality, we should ask ourselves: Are they genuinely concerned for the poor or are they indignant about the rich? Here’s how to tell the difference: Whenever someone grumbles about “the gap,” ask her if she’d be willing for the rich to be even richer if it meant improved conditions for the absolute poorest among us. If she says “no,” she’s admitting that her concern is really with what the wealthy have, not what the poor lack. If her answer is “yes,” then the so-called “gap” is irrelevant. You can then go on to talk about legitimate concerns, like how best to improve the conditions of the poor without paying them to be wards of the State. In other words, the meaningful conversation we should be having is about absolute poverty, not relative poverty.
In so many of the discussions about income inequality, there is a basic emotional dynamic at work. Someone sees they have less than another, and they feel envious. Perhaps they see they have more than another, and they feel guilty. Or they see that someone has more than someone else, and they feel indignation. Envy, guilt, and indignation. Are these the kinds of emotions that should drive social policy? When we begin to understand the origins of wealth—honest entrepreneurs and stewards of capital in an inherently unequal ecosystem—we can learn to leave our more primitive emotions behind.
