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The Calling: Some Thoughts on Inequality

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Perhaps no other issue is so much in the forefront of political debate these days as inequality. Many commentators argue that one of the most damaging things happening in the United States is increasing inequality.

Often this argument is tied to criticisms of markets, as if somehow free markets, or capitalism, are the cause of this supposed increase. It’s that connection that often puts defenders of economic freedom in the position of feeling like we must respond. Below I offer four responses that libertarians might employ when faced with this argument.

Response #1: Clarification

A first strategy might be to clarify exactly what the critic is concerned about. I say this because often it seems like growing inequality is so obviously bad that no argument needs to be made for why it’s bad. So asking why growing inequality is a problem is a first step.

In my experience, the response is often about the damage it’s doing to poor people. The implicit assumption seems to be that “growing inequality” means that the rich are getting richer and the poor poorer. But this need not be the case. Growing inequality is perfectly compatible with everyone getting richer.

So one response to the critics of growing inequality might be to ask them if they would prefer to the status quo a society in which everyone’s real income were double what it is now. Doubling everyone’s real income would substantially increase measured absolute (though not relative) inequality, yet we’d all be richer, including the poor. If the critics of inequality are fine with that, then their real concern seems to be not absolute inequality but something else.

If they think that doubled-income world would be worse, then that would appear to be evidence that they prefer a world of greater equality to one where people, including the poor, are better off. If so, that point needs to be made clear to them.

At the very least, you will find out where they stand. I would happily, of course, take the more unequal world where everyone was better off.

This conversation takes the validity of the claim of growing equality for granted. However, we can challenge that in two ways, and these are the second and third of my four responses.

Response #2: Income mobility

The critics of inequality often seem to talk as if the same people are rich and poor every year; that is, as if “growing inequality” means that the folks who are rich this year will be richer in later years and that those who are poor this year will be poorer in later years. If this is their view, it ignores the issue of income mobility. In fact, the rich and poor are not the same year to year.

There is a big debate over how much mobility Americans have, but even the most pessimistic numbers suggest that half of the Americans who are poor in one year will not be poor 5 to 10 years later. Other data suggest that number is notably higher. Whatever the case, the degree of mobility means that the rich aren’t locked into being rich(er) and, more important, the poor are not condemned to being poorer. It is always worth pointing out that even if inequality is growing, it’s not the same people who are in the various income quintiles each year.

Response #3: Consumption inequality

Another way to challenge the claim of growing inequality is to note that income is not the only way to talk about inequality. If the point of earning income is to be able to purchase consumption goods that satisfy our wants, then perhaps a look at consumption inequality might be another (perhaps better) way to think about inequality.

For most of human history, the difference between the rich and the poor was a difference between the “haves” and the “have-nots.” Today, at least in the West, the difference is more between the “have-mores and/or -betters” and the “haves.” A king 300 years ago had things that the commoners lacked. Today, both Bill Gates and I have cars. We both have kitchen appliances. We both travel by air. The difference is that he has more and better cars and appliances, and he has his own airplane rather than just being able to purchase the service.

Centuries ago, you could immediately tell the difference between a king and a commoner just by mere appearance. Today, the wealthy and the poor, at least in the West, are often indistinguishable. A look at the data on the possession of common appliances in the homes of the rich and the poor indicates the shrinking inequality of consumption possibilities. Measured that way, inequality has fallen over the long run and has continued to fall in the last few decades.

Response #4: Crony capitalism

So do libertarians have nothing they can agree with in the arguments of the critics of growing inequality? I think they actually do have one thing. It is possible that one form of inequality has grown in the last few years. With the significant increase in government’s role in the economy in the years since the financial crisis, there’s been a corresponding growth in “crony capitalism.”

Because economic outcomes are increasingly a function of who you know rather than your ability to create value for consumers, it’s quite possible that access to resources and the ability to earn income is less equal than before. When access to power determines income, those who already have high incomes are likely to be more able to access power and develop the crony connections necessary to get the government privileges.

The complaint about growing inequality might be legitimate if the inequality in question is due to increasingly unequal (and unfair) access to the right to earn an income. If so, libertarians should join the chorus of criticism.

Faced with the argument that inequality is growing, there are a number of ways we can respond that force our interlocutors to clarify what they mean and that challenge both the claim that rising inequality is necessarily bad and the view that income inequality is the relevant measure. We can also point out that if rising inequality is real and the result of cronyism, we agree with the critics that such rising inequality is a problem. But instead of this being the fault of markets, the fault lies in bigger government.

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    Steven Horwitz is Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY and an Affiliated Senior Scholar at the Mercatus Center in Arlington, VA. He is the author of two books, Microfoundations and Macroeconomics: An Austrian Perspective (Routledge, 2000) and Monetary Evolution, Free Banking, and Economic Order (Westview, 1992), and he has written extensively on Austrian economics, Hayekian political economy, monetary theory and history, and the economics and social theory of gender and the family. His work has been published in professional journals such as History of Political Economy, Southern Economic Journal, and The Cambridge Journal of Economics. He has also done public policy research for the Mercatus Center, Heartland Institute, Citizens for a Sound Economy, and the Cato Institute. Horwitz is also a Senior Fellow at the Fraser Institute in Canada and a contributing editor of The Freeman. He has a PhD in Economics from George Mason University and an AB in Economics and Philosophy from The University of Michigan. He is currently working on a book on classical liberalism and the family.