To discuss the political economy of natural versus contrived inequalities requires some explanation of what is meant by “natural,” “contrived,” and “inequalities.” The use of the word “natural” has had a long, if sometimes controversial, history in economics over the last two and half centuries. When using this term, the French Physiocrats in the eighteenth century meant that along with the physical “natural” order that demonstrated structure, pattern, and forms of self-regulation, the same was discernable in the social world. François Quesnay (1694–1774) who was a physician to the king of France, said that the interdependent self-regulation observable between the organs of the human body had its parallel among the interconnected sectors in the social system of division of labor. This led him to devise his famous Tableau Economique (1758), which every beginning economics student learns in some version in the depiction of the circular flow diagram. For Quesnay and the other Physiocrats, if government does not attempt to interfere with or control the economic system, it will ensure an adaptive coordination far superior to any regulating political hand.
The same idea is seen among the Scottish Moral Philosophers of the second half of the eighteenth century. Adam Smith (1723–1790), for example, spoke of a “natural” order in at least two senses. There is the “system of natural liberty” that “naturally” (spontaneously) takes form when governments perform a set of essential but limited functions, the most important ones being: policing, courts, and national defense. These ensure that each member of the society is secure in his individual rights to life, liberty, and honestly acquired property through voluntary trade with other individuals for mutual benefit.
Natural liberty and the natural price
Given this institutional arrangement, each member of a society can improve his own circumstances in the system of division of labor only by applying his personal knowledge, talents, and the resources under his ownership to producing goods and services that others may be willing to take in exchange for what they desire, because they either cannot manufacture such things themselves or not at a cost as low as their neighbors can. Hence, without central command or control, each individual, as if by an “invisible hand,” will be guided in his own self-interest to serve the ends of others — “society” in general — though it was not his intention and is often far better in its outcome than when someone purposely tries to do good for society. It is most dangerous when the planner has what Hayek called “the fatal conceit” that he is wise and knowledgeable enough to successfully do so. Such an institutional order enables a “natural system of liberty” to exist and function better than when the “man of system” —the social engineer — tries to directly design society and its human patterns.
But Adam Smith and his fellow Scottish philosophers David Hume and Adam Ferguson were also adamant that such a natural system was, itself, an unplanned, evolutionary outgrowth of untold generations of human interactions that generated sustainable institutional arrangements that improved the human condition. Indeed, it was only in retrospect that later generations could turn their inquiring eyes to the past and attempt to trace out and understand the cultural and economic processes that through time resulted in the existing social order, an emerging order that could never be fully understood or significantly imagined by those living centuries earlier, even though their own actions and interactions were slowly helping to bring it about.
The other “natural” element in this economic system, as Adam Smith saw it, was the idea of the “natural” price, which was the price toward which the buying and selling of any commodity would settle in the long run, reflecting the demand for the good on the one hand and the costs of its production on the other. Now, of course, in the eyes of the classical economists, the long-run cost of any particular good was ultimately a reflection of the quantity of labor that had gone into its manufacture. In the short run, fluctuations in the demand for or availability of the good would bring about deviations in that price, but the long-run price is the one around which any short-run movements gravitated.
More generally, the “natural” price was the open, competitive market price established by the existing configurations of supply and demand, and in this sense, both the short-run and long-run prices of marketable goods were “natural.” They were the prices that were chosen in a free competitive market without any direct or noticeable indirect effect of governmental interference with the overall economic processes at work, other than securing those institutional preconditions of safeguarded life, liberty, and honestly acquired property for all members of society.
Natural and contrived scarcities
The use of the word “contrived” does not seem to have been frequently used by the classical economists in the particular way I am suggesting, though the phenomena was completely known and analyzed by them. That is, government interference with the working of the “natural” competitive forces of the market. I take its use from the British economist William H. Hutt (1899–1988), who made the distinction between “natural” and “contrived” scarcities in a series of articles that he wrote in the 1930s.
Hutt emphasized that at any moment in time and over any given period of time, there are certain “natural” scarcities. That is, given the desired ends and goals individuals would like to attain, there are certain inescapable limits to what extent they may be able to achieve them, since there are only so many available means that are useful and usable for their attainment.
Assuming a completely unhampered, competitive free market, those means will be allocated to their competing uses reflecting the degree of importance those individuals have for the finished consumer goods, as expressed in the prices they are willing to pay on the market for others to supply them. This does not deny that, over time, savings, investment, capital formation, and innovation can successfully increase the quantities of the goods consumers want, thus reducing their absolute and relative scarcities. Nonetheless, the scarcities of the means at any given time in this process limit the abilities to supply what is wanted.
What drives this in a free-market process, Hutt said, is the existence of “consumers’ sovereignty,” a phrase, it seems, that he may have coined or at least greatly popularized in his book Economists and the Public (1936). In their role as consumers, individuals are at liberty to spend their earned incomes in any manner they desire. At the same time, no one may attempt to earn incomes on the supply-side of the market other than by devising ways of producing and offering for sale what others want. Since free-market relationships are based on mutual consent and voluntary exchange, each one in their producer role must direct his activities to try to successfully supply what others desire so they may then reenter the market as consumers to purchase the things they want from some of the very same people they have been serving.
While the total supply of all desired goods and services in their relative amounts are limited by these natural scarcities on a free market, government intervention can bring about situations of contrived scarcities or contrived plentitudes. Government price controls, restrictions, protections, or prohibitions may result in a smaller quantity — a contrived scarcity — of a good or service being available on the market in comparison to the amount that producers and suppliers would have competitively offered if not for government intervention. Or government price controls, subsidies, “bounties,” regulations, or commands may result in a larger quantity — a contrived plentitude — of a good or service being available on the market than would have been the case if not for government intervention.
Either way, both contrived scarcities and contrived plentitudes infringe upon “consumers’ sovereignty,” that is, a pattern of resource use and finished goods different from the relative structure of prices, wages, and production that would have tended to prevail if guided solely or far more consistently with the configuration of consumer demands on a free market. (See my book Austrian Economics and Public Policy [2016], chap. 27.)
Natural inequalities among people
This, now, gets us to the idea of natural and contrived inequalities. Of course, this requires a clarification or defining of what is meant by inequalities among people. Any discussion of this, especially when inescapably brief and inexact as it must be in the context of a short essay, raises a wide variety of controversies and ambiguities. This is particularly the case when it refers to personal, social, economic, or political inequalities and the overlaps that occur between them.
The primary meaning of human inequality may be taken as the most inescapable one: each of us has been born to particular parents from whom we inherit a set of distinct genetic and biological features. Siblings are not interchangeable in spite of the “natural” connection through the same parents; this includes biological twins, each of whom possesses certain distinct characteristics, even if they are not easily distinguishable to the observer’s eye. It has also been discovered that in the study of families that whether a child is first-, second-, or third-born often influences their developmental and personality traits.
These inequalities that may emerge due to which family you have been born in, and when, can be taken as inescapable parts of the “natural order” of things regardless of how much parents and other close relatives try to treat siblings “the same” when they are growing up.
In addition, home environments can greatly differ, with some parents emphasizing reading and studying, while other households give less importance to this in cultivating certain habits and interests in the younger members of the family. But even if books, music, and the arts are part of the home setting, it does not mean that all or even any of the children will be sufficiently inspired to develop certain habits of mind. Many parents who try to do so often end up disappointed and frustrated because of the interests and life-choices their children end up making.
We are also not born into the same political circumstances. Being born and raised in a family in, say, Sudan or Afghanistan or North Korea will often result in a variety of inequalities of situations and outcomes between that individual and someone born and raised in, say, Finland, France, Germany, or the United States. It was a tragic mistake on your part if you had unwisely chosen a parent who was sent to the Gulag in Stalin’s Russia, with you then being marked for life as “a member of the family of an enemy of the people.”
Political equality and individual inequalities
For most of the last 250 years, questions concerning political and economic equality and inequality have consistently dominated discussions, first in the Europe and North America of the eighteenth and nineteenth centuries, and since then virtually everywhere else around the world. Over most of human history, political inequality was taken for granted. From ancient times onward, there were masters and slaves; lords of the manor and those tied to the land he owned; kings with their circle of aristocrats and a much larger number of commoners subservient to them.
The idea of political equality is a relatively new historical phenomenon. The ideas of equality before the law and an equal right to vote by all citizens of a country have become taken for granted only over the last few generations compared to all of human history. With the rise of political democracy, those holding elected political office came to be seen as the agents of and not the master over the citizenry. In the modern Western world, this often arose from a deep Christian faith among many that all of humanity are children of God, made in his image, and all equal in His eyes. No one can read the arguments and pleas of the growing number of advocates of the anti-slavery movement in Great Britain and the abolitionist cause in America in the eighteenth and nineteenth centuries without seeing the religious basis and conviction of many that all men are created equal by their Creator and endowed with a common right to their individual life and liberty. All human beings are the children of God, with distinguishing physical or other characteristics that God bestowed on them, but they remained equal and equally valuable in His eyes.
But while it was taken for granted that each person should have recognized and secured equal rights to life and liberty before the law, there was little presumption that this meant equalities of conditions or outcomes. In America, especially, it was taken for granted that those equal rights provided an equality of opportunity for each person to try his hand in applying his abilities, skills, talents, and experience as he saw fit in the ways he considered best, with no guarantee of success or outcomes similar to any other. Indeed, equal rights were presumed to imply a wide spectrum of unequal social and financial results.
The American experience of equal freedom and unequal outcomes
For instance, the Italian historian and classical liberal Guglielmo Ferrero (1871–1942) traveled widely in the United States in the 1890s and wrote about his impressions of the country, its people, and its open institutions in a chapter of his book Militarism (1899). He did not assert that America was a perfect society, an unblemished Utopia; far from it, and he gave examples to demonstrate these imperfections in American society. Nonetheless, America was a land of freedom and vibrant opportunity for a large majority:
In the United States … the extreme freedom and ease of the individual, not handicapped as we [Europeans] are in changing occupations, habits, social caste, received ideals, and social axioms by a social tradition, become almost sacred; the innumerable opportunities in the midst of such constant material and intellectual change for the association of individual talent and energies; the prodigious rapidity with which these combinations can be formed and dissolved, the frequent return of opportunities brought about by the rapidly revolving wheel of fortune…. These conditions prevailing in America, render it easy to any ordinary intelligent and energetic man to obtain for his work remuneration which errs rather on the side of being beyond than beneath his deserts….
Thanks to the almost complete lack of intellectual protectionism — that is, of academical degrees which ensure the monopoly of certain professions — thanks, in consequence, to the lack of a government curriculum or unprofitable and obligatory studies…. Let him who can do a thing well step forward and do it, no one will question where he learnt it; such is the degree required of an American engineer, barrister, clerk, or employee. And as the opportunities to do well are innumerable, everyone can develop the talents with which Nature has endowed him, changing occupation according to circum-
stances and opportunity.
Natural inequalities in the free market
I suggest that any and all relative incomes earned in such a widely free-market setting, and the differences between them, are examples of “natural inequalities” in remuneration. With legal barriers to entry eliminated in all arenas of employment, investment, and trade, all incomes earned, profits received, and wealth accumulated are based upon freedom of association and mutually agreed-upon terms of trade. Yes, people possess differing characteristics, qualities, and motives, and they all enter the arena of human association with different inherited and acquired abilities, talents, and capacities. But their respective rewards are not due to who their parents were, or what social status they were born into, or where they are from.
The consumers in the marketplace — which means all of our fellow human beings in their economic roles as consumers — judge us by only one essential characteristic: how well we can serve their wants and desires better and more effectively, and less expensively, than others who are also attempting to supply them with what they want as the means of purchasing what those others have for sale in their respective roles as producers.
Our relative incomes and their differences reflect the value and worth consumers place on the services others can render to their well-being, as represented by what they are willing and able to pay for the goods and services they buy. They do this either directly in the form of entrepreneurs who meet the demand for finished goods and services, or indirectly when those entrepreneurs estimate the value of the services individuals in their producer roles can provide in the production process to bring those goods and services to market.
The market reinforces an unprejudiced estimate and appraisement of what we are worth in the eyes of consumers because rarely do the buyers of most goods in the marketplace know anything about the actual individual human beings who have contributed to their manufacture. The person who purchases a suit of clothes, or a pair of shoes, or box of breakfast cereal, or a paint brush to do some home improvements knows little or nothing about those who have participated in the making of the product they have bought.
Were they male or female? Were they Christian, Jew, Hindu, or atheist? Were they “straight” or “gay?” Were they political conservatives or “progressives?” Were they good, loving parents or deadbeats not paying child support? The anonymity of a complex and global competitive market process reinforces the fact that the natural inequalities of income and wealth have little or nothing to do with anything except the simpler question: who can best serve the consumers?
Government intervention and contrived inequalities
This also leads us to an understanding of what might be considered the “contrived inequalities” in society. Contrived inequalities are the result of political interference with the free, competitive decisions and outcomes of the open marketplace. For most of history, the inequalities of income and social positions have been contrived, that is, not based on an individual’s abilities, talents, skills, and experience in free association and trade with others. They have been based, instead, on political power and plunder. Slavery and serfdom forced most of mankind into positions imposed upon them by coercive powers who threatened physical harm if they refused to do what the ruler demanded of them. Individuals were prevented from rising out of and “above the station in life” assigned to them by those who ruled over them.
The classical-liberal era that began in the eighteenth century and continued into the nineteenth century ended the constraints of many of those contrived inequalities. The repeal of domestic regulations on occupations and enterprises; the removal of many, even if not all, protectionist restrictions on international trade; the abolition of slavery and involuntary servitude; the extension of a greater equality of rights before the law for women, and religious and ethnic minorities; reductions in and less discriminatory taxing systems; all these replaced the contrived inequalities of the past with a political and economic setting in which income-earning differences among individuals and groups in society were due to those natural inequalities among human beings when they are free from political power, plunder, and privilege.
What the twentieth century saw, however, was the return of systems of politically created contrived inequalities with the growth of the interventionist-welfare state. By the 1890s, Italian economist and classical liberal Vilfredo Pareto (1848–1923), writing about his native Italy, had distinguished between two types of socialism: bourgeois socialism and proletarian socialism.
The actual condition of civil society, as it is today, is based not on free competition and respect for private property, but on the intervention of the state. So, the governments of civilized peoples can be defined as bourgeois socialist…. A looser definition could be that socialism wants the intervention of the state to change the distribution of wealth [with socialists] divided into two types: socialists, who through the intervention of the state, wish to change the distribution of income in favor of the less rich [proletarian socialism]; and the others, who, even if they are sometimes not completely conscious of what they are doing, favor the rich [bourgeois socialism].
Or as Frederic Bastiat (1801–1850) called it earlier in the nineteenth century, “legalized plunder.”
Contrived inequalities due to government favors and bureaucracy
The intervention of the state, therefore, is the locus of contrived inequalities. One of the most notorious in the history of economics has been trade protectionism. By imposing import taxes or quota restrictions, the government brings about a higher price for the affected good or commodity than would have been the case under more open and competitive international trade. This brings about greater earned revenues and income for the sheltered domestic producer at the expense of domestic consumers who pay more for a smaller quantity and foreign sellers who otherwise would have received greater revenues and higher incomes from selling more in the protected market.
This, in turn, means that those sectors of the domestic market that would have seen greater export sales due to the greater demand with foreign income earners if they had been able to sell more in the trade protected country have lower incomes than they might have without protectionist policies. Other sectors in the protected country also have contrived increases in their revenues due to the protected manufacturers having higher incomes with which to demand more goods than they would have under freer trade conditions.
The other clear instance of such contrived inequalities is the product of government bureaucracies. Taxation reduces the “natural” relative incomes that private individuals would have earned from free-market transactions in satisfying the demands of others in the marketplace. This contrived reduction in the incomes of these individuals in the private sector means that their standards of living are lowered due to the fact that this government “taking” diminishes the types and the quantities of goods and services they would have purchased if not for the degree of compulsory taxation.
Beneficiaries of contrived inequalities in Washington, D.C.
At the same time, the other side of this process is that the contrived reduction in some people’s incomes from taxation results in the contrived increase in the incomes of those who are employed in government positions of one type or another. It is not too much of an unrealistic assumption to presume that those who apply and accept employment in the government sector do so because such positions in the bureaucratic labyrinth offered net gains in salary and job security than what they thought they could earn in the private sector.
From a relative income perspective, why would they have chosen a government employment and career track if not for the expectation that their private-sector alternatives represented lower opportunity costs than a job in the government? (This sets aside those who might be willing to forego a higher private-sector income because of a personal preference for having the position to run and restrict other people’s lives through the authority of government power.)
But in addition, there is the indirect contrived income inequalities that follow from the taxes extracted and the incomes received by those manning the government’s bureaucracies. One merely has to think about Washington, D.C. Here are apartment complexes generating income for landlords, along with restaurants, cafes, clothing stores, supermarkets and convenience stores, places of nighttime entertainment, and many other business establishments catering to the demands of all the government employees living off other people’s money. All the profits earned and incomes received have raised the income shares of those employed in working for and serving the needs of “the servants of the people.”
If Washington, D.C., were not the national capital of the country, with hundreds of government
bureaus, agencies, and departments employing around 300,000 people in the greater D.C. area (Washington and adjacent Maryland and Virginia), would there be as many businesses located there with comparable incomes earned? The chances are the answer is, No. Hence, many in the greater Washington, D.C., area have higher relative incomes than a good number of them likely would have earned if the federal government were closer to the far more limited functions and smaller size under the original Constitution.
The same logic applies to government taxation and borrowing that enables a redistribution of incomes and wealth away from many in society due to the taxes they pay, and the relatively higher incomes received by others resulting from farm price supports and subsidies for selected businesses and industries, along with defense contractors, many of whom receive anywhere between 50 and 100 percent of their profits and incomes from producing military materiel in the widest sense for the government.
We might add to this the 10,000 registered lobbyists in Washington hired by individuals, businesses, and interest groups to influence legislation in directions favorable for those who employ them. If the federal government did not have the political power and taxing and borrowing authority to spend over
$6 trillion in the current 2024 fiscal year, the relative incomes of many of these lobbyists would likely be lower, along with all those other private-sector recipients of the billions of dollars spent each year due to the lobbying processes.
All of these are examples of contrived inequalities, that is, differences in profits made and incomes earned that are products of government spending, regulating, controlling, restricting, and privileging. If not for this, the social and income inequalities in society would more reflect the “natural” inequalities that come from natural differences between human beings and the market valuations of each and everyone’s worth in directly and indirectly bringing desired goods and services to the market to satisfy the desires of others, based on peaceful, voluntary exchanges that represent agreed-upon mutual gains from trade.
This article was published in the July 2024 issue of Future of Freedom. It is based on a paper delivered at the annual meeting of the Association of Private Enterprise Education, held in Las Vegas, Nevada, April 9, 2024, for a session on “Inequality: The ‘Dangerous’ Concern of New Generations.”