Why Striving For Income Equality Hurts The Poor More Than It Helps Them
Political concerns of the Left often place a strong emphasis on income inequality. It is commonplace to hear politicians like Bernie Sanders and Jeremy Corbyn railing against income inequality, as it is fashionable to find op-eds on left-leaning news sites such as Huffington Post, The Guardian or on Medium trotting out statistics about how the majority of the wealth in the world is owned by a wealthy minority.
The idea is that most of the wealth in a market economy swirls within the already-rich, remaining out of reach to the poor. The ensuing income inequalities is disastrous for the poor because it fails to provide opportunities for them, while the wealthy thrives in reckless abandon. Therefore, welfare states and active income redistribution is necessary to correct for these inherent inequalities and subsequently reduce poverty.
Firstly, this way of thinking overlooks that capital investment is key to creating the wealth in society that its proponents are eagerly seeking to distribute. Steep taxation reduces investment toward producing cheaper consumer items that would increase the purchasing power of the lower classes. For that reason, while income redistribution from the rich to poor may alleviate poverty in the short-run, it adopts a dangerously short-sighted view because it ignores the necessary conditions that has uplifted all developed societies to material opulence. Remember that the totality of wealth in society is not a static pie, but a dynamic and ever-growing treasure chest. In tackling poverty, the question we are faced with is how this share of wealth can be enlarged so there is more to go around, not how we can divide and distribute it equally in pursuit of temporary equalities.
Humans have not rose out of poverty because kings, monarchs or democratic governments were eagerly correcting for income inequality. In recent history, economic liberalisation in post-1979 China, post-1983 Chile and post-1991 India that enabled the engines of human ingenuity and private enterprise has eliminated poverty on a more apocalyptic scale than any welfare state programme ever enacted. This is a cause to celebrate capitalism, not condemn it.
Further back in the annals of history, no life-changing piece of technology or good was ever made readily available to those at the lowest of the socioeconomic ladder without first being enjoyed by a wealthy minority. It has always been the case that material luxuries — air-conditioners, televisions, airplane trips— were enjoyed by a privileged minority first before becoming greatly availed to the average person much later on.
Because efficient economical decisions are not simply given to the human mind, market entrepreneurs first need to acquire the relevant knowledge required to (1) know if it is worthwhile to mass produce it and if it is, (2) how to produce it in the most inexpensive way. This knowledge is only emergent out of a niche entrepreneurial market experimentation with the privileged few who can afford these luxuries. Knowledge abounds from a rivalrous market process of experimentation where entrepreneurs learn to understand better about what (and to what extent) consumers are willing to pay for something and the cheapest production methods to provide it.
In other words, initial inequality is a prerequisite condition that allows for knowledge innovation to take place, which in turn leads to the affordable provision for the many through market competition. If governments forced the smartphone in its early stages of development to be cheaply obtainable for the average consumer in the name of ‘equality’, the entrepreneurial incentive to learn how to reduce the costs of production of the smartphone would be destroyed, and it certainly would not be as abundantly affordable today. Material benefits are first delivered to a few before becoming available to a wider spectrum of consumers as costs fall.
As the Nobel Laureate Friedrich Hayek puts it in The Constitution of Liberty,
The important point is not merely that we gradually learn to make cheaply on a large scale what we already know how to make expensively in small quantities but that only from an advanced position does the next range of desires and possibilities become visible, so that the selection of new goals and the effort toward their achievement will begin long before the majority can strive for them.
Thinking of inequality from a global perspective, the prospects of the poor in the developing world are made so much more promising by the fact that the developed world has made great strides ahead, of which technological and knowledge benefits have spilled over and given them a great advantage.
Secondly, it is not true that there are rampant inequalities even if Bill Gates can buy a hundred Rolexes while you and I cannot afford one. If we take a snapshot of income levels in just our own lifetime, it is easy to see how a capitalist system tend toward unequal material levels. However, if we take a panoramic view of human history, the very same system has tended toward radically equal material levels.
What do I mean by that? Before the 19th century, an activity like gourmet dining and travel were luxuries availed only to the elite monarchs and kings. Today, these are easily affordable for a far larger proportion of the population. From the means of our transportation, the technological devices or food delivery services that we use to the pursuits in life availed to us, there has been a gargantuan equalisation. Anyone who wishes to be an artist, athlete or botanist is much freer to pursue these lifestyles, instead of inheriting the family job of ploughing the farm fields. Sure, the child of a billionaire will have a larger spread of opportunities availed to them than the average person. But in the history of human civilisation, there has never been more equality in the basic ways that people live their lives, rich or poor.
This radical equalisation — termed the Great Enrichment by the economist Deirdre McCloskey — was birthed out of ideas of liberty, free minds and private enterprise, not extensive government redistributive programmes, regulations or trade unions. And it has had unprecedented effects on human welfare:
Since 1800 in the average rich country the income of the workers per person increased by a factor of about 30 (2,900 percent, if you please) and even in the world as a whole, including the still poor countries, by a factor of 10 (900 percent).
Should we attempt to appease Bernie Sanders’s ethical requirements of social inequality by taxing all of the income belonging to the top 1%, the income boost to the poor would be a mere 25%, an increment that pales in comparison to the 2,900% of the Great Enrichment, not to mention its one-time enforcement.
As much as we wish equal opportunities were afforded to all, it is not possible for everyone to simultaneously achieve the same material standards of life if wealth in society is to be continually produced. The poor today owe their material benefits precisely to the results of historical inequality. Progress in society is possible only when some are allowed to pull ahead of the rest. Income inequality is regrettable, but an attempt to equalise income levels will undoubtedly hurt the poor more than it will help them.