Knowing that the Employment Equality Act (EEA) has as one of its main objectives the equality of outcomes the following two articles by Steven Horwitz should be of considerable interest to those concerned about inequality and fairness. He suggests that four questions need to be at the heart of discussions of inequality. The arguments may astonish you!
“The change in the presidency is not going to reduce the amount of time and energy people will be spending debating the question of rising inequality. In fact, I would expect to see such debates become even more frequent and more intense.
I have written a number of articles, and given many talks, on the issues surrounding the claim that inequality is getting worse. Those contain a whole variety of data (most of which can be found in this piece and this one) suggesting that most of the claims about rising income inequality are wrong, overstated, or ignore other evidence.
However, what I want to do in this piece is focus more on the questions that need to be asked in such debates. Specifically, I want to raise four questions that should be at the center of discussions of inequality.
Question One: Are we talking about inequality or poverty?
So often these two issues get confused in discussions about inequality. Those concerned about inequality frequently start talking about how bad things are for the poor. One explanation for this is that they are assuming that rising inequality must mean that the rich are getting richer and the poor are getting poorer. More specifically, some seem to think the poor are poorer because the rich are richer. That is, they assume that economies are zero-sum so that if some are richer, those riches must have come from the poor.
So clear the ground up front. Make sure everyone is talking about the same thing. Because if we’re talking about poverty, the evidence is overwhelming that both globally and in the US, absolute poverty has been dramatically reduced in the last 25 years or so.
Question Two: Are we talking about income, wealth, or consumption inequality?
Those concerned about inequality often slide between income and wealth in these discussions. Even this well-known viral video does so. It starts by presenting data on wealth, but at several places along the way, including one extended discussion of a graphic, it refers to people’s salaries. That’s income, not wealth.
Wealth refers to the sum of our assets minus liabilities. It’s a stock. Income is a net change in our wealth in a particular period, such as when we get paid. It’s a flow. One can have high wealth, but low income, such as an older person living off savings but with a fully paid-for home. Conversely, one can have high income and low financial wealth if one has a large salary but spends it all immediately on consumption goods. The data and other issues are different depending on whether we’re talking about wealth or income. Be clear which it is.
Consumption inequality is yet a third possibility. Here we are talking about the differences between what the rich and the poor can consume. The available evidence suggests consumption inequality is much lower than income or wealth inequality, especially in the US. The homes of the American poor have most of the same things in them as do those of the rich, even if their quality is lower. And the gap between rich and poor on such measures has narrowed in the last several decades. Since it is what we can consume that ultimately matters, this is a question worth clarifying.
Question Three: What about income mobility?
Those concerned about inequality often argue as if the rich who are getting richer and the poor who are getting poorer are the same people year to year. They see the claims that the top 20 percent of income earners have a greater share of national income than 30 years ago and that the bottom 20 percent have less, and they seem to think that means those who were rich are richer and those who were poor are poorer.
But this ignores the question of income mobility. Those static comparisons of two years decades apart are static portrayals of a dynamic process. What those comparisons actually say is that “those who were rich in year x got y% of national income and the different set of people who were rich in year x + 25 got z% of national income.” In other words, which households and people comprise “the rich” changes year to year, as is also true of those in bottom 20 percent.
There is a large and contentious debate among economists about exactly how easy it is for people who are poor in one year to have higher incomes in later years. What is clear, however, is that such income mobility exists.
The point is that you cannot talk about inequality without at least discussing the degree of mobility. If what bothers people about inequality is the assumption that the poor are staying poor, or getting poorer, then exploring the degree to which that is really true would seem essential to the discussion.
Question Four: What exactly are the problems caused by inequality?
If you’ve clarified what everyone thinks about the first three questions, it’s worth asking exactly something like: if poverty is falling, and poor people have a decent chance to get out of poverty, what specifically is wrong with (rising) inequality?
In my experience, one common answer to this question is that even if the poor are getting richer, the even greater increase in the wealth of the rich gives them unfair access to the political process. The super-rich will turn their economic power into political power, often in ways that will redistribute resources to themselves and their friends.
That, of course, is a legitimate concern, but notice that the conversation has subtly shifted from inequality per se to the problems of cronyism and a state with enough power to engage in such redistributions. There are plenty of ways to attack cronyism and to reduce the ability of the rich to turn wealth into political power that are not about forcible redistribution away from the rich or other policy questions that arise from inequality.
Those who raise this concern are really just complaining about cronyism, not inequality per se. The source of the problem is the redistributive state, which arguably would get more powerful if many of those concerned about inequality got their favored policies passed.
Finally, even those who are skeptical of the arguments made by those concerned by inequality can agree that there has been some redistribution of wealth from poor to rich in the last few decades, thanks mostly to government policies that do favor the rich over the poor. I include everything from monetary policy and financial regulation that has punished small savers and banks, to occupational licensure and minimum wage laws that have made it hard for the poor to get work, to regulations and bans on Uber, Lyft, AirBnB, and the rest of the so-called “sharing economy.”
These policies are problematic precisely because they increase both inequality and poverty. A far more interesting discussion of inequality would include the role played by such public policies in creating what we might call “negative-sum” increases in inequality compared to the “positive-sum” increases that characterize much of the last few decades.
Again, readers interested in the data should consult the two papers linked at the very start. But even without the data, these are four questions worth asking in conversation about inequality if you really want to get to the heart of what’s really at stake and persuade those concerned about rising inequality to see the issue in a different light”.
“When I talk to student groups about inequality, one of the first things I ask them to do is consider a mental experiment. Imagine a society in which, for example, the richest 20 percent of households earn an average of $60,000 per year and the poorest 20 percent of households earn an average of $10,000 per year. Imagine average household income overall is around $35,000 per year.
Now imagine a different society in which the richest 20 percent of households earn $150,000 on average and the poorest 20 percent about $18,000. Suppose the overall average is about $54,000.
If we compare these two societies, there’s no doubt that the first one is far more equal. The distance between rich and poor is much smaller. But if we ask which society is the more desirable one, or which one people would like to live in if they did not know if they’d be rich or poor, most people would pick the second, despite its higher degree of inequality. Not only is it richer on average, but it’s clear that it’s possible to become very rich and, perhaps most important, the poor in the second society are much better off than those in the first.
(It’s worth noting that the second society roughly corresponds to the US of 2017.)
That so many people’s intuition is that the second society is better suggests that perhaps what we really care about is something other than inequality per se. We care about upward mobility, or average income overall, or how well the least well off do.
Inequality vs Unfairness
But maybe there’s another element to this concern. A recent study in Nature argued, with evidence, that what bothers people more than inequality per se is “unfairness.” People will accept inequality if they feel the process that produced it is fair. By implication, they will not support equality if it violates their norms of fairness.
We see this in another reaction students have when I give talks about inequality. I point out the number of Apple products visible in the room and ask them if they think the wealth Steve Jobs and other Apple founders accumulated over their lifetimes was objectionable. Is that the kind of inequality they object to?
Students are usually hard-pressed to articulate why Jobs’ wealth is wrong, and they look sheepishly at their iPhones when I ask them how much they would have to be paid to give up their phones and connectivity, and they realize it’s way more than they pay for them.
I also remind them that economic studies show that only about 4% of the total benefits of innovation accrue to the innovator. The rest goes to consumers.
So why might we be okay with the more unequal society where the poor and average folks do better? And why might we be okay with the wealth earned by innovators like Steve Jobs or Bill Gates or Mark Zuckerberg? Probably because they correspond to some notion of “fairness,” whether from a concern for the least well-off or from the fact that the wealth of the rich is connected with even greater benefits for the rest of us.
So how can those of us who think genuinely competitive markets are key to human betterment use this information to address concerns about inequality? I think there are two ways in which we can deploy fairness arguments.
The Fairness of Voluntary Exchange
The first is the one I suggest above: continually reinforcing the mutually beneficial nature of voluntary exchange. We should insist that wealth earned in a real market based on open entry and exit and voluntarily agreed-to transactions is fair because all parties believe themselves better off because of the exchanges.
Yes, the owners of capital accumulate wealth, but only because we think what they have created and transferred to us is more valuable than the wealth we transfer to them. It is no less true to say that consumers accumulate wealth through this process, as the thought experiment about giving up your phone and connectivity indicates. As Robert Nozick argued in Anarchy, State, and Utopia: if each step in the evolution of the market is fair by itself, how can the pattern of income that emerges be unfair?
Fairness Before the Law
The second fairness argument is one that comes from Hayek. He observed in The Constitution of Liberty that if we want equality of outcomes, we will have to treat people unequally. If, however, we treat people equally, we will get unequal outcomes. Hayek’s argument was premised on the fact that human beings are not equal in our native intelligence, strength, skills, and abilities. Although we can all change and improve those things, they are always constrained by differences in natural gifts.
If we wish to have social progress, especially for the least well-off, we need to find ways to ensure that we can take advantage of the different knowledge, skills, and abilities of other people. For Hayek, market exchange guided by the signals of prices and profits is how we do so. What such an arrangement requires, however, is that individuals be treated equally before the law.
The differences among humans are, in Hayek’s view, a reason to treat them equally, not differently:
“It is of the essence of the demand for equality before the law that people should be treated alike in spite of the fact that they are different.”
Or in the words of Rabbi Jonathan Sacks
“It is through exchange that difference becomes a blessing not a curse.”
If people really care about fairness, then supporters of the market should be insisting on the importance of equality before the law. If we really did want to create a world of equal outcomes, we would have to penalize the productive in various ways, and we would have to provide unequal benefits to those who were less productive. In the extreme, we end up in the world of Kurt Vonnegut’s Harrison Bergeron, where the state constructs individualized forms of interference to hamper the skilled, such as buzzers in the ears of the intelligent or weights on the limbs of the strong.
Equality of outcomes requires that we treat people differently, and this will likely be perceived as unfair by many. Equality before the law corresponds better with notions of fairness even if the outcomes it produces are unequal.
Another example of such unfairness is the way in which those with political connections can rig the economic game in their favor. When those with wealth can use the political process to protect their profits from new competitors or new products by legally restricting entry or the conditions of competition, many will perceive that as unfair. The same young people concerned about inequality also get that it’s wrong for cab companies to use government to deny them services like Uber and Lyft.
It’s especially important that many of the ways in which incumbent firms with economic power use government to protect their profits end up harming the poor disproportionately. Policies from occupational licensure to zoning restrictions to the minimum wage to the aforementioned privileges for taxicabs all serve to ossify the wealth of relatively rich and throw up barriers to the upward mobility of the poor.
If what appear to be concerns about inequality are, in fact, concerns about unfairness, we have ways of addressing them that demonstrate the power of exchange and competitive markets. Markets are more fair because they require that governments treat us all equally and that none of us have the ability to use political power to protect ourselves from the competition of the marketplace and the choices of consumers.
In addition, market-based societies have been the best cure for poverty humans have ever known.
We need not cede the high ground of fairness and equality to the opposition. The liberal tradition was built on equality before the law and its implicit norm of fairness. It’s time for us to recapture that as part of the humane, progressive case for markets”.
Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is spending the 2016-17 academic year as a Visiting Scholar at the John H. Schnatter Institute for Entrepreneurship and Free Enterprise at Ball State University. He is a member of the FEE Faculty Network.
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