The Blessing of Inequality

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"The
urge to save humanity is almost always a false front for the urge
to rule" ~ H.L. Mencken

For
most people, concern about poverty stems from noble ideals. Indeed,
for Christians, as well as those of some other faiths, improving
the lot of the less fortunate is one of life's highest callings.
Unfortunately, this concern leaves people vulnerable to those who
would prey upon their good intentions.

Since
at least the time of Marx, we have heard demands for income redistribution
in the name of reducing "inequality". This philosophy
is pervasive in the media and has become a central tenet of public
policy today. A recent example is Robert Wade's "Winners and
Losers" in The Economist (April 26, 2001). He declares, "The
global distribution of wealth is becoming ever more unequal",
and warns us that "that should be a matter of greater concern
than it is".

Few
ever challenge this idea, that inequality is inherently bad. Some
may protest that government attempts to reduce inequality are ineffective,
or that they violate property rights, or that the taxation needed
for such policies reduces economic growth. While these protests
are all valid, they still implicitly concede that inequality is
bad.

Is
it, really? In order to properly address the subject, we must do
two things: 1) distinguish between poverty and inequality, and 2)
distinguish different types of inequality, and their sources. When
we do, we will find that, far from being bad, the right type of
inequality is good and even necessary to our well-being.

The
concern over the "distribution" of income indicates a
misunderstanding of the nature of wealth. Wealth is not something
that exists in nature, with the only need being to distribute it
fairly. Wealth must be created. Oil in the ground, without equipment
to recover and refine it, and without machines in which to use the
end-product, is worthless. Natural resources are only valuable when
humans figure out a way to use them to satisfy their wants. In a
free society, income accrues to those who are successful at creating
wealth, that is, those that satisfy the wants of others. An inequality
of income simply indicates that some people are more able than others
to satisfy the wants of others.

Poverty,
on the other hand, is not the same thing as inequality. To claim
that the "gap between the rich and poor" is widening does
not mean that poverty is increasing. It may merely mean that the
"poor" are becoming better-off at a slower rate than the
"rich". But their lot may be improving nonetheless.

OK,
so poverty is bad, and inequality is not poverty. But how does that
make inequality good? Almost 50 years ago, Ludwig von Mises answered
this question, in an
article for The Freeman
. Rather than paraphrase him,
I'll quote directly the core of his argument:

"The
consumers [in a market economy], by their buying or abstention
from buying, ultimately determine what should be produced and
in what quantity and quality. They render profitable the affairs
of those businessmen who best comply with their wishes and unprofitable
the affairs of those who do not produce what they are asking
for most urgently… It is the consumers who make some people
rich and other people penniless."

"Inequality
of wealth and incomes is an essential feature of the market
economy. It is the implement that makes the consumers supreme
in giving them the power to force all those engaged in production
to comply with their orders. It forces all those engaged in
production to the utmost exertion in the service of the consumers.
It makes competition work. He who best serves the consumers
profits most and accumulates riches…"

"The
millionaires are acquiring their fortunes in supplying the many
with articles that were previously beyond their reach. If laws
had prevented them from getting rich, the average . . . household
would have to forgo many of the gadgets and facilities that
are today its normal equipment. [Countries like the United States]
enjoy the highest standard of living ever known in history because
for several generations no attempts were made toward u2018equalisation'
and redistribution'. Inequality of wealth and incomes is the
cause of the masses' well-being, not the cause of anybody's
distress."

Thus,
to the extent that inequality is a natural outgrowth of a free market,
it is not a problem at all. It is a benefit, the "cause of
the masses' well-being". But is the market the only source
of inequality? No. Quite clearly, when we compare the incomes of
countries around the world, it is governments that cause inequality,
by retarding the progress of people in some countries more so than
in others.

This
is why publications like The Economist can look at statistics and
sound the alarm that inequality is worsening. Countries where the
economy is relatively free (the U.S., Hong Kong, Western Europe,
etc.) make economic progress; those where the economy is stifled
by the heavy hand of government, don't. For example, in Sub-Saharan
Africa, things are so bad that the
average income per capita (excluding South Africa), is $315
,
lower than it was in 1960, even after adjusting for inflation. What
has characterized Sub-Saharan Africa? Ruthless dictators (often
propped up by foreign aid from guess who), communistic economic
policies (such as ujamaa, or "cooperative economics",
incidentally one of the seven principles of Kwanzaa), and wars.

As
long as some countries remain more free than others, inequality
will continue to increase. And this is why there is very little
we can do about it. Government aid just worsens the problem by allowing
a corrupt government to linger. Military action, even putting aside
the brutality, has a pretty poor track record of bringing about
prosperity. What we can do is to lead by example, and to spread
the philosophy of liberty far and wide, that those in desperate
places may come to see the root cause of their problems.

Predictably,
Mr. Wade's article closes with a call to "mobilise our governments,
the multilateral organizations, and international NGOs to establish
as an overarching priority a more equal world income distribution
– and not just, as now, fewer people in poverty". In so doing,
he reveals his true agenda: increasing government power, not helping
the poor. Mencken's words ring truer than ever.

To
the extent that inequality of income is a problem, it is a problem
caused by governments. Free markets, on the other hand, have everywhere
shown an ability to dramatically improve living conditions for all.
Only when this is widely recognized can we eradicate government-induced
poverty, leaving us with only the natural inequality inherent in
a free and prosperous society.

May
31, 2001

Jim
Waddell [send him mail]
is a financial analyst in Poughkeepsie, NY.

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