Why Inequality Is Necessary

By Mark Olson

Note: This post is part of our League Symposium on inequality. You can read the introductory post for the Symposium here. To see a list of all posts in the Symposium so far, click here.

By and large one working assumption by the left is that economic disparity is a thing to be avoided. Yet, without economic disparity, why work at all?

Economic reward for gainful effort is the engine of economies since, well, since man stepped out of the trees onto two feet in West Africa and uttered things we now call words. If you get the same return for doing nothing as you do for doing hard work, why work at all? This in turn is the basis of economic inequality. I work, you don’t. I get, you don’t. Voila, inequality. We all don’t have the same abilities, the same diligence, the same intelligence, the same work ethic. These things all engender disparate economic reward, i.e., inequality. If there wasn’t economic disparity then there would be no point. It is the engine of a free society. The only alternative is motivation to effort through fear (of violence). When fear replaces anticipation of reward … that doesn’t work so well. See how well that works in North Korea or similar. If you want a free society, you must therefore embrace economic disparity. This leads us to a fundamental problem with arguments against economic inequality. Work vs non work yields different pay. Different pay is also given for different skills. A Yugo costs less than a Bugati and just so an hour of a neurosurgeon’s time is remunerated at a higher hourly rate than a grocery bag boy.

The quick rejoinder from the economic inequality = bad thing proponents is that this is a straw example. Yes *some* economic inequality is warranted. they offer. But too much of it … that is what is wrong. In a book which was very interesting on other grounds, Paul Collier in The Bottom Billion finds some evidence that this too is an assumption that is unwarranted. The Bottom Billion is not a book which directly speaks on economic inequality directly. There are 6 and a half or so billion souls on this planet. A billion of these people are wealthy. 4 and a half of them are on their way to getting wealthy in a historically very rapid manner. But the remaining billion or so around the world are mired in extreme poverty. The Bottom Billion is a book which attempts to study reasons why those people are stuck and what works and what doesn’t in getting them unstuck. What on earth does this have to do with economic inequality? Well, Mr Collier is studies those poor in the third world with modern social scientific methods. If you think economic inequality is important … how about using the laboratory of the civil wars and violence in the third world countries over the last century to test this hypothesis? As the question, is civil violence correlated with economic inequality? You can measure violence, and you can measure economic inequality. Mr Collier investigated this question. And what was the answer? He found that economic inequality over the last century is statistically uncorrelated (!) with civil war and the outbreak of violence in the third world. Uncorrelated. This puts the straw hat on the other head. Clearly at the extreme end, as demonstrated in the prior paragraph, economic inequality is required for any meaningful economic activity. On the other side of the coin, actual civil unrest is uncorrelated with this “bad thing.” Those that assume economic activity is a bad have a hard row to hoe to demonstrate that this is to be avoided at high (or even moderate) costs seeing as it doesn’t engender the social ills you fear. What then is wrong with economic inequality? Apparently what is wrong is harder to put a finger on than one would suspect.

Yet the rejoinder continues … this too apparently is a straw argument. Inequality they cry is only OK when it is “fair” … whatever that might mean. How might we measure fairness?

In an early entry to this symposium, a post by a Mr B-psycho puts what he implies is a well celebrated graph of corporate productivity compared to remuneration over the last decades showing a divergence. This is assumed to be a “bad” thing, without much examination. After all, if you make more stuff per hour than you did 10 years ago, shouldn’t you by rights be paid more? That can’t be fair, right? Well the short answer is no. The anomaly in the graph isn’t the divergence that we see now, but the past closing tracking of these figures. Look at an extreme example in agriculture. Move from people pulled plows, to horse drawn, to tractor drawn plows. Productivity skyrockets. Yet, during those times pay for farming hasn’t changed nearly so much. A single family farmer makes do today, but not a whole lot better. A single family farmer made do but not much better … 300 years ago too. And 1000 years ago. No big change, yet productivity has increased by many thousand fold. This is a really really good thing. Automation is the engine of our wealth today, making more with the same work. Increasing productivity. Increased productivity is the engine behind lowering costs for consumers (not pay) … that is the important factor. Not the increase in profit but the decrease in costs. When automation made possible finely woven fabrics and ceramics … there is no denying that benefits accrued more to the capital/marketing people than the unskilled laborers. But the bigger benefit is that every single woman wasn’t spinning thread and weaving cloth anymore and a pair of pants no longer cost a months ordinary wages. That those same unskilled laborers could buy pants and booze and (now) smart phones and so on for a smaller and smaller fraction of their wages.

One of the common argument to identify “fairness” is to claim that those who “work” should reap the majority of the reward, as opposed to those who provide the capital. This is disingenuous and fails on inspection. Look for a while at those “capitalists”, those “managers” and the hours they keep. They don’t get greasy and sweaty. They also don’t limit themselves to working only 40 hours a week. Those top CEO salaries that are decried as unfair? Problem is the cut throat competition, the never ending work cycle that got those guys to that point. For most of them, the question of when are they working (and working hard) is equivalent to the question of when they are awake.