Income Inequality as Such is not the Problem

income inequalityJim Pagels over at has a good article on why Oxfam’s claim that the wealthiest 1% may soon be worth more than all the rest of us is not something to worry about. He correctly points out a number of reasons why this study is extremely flawed. For example, with the methodology the study uses a person I know, a truck driver who has gone through bankruptcy, is wealthier than more than 30% of the world’s population simply because he has some savings and no debt. (Sadly, I am in the 30% at the moment.)

Mr. Pagels goes on to point out that studies like that done by Oxfam ignore crucial relevant issues. By focusing on how big the “pie” of wealth is at a given moment in time, the study ignores the fact that the pie is getting larger all the time which has resulted in ever declining rates of actual poverty. It also ignores the fact that people are not stuck in any particular slice of the pie.  There is considerable movement between the slices such that, in a pie divided into 5 slices, only 54% of people who start in the lowest slice remain there 10 years later. The same is true at the top end, where only 60% of those in the top slice are still there over the same time period.

His conclusion is excellent:

Most income inequality reports focus only on the most negative interpretation of the data, creating a narrative that the world’s economic situation is spiraling toward a dystopian hell. People then use that misperception to justify wide-reaching government redistribution policies. Stepping back to look at the more meaningful figures, though, makes it clear that those fears are largely misplaced.

Where the author goes wrong is that, stuck in the middle of the good stuff, he slips in this bit about whether income inequality is a problem.

Is inequality an issue? Sure. A dollar in the hands of a poor person has greater utility than a dollar in the hands of a very wealthy one, so wealth inequality means we have something less than the maximum possible amount of worldwide utility/happiness.

This is a purely utilitarian view which completely undercuts his stated conclusion that “wide-reaching government redistribution” is not justified. Utilitarianism declares that what is good and right is what provides the most benefit for the most people, or as it is often put, the greatest good for the greatest number. This is the case even if the act harms the actor. According to John Stuart Mill, one of the founders of Utilitarianism, “All honor to those who can abnegate for themselves the personal enjoyment of life when by such renunciation they contribute worthily to increase the amount of happiness in the world.” Such a philosophy  provides all the justification one might need for government redistribution policies. If by taking 10%, 20%, 50% or even all the wealth of one person, even their life, you can make ten  or one hundred or one million people happier, Utilitarianism would sanction it as moral.

What might the results be if you actually put this idea into serious practice? Ayn Rand discusses this in her column titled “Textbook of Americanism,” (quoted here from the Ayn Rand Lexicon):

What is the definition of “the good” in this slogan? None, except: whatever is good for the greatest number. Who, in any particular issue, decides what is good for the greatest number? Why, the greatest number.

If you consider this moral, you would have to approve of the following examples, which are exact applications of this slogan in practice: fifty-one percent of humanity enslaving the other forty-nine; nine hungry cannibals eating the tenth one; a lynching mob murdering a man whom they consider dangerous to the community.

There were seventy million Germans in Germany and six hundred thousand Jews. The greatest number (the Germans) supported the Nazi government which told them that their greatest good would be served by exterminating the smaller number (the Jews) and grabbing their property. This was the horror achieved in practice by a vicious slogan accepted in theory.

But, you might say, the majority in all these examples did not achieve any real good for itself either? No. It didn’t. Because “the good” is not determined by counting numbers and is not achieved by the sacrifice of anyone to anyone.

The fact of whether or not income inequality is a problem does not rely on the simple fact that one person has more than another. It is not merely a matter of “numbers.” The problem is what the source of that difference is. Did the rich man gain his wealth from his own efforts or did he achieve it through the use of force, either directly or indirectly? This is the point I made in my post “Income Inequality is a Fact of Reality,

Where income inequality is a problem is when the income generated does not come from skill and hard work, whether the skill involved is actually understood or not, but rather at the expense of others, from playing the system. Outside of criminal activity, which everyone condemns, this situation is most often seen when the government, with its monopoly on the use of force, involves itself directly in the economy.

We have all likely read stories where government regulates a business in such a way as to favor some companies at the expense of others. Examples include regulations that are written to impose such burdens that they favor larger, established companies with teams of lawyers and accountants over smaller startups. Or regulations that impose meaningless requirements with the sole real purpose of preventing competition against established interests. It is the income inequality that results from such interference that is the problem, not that fact that some people make more money than others.

The way to fight the problem of income inequality is not via the Utilitarian notion of trying to benefit the most people, as shown above this simply leads to sacrificing some to benefit others, but rather through a system of government that respects the rights of each individual as an individual, i.e. capitalism, where no individual is sacrificed to another for any reason. In a capitalist system, the government would neither provide favors to some at the expense of others nor protect some when they violate the rights of others.

Under such a system, the wealth that an individual accumulates would be the just results from his skill and effort. That one man might accumulate more than another under such conditions would be no cause to redistribute that wealth but would rather serve as an example for others. They would look at the achievements of the successful men and say, “If they did it, I can too.”