Does inequality matter?
If you take the position that inequality matters in and of itself then, essentially, you are taking the view that you are happy for poor people to be made poorer as long as the rich lose out even more. This argument cannot be countered by arguing that a government can redistribute income and make the rich worse off, the poor better off and inequality lower. If you take this position then you are a Rawlesian and not an egalitarian. If you regard equality as a positive good, then you must be willing to accept more poverty as a trade-off for more equality.
And this view is widespread in universities, charities and on the political left. Wilkinson and Pickett, for example, are widely admired on the left of politics. They explicitly argue that it would be better for everybody to be worse off as long as the rich are made, relatively speaking, much worse off. They argue that this leads to societies that are happier, healthier and generally better places in which to live.
Their evidence has been convincingly dissected and the relationships they find do not appear to be consistent or robust. For example, Wilkinson and Pickett argue that, as equality increases, trust in society increases. However, their relationship is reliant on a few outlying countries and, if you remove them, the relationship reverses. Furthermore, other measures of social cohesion such as charitable giving and voluntary activity both decrease as societies become more equal.
Equality and envy
It is worth adding that, if some in society are willing to make the rich much worse off simply to reduce inequality without making anybody better off, they are simply succumbing to the temptation of envy. Envy is a very bad basis for public policy. If some people go around coveting the beautiful wives or good looking husbands of others, should the government respond by arranging marriages?
The poor in poor countries
But the fact that we should not be concerned about inequality as a matter of principle does not mean that the position of the poor should not be a major concern for us.
Internationally, the important pro-poor policies are free trade, peace and the development of good institutions of government. In two decades since 1990 the global rate of absolute poverty has halved. In the face of staunch opposition from the opponents of global capitalism those who believe in free markets and free trade have influenced policy at the international level to the huge benefit of the poor. As a result, we are witnessing the most rapid fall in global poverty and the most rapid rise in the global middle class in the planet’s history. This has not happened by accident. It has happened because the policies espoused by interventionists – the same people who campaign against inequality today – were rejected in favour of policies of free trade.
As it happens, as a result of the fall in poverty, global inequality is falling and inequality is falling in a number of rapidly growing countries. That is a side effect though. If I were offered the option of fewer starving people and more inequality, I would take it.
The poor in rich countries
The reason we are debating this issue, of course, is that there is an industry trying to persuade us all that poverty is growing in the UK. And, of course, Thatcher – and free markets – generally get the blame. But this is unjust.
Between 1979 and 2005, the income of the poorest rose by more than 50 per cent. In the same period, the proportion of people earning below 60 per cent of median incomes rose by 5 percentage points to 18 per cent. Unfortunately, our poverty industry neatly dictates the terms of the poverty debate by defining inequality as poverty so that, even if the poor get richer, they argue that there is more poverty if the rich are getting richer faster than the poor are getting richer.
But even here, their arguments are shaky. As it happens, since the 1980s, inequality has been on the retreat in Britain. And so the focus of the poverty industry – the arguments of which are like a bouncing rubber ball – moves on to new territory: the top 1 per cent. But, even with regard to this metric, it is an intriguing fact that, across many countries, inequality fell dramatically after the 2008 crash. Real wages fell, bonuses were slashed and the incomes of those reliant on the state were generally maintained. Is this what proponents of equality want: financial catastrophes and enduring recessions in order to reduce inequality?
The market economy and the poor
But believers in a market economy should not just deliver negative messages about the poverty industry. Those of us who believe in a market economy should not be on the back foot. We should make clear that it is adherence to things in which we strongly believe that has led to a sophisticated international economic order in which billions of people co-operate together in order to not just survive but to flourish.
At the same time, it is important that we highlight as policy priorities those practical proposals that would help the poor to the greatest degree. This would include, land-use planning reform which could halve the cost of housing; liberalising energy markets; the removal of trade restrictions; the removal of state protection from rent-seeking groups, whether they be professionals, trades unionists or bankers; and education reform that gives the poor the same autonomy as the rich.
We also do not defend that ridiculous straw man of trickle-down economics. People get rich by serving people who are relatively poorer with goods and services – with things that in previous generations were, indeed, the preserve of the rich. In other words, as my colleague Kristian Niemietz, has said, the market economy is a trickle-up economy not a trickle-down economy. And it is economic flourishing for all with which we should be concerned. If we obsess about inequality we may throw away the very mechanisms that have made richer societies better places to live for everybody.
This article is an edited transcript of a speech given at the panel discussion on ‘Capitalism and wealth accumulation: Does inequality matter?’ held at Bloomberg European Headquarters on 23 July 2014