Does inequality matter?

To me, reducing poverty matters very much. That is why I believe in a market economy. However, I am entirely uninterested in the issue of inequality.

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

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

8 thoughts on “Does inequality matter?”

  1. Posted 08/08/2014 at 20:39 | Permalink

    The argument about ‘inequality’ often seems to be carried out on the basis of nation-states. Why? Surely the historical record of national socialism is hardly one to follow? In practical political terms I believe the key question about reducing poverty boils down to this: which is likely to help the poor more: economic growth or coercive redistribution? My reading of history leaves no doubt that economic growth does far more to reduce poverty than coercive redistribution. Of course voluntary charity may well also ‘redistribute’ income and/or wealth, but it is not coercive, as tax-based redistribution is.

  2. Posted 10/08/2014 at 12:28 | Permalink

    A few things are forgotten by those demanding more ‘equality’. Firstly, many things are now provided free of direct charge to people whose seem to be at the ‘rough end’ of inequality – for example free education and medical care. These things are never accounted for in measures of income/wealth inequality.

    Secondly, may of the the essentials of life have now become relatively inexpensive – for example, food, which now requires a far smaller proportion of incomes than 50+ years ago. The luxuries, however, have often become more expensive simply because of exclusivity/limited supply (e.g. an address in Mayfair) so the rich get less for their money in these areas.

    Thirdly, many things, due to free market technological progress and the wonders of volume manufacturing, have become almost equally available to the poorest. For example, my daughter, a supposedly impoverished student, can afford a mobile phone that is exactly the same as the best mobile phone a multi-billionaire can buy (the multi-milionaire could perhaps gold plate theirs, but it would provide no greater utility). Even if we look at cars, a multi-millionaire can afford a Bugatti or Rolls-Royce (neither of which I can afford) but my small Fiat provides 90% as much utility to me for less than 10% of the cost.

  3. Posted 11/08/2014 at 22:25 | Permalink

    HJ., you say that free education etc is never counted . Actually it is, in a regular ONS table which has been published since before I was an undergraduate. The most recent figures I have to hand are for 2011-12. They show that the ratio between the top quintile income and the bottom quintile before taxes and benefits was 14 to 1. But after all taxes and benefits, including benefits in kind like education, the ratio fell to 3.6 to 1. These figures deserve wider publicity., but are never quoted by today’s would-be Levellers.

  4. Posted 12/08/2014 at 09:09 | Permalink

    Thank you Len. I was aware of that – the point I was making is that these figures (which can be seen here for 2012/13: http://www.ons.gov.uk/ons/dcp171778_367431.pdf) are – as you say – never quoted by ‘inequality campaigners’. What I’d be interested to know is whether, once these transfers are taken into account, we are so much more ‘unequal’ than other countries, as is often claimed.

  5. Posted 12/08/2014 at 13:36 | Permalink

    So, what we need is a level playing field, with no favoured groups or State subsidies?

    Capitalised land rent is an implicit State subsidy, which is why economists call it “Regualtion Tax” all be it a privately collected one.

    What happens to

    a) housing affordabilty
    b) allocational efficiency
    c) GDP growth
    d) Wealth and income inequality
    d) Planning

    when, this State created value is used to pay for the public services we share, instead of being privatised? i.e a level playing field.

    Landlords, banks and the top 1% gain the lions share of this implicit State subsidy, currently worth £200bn per year net. This is the group the fake-Capilatists either belong to, or aspire to belong.
    The biggest welfare basket cases in society. No wonder they never ask, let alone answer the question.

  6. Posted 15/08/2014 at 17:22 | Permalink

    Interesting. However the author seems to make a number of glaring mistakes in his assessment of income inequality. You mention incomes have increased since ’79, but it’s a meaningless figure. Purchasing power on the contrary, is what we’re interested in. You mention reducing income inequality makes everyone worse off, but completely ignore basic economic insight of marginal utility, which is much higher per dollar income amongst those who have less dollars in total. Thirdly, income inequality is usually a sign of market inefficiency. In a strongly efficient market, there would be no income inequality, because high profits are a strong signal for competitors to enter the market. Income inequality leads to bubbles, irrationality and overall market failure, as it puts too much economic decision power in too few hands. In the US, 1% control 47% of the economy, that is tantamount to central planning in terms of efficiency. Income inequality is in the long term, destructive and very dangerous for an economy. In the US, it could be solved by running zero-tax and zero-regulation on small business, poor and middle class incomes. Gut all subsidies, bailouts and welfare to larger corporations.Instead, tax them heavily, and put a heavy tax on the rich. Should they refuse to be taxed, they are welcome to leave the country. As the vast majority of jobs, innovation, patent fillings and wealth creation happen amongst small businesses (around 85% for each figure) owned by small-time millionaires, we’d be just fine.

  7. Posted 15/08/2014 at 21:25 | Permalink

    @anonymous – no they are not mistakes. When talking about incomes since 1979, I mean real incomes. Also, I did not say that reducing inequality makes everybody worse off. I specifically sideline the point about reducing inequality by making the poor better off and taxing the rich because that is a separate argument from the debate about whether equality of itself is a good thing even if everybody is made worse off. In the piece I am specifically dealing with the argument about equality being a good thing even if everybody is worse off (in incomes terms) as a result.

  8. Posted 15/08/2014 at 22:05 | Permalink

    Anonymous? Hmmm.

    1, Purchasing power (ie real income) has in fact risen considerably since the 1970s. The ONS published a report last month showing that average earnings for full-time employees have more than doubled – after accounting for inflation – since 1975.
    2. Income equality in itself implies nothing about market efficiency. More skilled/experienced people earn more, and savings (with consequent income from investment) are accumulated over lifetimes. If ‘supernormal’ profits are eroded by competition this doesn’t mean there is no income inequality.
    3. In what sense do 1% ‘control’ 47% of the economy? Meaningless.
    4. Your figures about small businesses need further explanation, but on the surface they appear nonsense. To take the employment thing alone, SMEs (ie those employing less than 250 people) only account for about 20% of total private sector employment.
    5. No tax and regulation on small businesses only would produce silly outcomes as in France where there are thousands of firms with 49 employees and virtually none with 50 because that’s where the borderline is drawn for some types of employment regulation.

Comments are closed.