Economic Theory

Our obsession with inequality is dangerous – the emerging world knows better

Forget political polls and voting intentions. The most important survey of recent months came from Pew Research on the attitudes of populations worldwide to capitalism and inequality.

As many Western economies labour under the strain of slow growth, an intellectual narrative has taken hold, arguing that free-market capitalism causes unacceptable levels of inequality. But in the emerging world, they see the big picture: moving towards free markets works wonders in improving living standards.

The figures are startling. While inequality is seen as a major challenge by the majority of the public in most advanced and emerging economies, the attitudes to capitalism’s role and the potential solutions are starkly different.

Asked whether a free-market system makes most people better off, despite gaps between rich and poor, an incredible 95 per cent of Vietnamese and 76 per cent of Chinese people agree (versus just 3 per cent and 18 per cent who dissent). In Spain, Greece, and Japan, the majority of people disagree.

On solutions too, there’s a clear divide between advanced and emerging economies. Populations in seven out of 10 advanced economies thought high taxes would do more than low taxes to reduce the gap between rich and poor. In contrast, people in 17 out of 24 emerging economies believe that low taxes to stimulate growth are a better cure.

This may be unsurprising. Many advanced economies have been through painful recessions or, in the case of the euro zone, are still in the midst of deflation induced by a misguided currency project. In a world without much growth, the pie becomes largely fixed. The size of the slices becomes more easily observed, and the politics of redistribution more important. For those countries with exploding numbers of middle class citizens and rising standards of living, it is less of a concern.

But in advanced economies a narrative has developed that inequality is the product of unrestrained capitalism. It is held up as a social evil, with little nuanced thought given to how it may have arisen. It is constantly conflated, almost deliberately, with poverty.

The concern for those of us who recognise the dynamic gains of a free-market system is that an obsessive focus on distribution is fermenting the intellectual climate for a range of policies – high taxes, price controls and heavier regulation – which would harm growth further, making the concern about distribution a self-fulfilling prophecy.

Last week, for example, US Federal Reserve chair Janet Yellen said she is ‘greatly concerned’ about rising inequality in the US. And the explosion of wealth seen in emerging economies was barely mentioned in Oxfam’s reaction to a recent report by Credit Suisse on the distribution of global wealth. Instead, it predictably focused on the gaps between rich and poor worldwide. Even the IMF has bought into this trendy conventional wisdom.

To denounce inequality is almost a necessity for gaining acceptance in much of the economics community. But many miss the wood for the trees. Advanced economies do indeed have lots of problems. But they are often the product of not having enough free-market capitalism. Cronyism and the protection of vested interests, poor educational outcomes and rigged housing markets all help to exacerbate inequality.

Yet rather than focus on solving these issues, which would also have a growth dividend, many people who should know better continually make generalised denouncements about inequality and capitalism in broad terms.

This new-found egalitarianism may be the socially acceptable thing to say, but if it leads to the sorts of anti-market policies which it is legitimising, we’ll all suffer in the long run.

This article was originally published by City AM.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

2 thoughts on “Our obsession with inequality is dangerous – the emerging world knows better”

  1. Posted 22/10/2014 at 09:28 | Permalink

    One relevant point is that the age distribution in many developed countries shows a larger proportion of the population now being ‘old’ than in the past. This is much less likely in developing countries whose populations are growing fast. Old people tend to have more wealth than young people, for fairly obvious
    reasons — they often earn more, they tend not to still have expensive family responsibilities of bringing up young children, so they save more of their income, so their cumulative savings are much higher, they may well have paid off their mortgages (if any), and they are more likely to have inherited assets from their own parents.

  2. Posted 22/10/2014 at 20:08 | Permalink

    We don’t have free market capitalism. We have a neo-feudal economy that taxes work and enterprise and allows freeholders a massive free lunch of capitalised land rent.

    As land by value is concentrated into the hands of the very wealthy, our economy is nothing more than a giant Ponzi scheme.

    Aristocrats and Kings fought wars for Centuries for control of this lever of economic slavery. Now its the banks at the top. Although, the Duke of Westminster is still the UKs richest born citizen, so some things will never change.

    How about a level playing field instead? Where we keep 100% of what we contribute, and only pay for the land we use, to those we exclude.

    Not only would this produce a meritocratic, dynamic economy, but inequality would also be vastly reduced. And issues like housing affordability solved.

    This is, of course, the very last thing fake-Capitalists want here in the UK.

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