Research

An Introduction to Economic Inequality


https://iea.org.uk/wp-content/uploads/2022/07/An-introduction-to-economic-inequality.pdf

Summary



  • The issue of economic inequality has come to dominate the economic and political debate, with mounting numbers of books and articles. Equality is commonly considered as not just good in itself, but something that delivers other values such as health and trust.

  • At first sight, the statistics look shocking, with a rich few earning most of the world’s income and owning most of the world’s physical and financial wealth. Inequality has been linked to lower life expectancy, poor education, mental illness, obesity, political instability and other social problems. Campaigners call for taxes on wealth, an expansion of the welfare state and higher minimum wages.

  • However, there are deep flaws in this narrative.

  • For example, inequality is hard to measure. While pretax incomes look very unequal, taxes and welfare benefits (including access to education, housing and healthcare) reduce the real inequalities in living standards dramatically. Much of the benefit that people get from their work is not just financial, but stimulation, enjoyment and satisfaction.

  • The inequality statistics are misleading in other ways. People’s earnings usually rise over their lifetime, and higher earners can build up more life savings. By bundling older and younger people together, the statistics suggest a wide inequality — and would do, even if every person earned exactly the same amount over their lifetimes.

  • The policies built on the inequality narrative are also problematic.

  • Though we talk of the ‘income distribution’, nobody in fact distributes incomes in a conscious way. Incomes are just the outcome of everyone’s economic actions. Nor is the pattern of wealth and incomes zero-sum. The fact that someone gets richer does not mean that others must become poorer. Rather, the spread of markets and trade over the last two centuries has made the whole world richer.

  • Redistribution in the name of equality is contradictory because it requires us to treat people unequally. And it ignores the fact that people’s economic position reflects their own choices. Some may choose more family time, or job satisfaction, or ease and leisure, over better-paid work.

  • Critics of the redistribution agenda say that policies such as higher taxes, minimum wages and a bigger welfare state would depress incentives, discouraging work, saving, enterprise and progress. Because politicians would be managing the programme, support would not go to the poor but to groups with greater political influence.

  • Opinion polls suggest that people dislike unfairness but rank other objectives much higher than equality. Focusing on inequality may distract us from the real problem: how to create the conditions that will boost the prosperity of everyone.


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Eamonn Butler is the co-founder and Director of the Adam Smith Institute.



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