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Debunking a number of myths and straw men which proponents of free markets often find laid at their door

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  • It is often asserted that supporters of a market economy believe that ‘greed is good’. This is simply not true. Economists know that people are capable of a range of thoughts, feelings, motivations and emotions and a market economy works regardless of whether people are selfish or altruistic.

  • A further straw man often erected by opponents of market economies is that free-market economists assume that individuals always behave with perfect rationality. Again, this is not true, though it is assumed that individuals are better placed to know their own preferences than government planners or officials.

  • It is frequently suggested that the rich are getting richer while the poor get poorer. For example: ‘[the] late 70s saw the most equal time in British history, but since then the rich have got richer and the poor poorer’ (Polly Toynbee writing in 2012). This is false. Between 1977 and 2011/12, the incomes of the poorest fifth of the population have risen by 93 per cent. It is also not true that median earnings have stagnated. Median earners saw their hourly wage rise by 62 per cent between 1986 and 2011.

  • The average number of hours worked by British workers continues to fall. It fell from 37.7 hours a week in 2000 to 36.4 per week in 2011, having fallen from 38.1 hours in 1992. Fewer than 12 per cent of British employees work more than fifty hours a week. Working hours in Britain are neither much longer nor much shorter than those in other wealthy countries.

  • The reason we have not reduced our working hours to the extent that Keynes, for example, believed likely is that we aspire to a lifestyle that is better than a typical 1930s working class lifestyle without central heating, hot running water, a telephone, wall-to-wall carpets, a car, an indoor toilet, a computer, a television and so on.

  • Many commentators argue that the UK is suffering from growing inequality. For example, Deborah Hargreaves, director of The High Pay Centre, asserts that ‘Inequality has been rising rapidly in Britain for the past 30 years … If the growth in inequality continues at its current rate, we are heading towards Victorian extremes in the next 20 years.’ Such statements are not true. The peak in inequality was in 1990 and the income gap has been flat or in decline ever since. Between 1990 and 2006–7, those in the bottom quintile increased their disposable income by 40 per cent, a faster rate than was seen among the top quintile, whose disposable income rose by only 29 per cent. In 2011–12, income inequality in Britain fell to its lowest level since 1986. It is only within the top 10 per cent of income earners that incomes are becoming more unequal.

  • Once income has been redistributed through tax, cash payments and benefits in kind, the ratio between the incomes of the top and bottom fifth of the population is reduced from 14 to 1 to 4 to 1. This is almost exactly the same ratio as in 1987.

  • Many claims have been made about the relationship between inequality and various social outcomes such as murder rates, health outcomes and so on, especially in The Spirit Level. However, the claims do not stand up to thorough scrutiny. They are often reliant on outliers within the data or the particular way in which the relevant countries were selected. These issues have been studied much more thoroughly by specialists who come to more nuanced conclusions about how social outcomes can be improved.

  • The authors of The Spirit Level argue that there is a relationship between reduced inequality and happiness. However, there is a stronger relationship between happiness and higher average incomes. While there is good reason to be sceptical about ‘happiness economics’ it would seem just from these figures that the best strategy to increase happiness would be to reduce poverty through faster national income growth – even if this led to higher inequality.

  • It is not true that social mobility has ground to a halt, nor is Alan Milburn correct when he says that ‘we still live in a country where, invariably, if you’re born poor, you die poor’. Over the last generation, if the income of a boy’s parents was in the poorest quarter of the income distribution, the probability of the boy moving into the top half of the income distribution is 37 per cent. If the income of a boy’s parents was in the top quarter of the income distribution, the probability of the boy moving into the bottom half of the income distribution is 33 per cent. There is substantial mobility within society.

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2014, Hobart Paper 177

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Chris Snowdon Final

Head of Lifestyle Economics, IEA

Christopher Snowdon is the Head of Lifestyle Economics at the IEA. He is the author of The Art of Suppression, The Spirit Level Delusion and Velvet Glove; Iron Fist. His work focuses on pleasure, prohibition and dodgy statistics. He has authored a number of publications including Sock Puppets, Euro Puppets, The Proof of the Pudding, The Crack Cocaine of Gambling and Free Market Solutions in Health.