Income Inequality is Good

One of the favorite laments of liberals is income inequality.  But is that a bad thing?  The short answer is no, but read on.  Liberals may be surprised that I do agree that our current income distribution reeks.  My disagreement is with the alleged causes of the gap and what is to be done about it.

Let’s get one perspective out of the way first–the premise that incomes should be more or less equal for everyone.  Socialists, and those who are socialists but refuse to admit so in public are fond of this one, thinking that outcomes are what matters.  Make sure everyone has the same amount of money and social justice is served.

We already know from history that there is only one outcome possible from an honest application of this principle: universal poverty.  And please don’t try to tell me that socialism works, it just hasn’t been tried.  It has.  No one will, and no one should be expected to, work for the collective to his/her own detriment.  Add to that the fact that human beings will trade freely unless compelled not to and we have the makings of tyranny.  Some enforcer must always make sure no one profits and you can be sure that he/she will not be living in squalor.

In a true free market, where the government’s role in the economy is limited to the enforcement of voluntary contracts, income inequality reflects the differential contributions of individuals.  Better bakers make more money, not because something nefarious is going on, but because more people choose to buy that particular bread.

Let’s say our stringent limitations on the government’s role are relaxed.  A prominent baker, Don, has built a chain of bakeries and is quite successful.  Unfortunately, because the market is free, he has to constantly fight off competitors.  His prices are constrained by others offering other baked goods for less and innovations by others force him to constantly work on staying ahead.

One day, Don the Baker decides that he has worked hard to improve baked goods offerings for society.  He has introduced mass production methods that lowered costs, he has improved cleanliness, and he has launched numerous conveniences for consumers, like drive-through bread service.  He begins to feel used, and so he asks his representative to help.  He wants regulations.

Don believes in the free market, or so he says.  After all, he displaced Juanita the baker as the industry leader by doing things better.  He just wants to make sure society is “protected,” and so he wants government to regulate cleanliness.  How could that be wrong?

The problem is, these regulations require equipment he was only able to afford after several years in business.  And, while it was an improvement, there were no serious problems with the old way.  Bad bread incidents were rare.  New bakers cannot possibly buy the new equipment, so after a while, Don expands his base as smaller bakeries disappear in favor of very large ones.  He and the other few large ones have a “gentleman’s” agreement that they will play nice and not compete too fiercely.  Don is getting wealthy–very wealthy.  So are his big-bakery friends.

Is this just?  It was perfectly just, right up to the point where Don colluded with the government.  And here is the point: government has the power of coercion, Don alone does not. As long as Don has to earn his money honestly, any level of income he makes is just.  The moment he is able to coerce others by erecting governmental barriers to entry, he has starting being a crony capitalist rather than a true capitalist.

If you really want to get steamed at rich CEOs, research how the financial system is rigged.  It is not capitalism that causes CEOs to make more money than God.  It is perversions of capitalism that do so.  Banks create money out of thin air to fund businesses that get rich with government help.  Government claims to interfere only in the name of fairness when the real agenda is self-enrichment through coercion.  Play the political game well and the world is yours on a plate.

So, my liberal friends, we do agree on something.  Income inequality is a problem.  The solution, though, is not more regulation, more government interference.  The solution is the elimination of government interference in the economy.  Let every baker bake to his/her potential and let the income chips fall where they may.  The baker who drives the Cadillac should stand out as a benefactor of society–one who was enriched by creating better bread and trading freely with others.  Let her be venerated, not despised.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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6 Responses to Income Inequality is Good

  1. Jim Syler says:

    “he has starting”?

    Otherwise, excellent article, although you might want to justify the statement that banks create money out of thin air. This is not obvious to most people.

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    • Terry Noel says:

      Thanks, Jim. That is a good point. I have covered that in some previous blogs. For a quick summary, though, to readers who may not be familiar with fractional reserve banking, anytime a loan is created, the “money” to lend is literally created with a bookkeeping entry. There is no money already on hand in the bank to lend out. Each new loan increases the money supply; the retirement of a loan through payoff reduces it.

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  2. White Indian says:

    Universal poverty” is a false premise. The last 30 years or so of anthropology have established the as a fraternité that valued liberté and égalité.

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  3. White Indian says:

    Universal poverty” is a false premise. The last 30 years or so of anthropology have established the as a fraternité that valued liberté and égalité.

    [sources]
    http://en.wikipedia.org/wiki/Original_affluent_society
    http://www.time.com/time/magazine/article/0,9171,901135,00.html
    http://courses.washington.edu/anth457/foraging.htm

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  4. littlehorn says:

    1- The title is completely false. There’s no such thing as a good economic outcome. An outcome is either the result of a just system or it isn’t. To say that one particular outcome is good is to engage in sectarianism, what state socialists do, you also commit. You do not know what incomes people would have, with complete liberty. Who’s to say that inequality is good or bad? Or that equality is? Suppose that I join a commune and we are all paid the same? Is that bad?

    2- Socialists make the point that oppression may also happen, legally in natural law theory, through sufficient disparities of power and conditions, which are in turn also determined by the outcomes of the voluntary contracts you mentioned. As you already know, the more one needs a contract, the more he will sacrifice to get it; also, the easier it is to exploit someone, the more you can expect him/her to be exploited. That is natural, and cannot be helped. Thus equality should be desired for its own sake, to further make sure that oppression does not step in through the unguarded back-door.

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    • Western says:

      So we should protect against oppression from the back door by allowing it in the front door with open arms? And if I am happy in choosing to be ‘exploited’ as you call it, who are you to say differently? If contracts are voluntarily entered into without coercion from opposing parties or the government, how is that inequality by choice bad? And be sure that without government interference there would be many more ‘less exploitative’ choices such that those most oppressive must cease to operate in such a fashion or risk obsolescence (google Hayek and spontaneous order).
      No system is infallible because man is fallible – liberty and self-determination should always trump slavery and coercion, regardless of your good-intentions.

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