Who Cares about Income Inequality?

It is common to hear prominent members of the Left – especially America’s executive, President Obama – discuss income inequality as if it were a dire, undesirable consequence of “unfettered capitalism,” capable of creating an environment in which the likes of Bill Gates stomp all over the poor and hoard all their extra dollars in some gargoyle-ridden castle in Vermont. They seem, unwisely, to see the American economy as a vast book with a limited number of pages – pages that increasingly belong to a dominant class of entrepreneurs, capitalists, and moguls whose interests are contrary to the public good. But, as I hope to briefly indicate, they also profoundly fail to take into account both the benefits of having wildly rich actors in a capital-based economy as well as the actual, economic conditions of poor people who live in unequal, but rich societies.

Firstly, it is critical to understand that capitalism, to be successful, requires the employment of capital for productive uses: On a microeconomic level, Joe wants to start, say, a local grocery store, so he constructs a business plan, acquires a loan from a bank, and uses it to purchase the necessary starting points that will establish an enterprise hopefully capable of creating jobs and becoming profitable. (This also constitutes an important inefficacy of socialism, but that’s not for this article to detail; see the writing of Ludwig von Mises, or Kevin Williamson’s very useful simplification of Mises’ theory). In order for the sort of activity in which Joe is engaging to occur thousands and thousands of times over, it is certainly useful to have large amounts of concentrated wealth – in billion-dollar banks, in individuals whose profit motive is likely to lead to the creation of innovative companies like Apple and Facebook. When you don’t have those wealthy capitalists or those “faceless” and expansive banks (to whom liberals also levy much undue criticism), the accruing of capital for economic purposes can be difficult and much less common. This, indeed, is not even to mention that the progressive idea which seemingly envisions rich people as draconian money-hoarders is completely devoid of sense, especially considering how difficult it would be to stuff a billion dollars under a bed. The reality that they miss is crucial: Dollars, whether they are stored in banks that then make loans or invested in corporations that create jobs, are useful, even in the hands of vast billionaires.

Regarding the nature of the poor in wealthy but unequal societies, it is worthwhile to consider the assertion that the sorts of economic conditions and institutions which tend to create a slew of really rich people are the same sorts of conditions which make the poor increasingly better off. Allowing capitalism to do its work generally entails the private market’s realization of profitable, technological innovation – not just in distributing resources more efficiently and cheaply, but also in providing goods to the marketplace that are consistently more advanced than whatever came before them. In the end, the environment becomes one in which the phones that billionaires had in the eighties are Paleolithic compared with those that lower-middle-class and even poor people use today; the iPhones of the twenty-first century, in like fashion, are getting cheaper and cheaper as the forces of competition urge Apple to continue to create better products. Charity, too, is a much more fluid and active entity in a nation enjoying rampant economic growth – a nation in which it is actually fashionable to engage in non-profit work and other forms of giving back – than in one that is struggling to establish the institutional roots of a sound economy.

The GINI index is a statistical measurement of the level of inequality within a particular nation, 0 implying perfect equality and 100 implying perfect inequality – analysts generally hoping to see mid-to-low scores as an indication of preferential levels of economic dispersion. If you look, however, at some of the nations that have “good” GINI index scores versus those with high scores, you cannot help but wonder whether or not this type of analysis is useful in measuring economic health: While (in 2010), the United States had a score of 41.1, Ukraine had a score of 24.8; while Israel had a score of 42.8, Slovenia had one of 24.9. Of course, there are a plethora of additional factors to consider when evaluating the health of these economies, but the prevailing consideration seems to me to be that their levels of inequality reveal little about their overall economic quality.

In short, the activists who incessantly scream about income inequality, big banks, and immoral businessmen are generally looking unintelligently at economic theory and data. When thinking rationally about the benefits of having large amounts of wealthy actors, the egalitarian ideal of the Left once again shows itself to be a poorly considered and philosophically adverse prescription for society. Conservatives and the Republican Party properly understand that income inequality is not a pernicious development, but rather one byproduct of a well-functioning, capitalistic economy in which funds are effectively and productively assembled and smart industrialists are able to enjoy the fruits of their innovative behavior.