Wealth Inequality Rocks – Econlib

None can dispute that wealth inequality has become a hot topic. Of course, many economists have written about the issue; Ludwig von Mises has a cool, short article here and I adore Ben Powell’s short book Out of Poverty. However, many economists seem to relegate wealth inequality to some bane of existence, like traffic or Thomas Piketty. This leads many free-market proponents to merely defend wealth inequality as necessary, but not preferred.

I would suggest otherwise. That some individuals can amass more capital than others is an awesome feature of the economic progress we enjoy. As I understand critics of wealth inequality, too much concern is placed on relative incomes between arbitrary classes of people, as if whatever ratio they produce is inherently “bad.” As I plan to demonstrate, any uneven ratio of incomes would be (if anything) good. 

Richard Posner explains in a great 1970s paper a fundamental problem that humans have faced for millennia: that of protecting wealth. For folks of the 21st century, this concept seems largely foreign. Many don’t give a second thought to the protection of their property. Sure, you can call the police if a car is stolen. But how prosperous we are for that to be true!

As a thought experiment, imagine you were to visit Mars and discover a lone, sentient alien. Lucky you! Will you trade with it? Will you attempt to talk with it? Will you even go near it? If you desire life, your answer should be a resounding no. What incents the alien to keep you alive? You have no idea. That’s because the alien’s choices are not affected by human courts, police, norms, or opinions. Quite literally, it could steal all your property and leave. This is the issue that every person must resolve before pursuing cooperation with others, and our institutions develop constantly to ensure said cooperation. 

Posner uses this concept to discuss primitive societies. A fundamental issue with primitive society is that amassing wealth attracts theft. What could a person do if they, say, found a hoard of treasure? If they remotely indicate this to others, then the threat of theft is incredibly high because no overarching institutions narrowly define individuals’ property rights. They could hire bodyguards, but the bodyguards would have incentive to renege via appropriable quasi rents. Finding ways to peacefully cooperate has been the fundamental issue to humanity forever, and only through tedious innovation have we arrived at a state of the world where individuals have such specifically-defined and enforced property rights. 

In primitive societies, wealth inequality is exceedingly rare because of the constraints to wealth-building. If the Wright Brothers discovered flight in 1400 AD, there would be much lesser incentive to act on this information because wealth accumulation was constrained. That we can reward innovators for improving our lives (and reciprocally punish bad entrepreneurs) is a monumental achievement for humankind, not just an unfortunate state of affairs. Poorly-defined property rights and lower standards of living are inextricably (causally) linked, and critics of wealth inequality must assume this relationship away in arguing that wealth inequality is “bad.” An uneven ratio of incomes is necessary for feedback loops in resource allocation, and for merely demonstrating preference in a world wherein people prefer differently.