With Inequality, Some Is Fair and Some Is Unfair

by Sascha Klocke

Should we care about inequality? Interventionists and egalitarians of all stripes would answer with a resounding “yes.” They argue that, in the words of former president Obama, inequality is “the defining challenge of our time,” and their criticisms of high and growing inequality such as Occupy Wall Street’s protests against the (symbolic) “1%,” Piketty’s Capital in the Twenty-First Century, or the annual Oxfam report on wealth inequality manage to draw a lot of public attention.

Conversely, free market advocates and proponents of capitalism appear to often categorically reject the notion, as illustrated by Daniel Lacalle’s recent Mises Wire article. Instead of focusing on inequality trends, Lacalle and others argue, we should focus on the achievements of capitalism with regard to the staggering increase in (material) living standards across the globe, and not worry too much that growth has not been evenly distributed. Inequality is seen as a natural outcome of the market process and economic development, provides positive economic incentives, and rewards individuals according to their efforts and services rendered to society at large. Public and political focus on inequality just serves as justification for continued interventionism, which is threatened by steady retreat of absolute poverty across the world. To quote Lacalle: “If the world eradicates poverty, the bureaucrat’s job is gone.”

Inequality, however, is a complex phenomenon, encompassing wealth and income as well as within — and between — country inequality, not all of which move in the same direction (global income inequality, for example, is now falling). More importantly, it is important to analyze what causes inequality. Whether inequality is good, bad, or indifferent is ultimately a moral judgment.¹ It is here that the free-market position would benefit from a more nuanced analysis.

Despite different judgments concerning inequality, interventionists and free-market advocates seem to agree that, for the most part, inequality is a natural outcome of the market process or “capitalist development.” Throughout history and across the globe, however, the causes of inequality have been multi-faceted and lie not only in economic processes, but stem also from the institutional realm. It is the latter — inequality caused by (state) intervention — which the supporters of the free market might also find objectionable and in opposition to their ideals.

One example, which should speak to Austrian economists and libertarians and addresses one of the most potent symbols of contemporary social movements, “the fight against the 1%,” is that of modern central banking and monetary policy. As Louis Rouanet and others argue, central bank policy, notably the creation of asset bubbles and Cantillon effects which redistribute income from the bottom to the top via inflation, has played an important part in increasing wealth and income inequality in the US over the last decades. This development has continued unabated in the aftermath of the financial crisis of 2007/08 and the subsequent “unconventional monetary policy,” and does not constitute a “normal” outcome of the market process, but a significant intervention in it (with policies such as bail-outs effectively eliminating one important half of the market’s profit and loss mechanism). It has also not resulted in unevenly distributed “improvement for all,” but in great material improvements for some and stagnation for many others.

Free-market advocates are, of course, often at the forefront of criticizing such policies and interventions. However, it would appear that linking such criticism explicitly to the inequality debate, acknowledging the concerns over rising inequality, and differentiating between “fair” and “unfair” inequality depending on its sources is a better strategy for the advocates of free markets than categorically dismissing that inequality is anything to be concerned with at all.

¹ Of course, there are also attempts to make value-free arguments for why inequality is “bad,” such as the proposition that certain levels of inequality harm “growth.” These, however, seem reminiscent of the “neoliberal” pattern where policy recommendations are declared to be “objective” on the grounds that growth or “efficiency” are somehow “objectively” desirable.

Sascha Klocke is a PhD candidate in Economic History at Lund University in Sweden and is a member of the Austrian Economics Meeting Europe.

Source: Mises Institute