What Precisely Is Wrong With Economic Inequality?

By Peter C. Earle

Why is it, precisely, that we are supposed to be alarmed by inequality? The usual answer is that too much of it leads to social disorder and dangerous political unrest. People seethe in seeing so much wealth around them even as they themselves struggle through. 

This is a key part of current narratives regarding allegedly spiraling rates of inequality — in fact, a key part of narratives regarding inequality going back as far as Aristotle. A large and/or growing degree of wealth inequality, so the story goes, inevitably creates an unruly population that ends in tearing up the social fabric. The French Revolution, this description typically insists, is both evidence and example of this phenomenon. 

Is it true? A major initial problem with the claim is measuring inequality. Econometric calculations of inequality are highly sensitive to data choice, quality, and interpretation. My colleague Phil Magness has made this abundantly clear in his recent research, which casts substantial doubt on the widely reported findings of Saez, Zucman, and Piketty, et al. Perhaps tying the alleged risks of civil turbulence to the existence or growth of inequality serves as a catch-all for those unfamiliar with, not receptive to, or for any other reason ambivalent where Gini coefficients, Galt scores, and other quantitative measures are reported. 

Or perhaps existential threats serve to overthrow the instinct to observe the foundational protection of property rights; yes, even of billionaires.

Academic literature regarding the macroeconomic implications of power-law distributions is arcane, passionless, and yet of supreme importance in understanding the outcomes of market systems where the distribution of wealth is concerned. Nevertheless, most individuals probably understand that widely contrasting talents and inabilities across a given society, exercised at different times in different places in different ways, will necessarily see vastly disparate outcomes. 

And yet, the “Wealth inequality leads to social upheaval” rendering is even more easily dispensed with than the quantitative evidence.

Two brief comments regarding the French Revolution. First, asserting that it occurred because of or even primarily owing to the singular factor of wealth inequality should produce the same high degree of skepticism that any social science finding predicated upon simple linear regression would. Second, the role of taxation in the fomenting of the French Revolution is consistently, and somewhat suspiciously, left out of the egalitarian account.   

In any society, there is always some degree of simmering turmoil. It strains credulity to allege that — without sensational dissemination by the media or other partisan interests — by some unnamed process, wealth disparities will cause it to rise to a feverish, actionable pitch. To assert that, absent incitement, at some level an invisible scale will tip and unleash tremendous disturbances upon the realization of a particular level of wealth disparity is the same variety of unfalsifiable drivel (some would say mysticism) which undergirds such terms as “animal spirits,” “gouging,” and “neoliberalism.”

Additionally, levels of or changes to economic inequality move at a glacial pace and, at any given time, are essentially impossible to see — outside of extremes. Alarmist screeds regarding wealth inequality are primarily driven by political and academic interests, constituting the left-wing or “liberal” equivalent of the right-wing, “conservative” fear-mongering over immigration, legal and illegal. Neither represents a threat to the broad sweep of individual citizens, but democracies are susceptible to doomsayers.

Envy, it bears mentioning, is an inalterable facet of the human condition. But there is scant evidence that jealousy (again, if unfostered by politicians and court intellectuals) has effects which consolidate and multiply socially. Less so does it follow that government intervention should be employed to blunt widespread covetousness … any more than laws or policy should be enacted to prevent the mass profusion of, say, joy or cynicism.

Once the apocalyptic rhetoric regarding the implications of economic inequality is disposed of, the testable arguments as to the actual degree of wealth inequality at a given point in time, and/or whether it is an artificial or natural by-product of prevailing economic policies, are reduced to their proper fundamental form: controvertible hypotheses which, while amenable to empirical treatment, remain eminently sensitive to the circumstances of time, place, and methodological treatment.

In short, the presumption that inequality leads to upheaval is highly questionable and ultimately unproven. The lack of opportunity to move up the social ladder? Yes, there is plenty of evidence that this leads to what people fear. Inequality and lack of opportunity are different animals. The latter issue is solved by more freedom, not a more equitable redistribution of what we already have.

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Peter C. Earle

Peter C. Earle is an economist and writer who joined AIER in 2018 and prior to that spent over 20 years as a trader and analyst in global financial markets on Wall Street. His research focuses on financial markets, monetary issues, and economic history. He has been quoted in the Wall Street Journal, Reuters, NPR, and in numerous other publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point. Follow him on Twitter.