The disproportionate influence of the wealthy in the political system comes to mind.
The OP was about whether income inequality is good or bad, or whether it is a sign of a healthy free market. The answer to the first question is it is bad. As far as the second question, Bricker was stating income inequality is a sign of meritocracy. What I and others are saying is that income inequality is the opposite of meritocracy, it leads to aristocracy and plutocracy/oligarchy.
In an unequal society the wealthy and powerful can just co-opt the levers of power (the police, the military, religion, judiciary, politics, media, academia) and use them to force the rest of the public to serve their interests. As a result people who are more intelligent, harder working or more innovative than the aristocrats never get off the ground because the system is designed to suppress and outmaneuver them since the aristocrats have co-opted all the levers of power.
Social mobility is much higher in countries with lower Gini coefficients. Higher income inequality is a threat to meritocracy, not a symptom of it.
http://people.anu.edu.au/andrew.leigh/pdf/InequalityMobility.pdf
A corporation can lobby for stricter laws or stronger enforcement of existing laws, run prisons in rural communities, and get the inmates to perform labor for a pittance.
There’s an example.
Regarding the OP, some inequality is necessary in a capitalistic society. A person wants to move up in society, therefore she adds to society in a meaningful way in order to receive compensation in order to elevate herself. I think this is good.
There is such a thing as too much inequality, where the people at the lower end of the spectrum realize things are so unequal that they have no chance of moving up. I think this destroys incentives and results in a general malaise, resentment and alienation. I fear we are on the way to this scenario.
I can see both sides of the argument.
A true meritocracy, which I think a lot of free marketeers strive for, would not result in anything resembling income equality.
But, OTOH, as can be seen from the papers and from studying other countries in the world, income inequality, once established, has a lot of inertia. Once poor, people generally stay poor; once rich, people generally stay rich. The greater the inequality, the more unlikely moving between social ladders is.
Furthermore, as far as I can tell, the unspoken fear of free marketeers is that the implied solution to the problem of income inequality is wealth distribution. I can empathize with that fear. I’m upper middle class, and I certainly didn’t get there by the way of privilege, and I hate the idea that I’m implicit in oppressing others just because of my income.
I would think that a better solution would be to place tools in place for social mobility, rather than emphasizing correcting income inequality. The standard should be measuring whether the poorer are getting richer or not; income inequality all in itself is a bit of oversimplification IMO. Things like quality education, subsidized secondary education, much better sex education, estate taxes, and so forth might go a long way into creating a meritocracy rather than a plutocracy.
And again, this correlation is wrong because it is not the goal of the free market to dispense equality. The sign of a “healthy” of free market is simply freedom from government interference to choose the products & services according to your preferences. That is all.
Incorrect. Think about what you’re saying.
Let’s say you EQUALLY DISTRIBUTE $100k of income to 10 people. 9 people spend it on worthless junk and vacations. 1 person spends $10k on an investment with a return of 5% and saves the rest.
Next year, you EQUALLY DISTRIBUTE $100k again. Look what has happened: 9 people get $100,000 but that 1 person gets $100,500 ($100,000 + $500 5% interest on 10k). He now has more “income” – $500 more than everybody else.
What do we do now? We take that one person’s interest income on $10k and RE-DISTRIBUTE IT AGAIN among the other 9? Otherwise, that one person saving his income is building a plutocratic empire, right?
What are the solutions here? Confiscate all savings and redistributed them? And establish a 100% inheritance tax?
And which aristocrats in America kept Andew Carnegie the messenger boy down? And which plutocracy oppressed Sam Waltan and prevented him from building up Wal-Mart?
I would point out that if 20% of the people control 85% of the wealth, that’s yet another example of the Pareto Principle, which states that in any large system, 80% of the effects come from 20% of the causes (the 80/20 rule).
Pareto actually came up with his principle when studying wealth distribution, which is surprisingly similar in many countries. In 1989, the year cited in the article, 20% of the world’s population earned 83% of the world’s income. And the ratio holds the deeper you drill - if you look at that bottom 80%, you find that of that wealth, 20% of the people hold 80%. And if you look at that 20%, you’ll find that 20% of those have 80% of that proportion. It’s a surprisingly consistent ratio.
This rule holds up over lots of sociological effects. In an organization, 80% of the productivity comes from 20% of the workforce. 80% of HR’s workload is generated by 20% of employees. 80% of patents come from 20% of engineers and scientists. 80% of programmer productivity comes from 20% of your programmers. And so it goes.
It is therefore almost a given that if your society is free, 80% of the wealth will be collected by 20% of the people - because they’re the ones having the most effect on society. They’re the hardest workers, the best thinkers, the most financially adept, etc.
We’ve been around and around on this before on this board. The lefties are never going to be convinced that wealth distribution is anything but the powerful elites manipulating the world to take what they want at the expense of the poor. So you get studies like the one linked in the OP - a study of economics carried out by an epidemiologist with a partisan axe to grind, written up in a socialist magazine.
I found the article to be less than compelling. For one thing, he draws a lot of spurious correlations to prove his point (such as comparing income inequality with the prison population). He spends a lot of time talking about the psychological impact of inequality, despite the fact that he’s not a psychologist. He makes all kinds of sweeping conclusions that aren’t justified, including working global warming into the discussion. And he prattles on about ‘dominance hierarchies’ in monkeys and other theories for which he presents no evidence at all. Very weak.
And his answer to the problem? Peace, love, cooperatives, ‘democratic economics’, wealth redistribution, employee ownership of businesses… Basically the socialist playbook. What a shock.
He also doesn’t mention that the data by country is heavily skewed by a few kleptocracies and dictatorships at the top. This is what correlates a lot of the bad effects he mentions to Gini Index - but it’s a spurious correlation. The real correlation is more like, “In dictatorships, most of the wealth is extorted by the ruling class. Oh, and they arrest a lot of people, too.”
If we restrict our discussion to only modern 1st world democracies, the first thing you notice is that wealth inequality is surprisingly consistent, even in countries with very different taxation levels, with almost of these countries having GINI indexes between 25 and 40 (compared to the more despotic countries, which have Gini indexes up in the high 50’s and 60’s).
For example, the U.S. has a Gini index of about 41. But The UK, which is much more redistributive, with higher marginal rates, public health care, etc., still has a Gini index of 36. And some outright socialist or communist countries, such as China and Venezuela, have Gini indexes even higher than the U.S.'s.
To me, this robustness of wealth inequality tells us that it’s not about social policy redistributing wealth - it’s simply the fact that when people are free to benefit from their own ability, the nature of the population distribution dictates that most of the wealth will wind up with the most capable people. And in fact, the large number of supposedly socialist or Communist countries with high Gini indexes indicates that even when government power is increased, it just winds up being hijacked by the top 20% for their own purposes anyway.
Perhaps we should be more worried about how the top 20% get 80% of the wealth. You can set up a system whereby the top 20% can only get 80% of the wealth through providing goods and services that 80% of the population wants, or you can set up a system and its incentives such that the top 20% happen to be the ones most adept at wielding political power. I know which system I would prefer.
Maybe people need to stop worrying so much about how well the rich are doing, and start focusing more on whether there are roadblocks in front of the poor preventing social mobility.
I agree with both of these statements. The “fairness” of a system shouldn’t be judged by the equality of its results; it should be judged by the quality of its opportunities. I have no real problem with a system where one percent of the people own a third of the wealth - as long as everyone has an equal opportunity to enter that one percent.
Too little income inequality would be a problem. If everybody got the same income, nobody would do the more challenging jobs.
Too much income inequality would also be a problem. Then you have poor people who have nothing to lose. People like that, historically, have started peasant revolts. I’d rather live somewhere with no revolts.
Could I have a cite for those assertions please? Because it conflicts with the evidence I’ve seen - that the U.S.'s income mobility is at least as high as it is in countries with lower ratios between rich and poor, and in some cases the U.S. is better - for example, income mobility in the U.S. is greater than it is in the UK, despite the U.K having a lower Gini index.
Estate taxes don’t appear to have much to do with it, since the vast majority of held wealth is not inherited. Canada has no estate tax, but we have a lower Gini index than the U.S, which has had estate taxes. The U.K. has an estate tax of 40% of assets greater than 325,000 pounds, yet it has a higher Gini Index than Canada.
Sam Stone has basically said what I said above (we should be focusing on equality of opportunity, not equality of outcome), only he said it a lot better…
The goal of the market is to improve human standard of living, productivity and purchasing power in a sustainable fashion. Doing so requires regulation.
What you are describing in your example is perfect redistribution, which is not realistic or desirable. Nobody is saying people who make good choices shouldn’t be rewarded for those choices. However when income inequality goes too high then even when you make bad choices, you still control enough levers of power to survive and thrive. The financial industry recently collapsed the global economy. They got a bailout and are now blocking legislation to stop them from doing it again. That is plutocracy in action. You worry that income equality doesn’t reward good behavior. However income inequality ends up rewarding/tolerating bad behavior since the plutocrats who commit bad behavior have enough power and influence that nobody can stop them.
On the subject of the Robber Barons you should read up on some of the things they did if you are going to use them as examples of meritocracy and free markets.
Fisk and Gould tried to corner the gold market. They used their capital and political influence to do it. As a result they got money and tons of people ended up broke. W/o their capital and political ties they could not have done that.
Another thing that happened was people like Vanderbilt would lower the cost of their rail lines at a loss, until all competition was destroyed. Then when Vanderbilt had a monopoly he would jack up the rates since nobody could compete with him.
On the subject of Wal-mart, my SIL worked in banking. She said when a walmart came to town they’d go to all the banks and request as many loans as possible, even if they didn’t need them. The goal was to ensure that there were not enough loans for competitors to walmart (local stores, other retailers, etc). So there you have another example.
Here is another example. In a free market there is competition. However for pharmaceuticals the companies can lobby the government to ban the reimportation of drugs from foreign countries. They can also bribe generic drug makers from releasing generic products. So pharmaceutical industries can either bribe their competition to not release competing products or bribe the government to making their international competition illegal.
Like the article I posted said, social mobility goes up as inequality goes down, Walton and Carnegie not withstanding.
You mean with programs like Affirmative Action? Governmental loans for college and the such?
Amazing to me, is that it is not and never will be enough for the woe is me crowd.
The per capita number of patents granted does not reflect income inequality. In fact nations with lower Gini coefficients like the Scandinavian countries have more patents per capita.
http://www.nationmaster.com/graph/eco_pat_gra_percap-economy-patents-granted-per-capita
The Pareto principal doesn’t hold either, because in the 70s the top 10% only held 33% of wealth. Now it is over 50%. The top 1% went from about 9% of national wealth in the 70s to 24% in 2005, I think closer to 26% now.
http://www.nupge.ca/files/images/2009/top1__us_income_chart_450.jpg
So the Pareto principal is a justification after the fact, not a rule. As far as Gini coefficients and dictatorships, many of the nations with high Gini Coefficients are Latin American democracies. So the concept that the flaws can be blamed on dictatorship aren’t true, there are generally 2 kinds of unequal societies. African dictatorships and Asian/Latin American democracies. However the rates of corruption are a bit higher in those countries, which is more a cause or effect question.
China is socialist in name only at this point, and the Gini Coefficent of Venezuela has declined dramatically in the last few years from 48 in 2003 to 42 in 2007.
http://www.cepr.net/index.php/press-releases/press-releases/cepr-paper-responds-to-foreign-affairs-on-venezuela/
The Gini curve in the US follows a U pattern of declining during the depression through the 60s, then rising rapidly during Reagan’s era.
http://www.thewe.cc/thewei/_/images11/us_rich_scandal/income_inequality_us.jpe
However innovation was constant throughout this period. The idea that we have inequality because a few people are being innovative doesn’t strike me as true. We had innovation in the 60s too, when our Gini coefficient was much lower.
The concept that income inequality is a natural side effect of good judgement or work ethic doesn’t strike me as true. If it were, why did it start rising dramatically with the political rise of movement conservatism? And why do nations with lower inequality still produce at the very least the same amount (if not more) patents per capita than less equal societies like the US?
Are the top 1% (who made 9% of national wealth in the 70s) suddenly working 3x harder to earn their 24% of national wealth? If so, how?
And income inequality is a problem for the reasons I outlined. The wealthy can buy the levers of power and cement their status as aristocrats and plutocrats. And as the article I posted shows, income inequality leads to lower social mobility among the poor. A good way to increase mobility in the poor is to lower inequality.
This is as much a problem of concentrated government power. Yet you always seem to think the answer is even more government power.
The plutocrats aren’t blocking legislation - they’re co-opting it. They always have. Goldman-Sachs was a huge beneficiary of the TARP program - and it’s also the most politically connected of all the major financial firms.
The railroads were a case of a government-imposed monopoly. People like Vanderbilt were given land grants which is what allowed them to shut out their competitors.
A really bad example. I’d like a cite other than the recollection of your sister-in-law, because this doesn’t pass the smell test. There’s no local pool of funds that Wal-Mart can ‘corner’. This sounds like another anti-Wal-Mart urban legend.
‘Banning’ generic drugs comes from patent law. Basically, you’re not allowed to steal someone else’s research. How horrible.
As for drug re-importation, you need to learn how it works, and what the effect would be of allowing it. Basically, it would drive up the cost of drugs by making the market less efficient.
Other studies have shown otherwise. And your linked study seems very limited. The dataset seems small, and I question the inclusion of outliers like Chile. If you look at just the cluster of large market economies in the center, the pattern is much less clear. For example, Canada has a higher Gini Index than Norway, West Germany, and Australia, but more mobility. The U.S. has almost the same intergenerational mobility as Norway, despite it having a dramatically higher Gini index.
And your paper only discusses intergenerational mobility (did I do better than my parents?), and not individual mobility through life (do poor people have opportunities to get richer through hard work?).
Do you have a cite for this?
That is a misleading way of putting it. After a drug’s patent expires, pharmaceutical industries pay generic makers not to release the product on the generic market to compete with the brand name drug. That is different than what you are describing.
I have never heard the argument that re-importation would drive up costs. Why does government negotiation different from private negotiation of prices?
Reimportation will actually drive prices down since domestic sellers will have to compete with international markets.
Sorry, Kearsen, I’m not following your point here…
Cite please. That sounds like complete nonsense to me. a) Banks don’t lend out their entire loan portfolio to one company, and b) if the company was taking out loans it didn’t need just to hurt local mom & pop stores, it’d be a lot easier and a heck of a lot cheaper to just buy out the stores.
If you aren’t going to believe third person anecdotal evidence, then I weep for the entire GD forum.
I don’t have a cite, I’m trying to find one but cannot.
Free market is about honoring an individual’s freedom of choice. Regulations include enforcement of contracts and punishment of willful fraud. Regulations should not include price manipulation, rent ceilings, or subsidies.
You can’t seem to follow the point of my examples. I emphasized that there was no shadow plutocracy holding those men down. You then go and elaborate in further detail about what their businesses did which has NOTHING TO DO with how the so-called “plutocracy” oppressed Fisk Gould, Vanderbilt and Walton, all born with humble beginnings.
That article is flawed because their research method was backwards. They measure income inequality and then conclude social mobility. That is backwards. You don’t try to fix income equality first to encourage mobility… what you do is set up structures for opportunities (establish private property, enable low friction business licensing, remove corruption from courts, etc) that allows everyone to create value. Shuffling money around from one person to another does not solve income inequality.