I have resisted writing about the perceived problem of inequality in income and wealth—Thomas Piketty’s book, Capital in the 21st Century, has received too much unjustified attention already. But I gave in because I think what I have to add to the debate helps in rejecting Piketty’s argument that the wealth and income gap is somehow alarming and should be reduced.
Why is the attention to Piketty’s book unjustified? Because the wealth and income gap between the rich and the rest of us, whether growing or not, does not matter. Therefore, over 700 pages of analysis of this issue are a waste of paper and a waste of time to read and think about. (Disclosure: I have not read and will not read Piketty’s book).
As Harry Binswanger convincingly argues in a Real Clear Markets column [unfortunately, not accessible any more], income level is not a social but an individual issue. How much money someone makes is nobody else’s business, as long as they earn the money honestly, without initiating force or fraud, and are not forced to do it. The amount of money a person earns by working for someone else, by operating a business, or by investing is a matter of trade.
In (relatively) free markets your income depends on how valuable what you offer (your labor, your products or services, or your capital) is to your trading partners. And how valuable what you offer is, depends on your productivity: creation of material values, whether goods or services. The more productive you are, the more material values you are able to create, and the higher your income and accumulated wealth.
Our lives depend on productivity: without our productive efforts and those of others, there would be no material values—houses, vehicles, fuel, food, medicine, insurance, art, entertainment—that a flourishing life requires.
Productivity requires freedom: freedom to think and learn, freedom to choose with whom to trade, what to produce, where, and when, and how to dispense the results of one’s production (to consume or to invest). While slaves can produce material values under the threat of force, they lack the incentive to innovate new and better products and better ways of producing.
Throughout history, the freest societies have always been the most productive. For examples, contrast America (especially before it became a modern entitlement state) and Russia under various forms of dictatorship. Or compare Hong Kong and the mainland China. In the span about 70 years the former grew from a fishing village into a prosperous financial center with an average GDP matching that of the United States. The latter is still much poorer, due to its communist regimes, despite its more recent partial increases in economic freedom.
Now, take Piketty’s (and Bernie Sanders’ and other leftists’) argument that income inequality is a problem and should be reduced or eliminated. The only way to reduce the differences in income and wealth is to take (through taxation) from those who are more productive and give to those who are less productive. This reduces the freedom, motivation, and production of the producers. The consequences? Fewer material values are produced overall—given the lesser motivation, ability, and effort—and everyone’s ability to survive and thrive is diminished.
We should not envy those who are more productive than us nor demand the government to reduce the income gap. We should encourage and appreciate their productivity instead because their production, investment, and consumption (which means increased demand for products and services) create more material values and trading opportunities for us.
Curtailing the producers’ freedom and forcefully reducing inequality in income and wealth harm everybody, especially those with the lowest incomes. If we want less poverty and more prosperity, we should reject Piketty’s and others’ arguments against income inequality and embrace and defend freedom to produce and trade instead.
Originally posted 31 March 2014.
Photo credit: Max Pixel