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Economic Inequality Is a Red Herring

(Joshua Lott/Reuters)

There’s nothing wrong with working for minimum wage, just as there’s nothing wrong with being unable to touch your toes— but if you wish to make more money, you must gain valuable skills, experience, and perhaps start stretching.”

Economic inequality has become an axiomatic issue in many circles, often invoked by the current  Democratic presidential candidates. It’s self-evident, apparently, that for some people to be wealthy while others are poor is inherently objectionable. The argument is as follows: Money is a finite resource in a zero-sum game (beneficial to one at the cost of the other). Therefore, those who capture a larger share do so at the cost of others. Thus, vast wealth is responsible for vast poverty. Put another way, economic inequality is a problem because the rich are wealthy at the cost of the poor—the richer the rich, the poorer the poor. In this framework, having wealth is not only unjustifiable; it is immoral.

The assumption that money is a finite resource in a zero-sum game is simply incorrect, though it’s easy to conceptualize it as such. We often think of the economy like our personal bank accounts, which are finite indeed. But instead of a bank account, the economy should be thought of as an expanding network of mutually beneficial transactions. Being a part of the economy makes you a shareholder, and when it grows, we all benefit.

Economic inequality is a red herring because it distracts from not only the real problem, but the real solution.

In a free market, a business makes money by fulfilling market demands. A consumer will purchase a product or service if the value it provides is equal to or greater than the cost. A business will sell a product or service if the value it brings to the consumer is greater than the cost to produce. Both the consumer and the business gain from this transaction. With the revenue made from these exchanges, the business pays workers for their time and expertise in helping to create and manage newer and better products and services. These individuals become customers for other businesses, and the cycle repeats. Clearly, money is not gained at the cost of others. Rather, such an economic system is a universally beneficial positive-sum game. In fact, in a free market, the business will fail if the relationships are not mutually beneficial. Since money is a generative resource in a positive-sum game, the rich are not benefiting at the cost of the poor. In fact, it’s the opposite: The rich are earning money by giving everyone what they want.

It should be noted, however, that consumer-business relationships are not always positive-sum games. This would be the case if the consumer didn’t have the freedom to choose from competitive options, like in a monopoly or nationalized industry. If there is only one seller of the product, or if it’s produced and mandated by the government, the price may very well exceed the value that it provides, and therefore the sale will benefit one party at the cost of the other. Similarly, if corporations are supported by taxpayers through excessive subsidies, preferential licensure, or bailouts, businesses no longer have to innovate and compete, thereby keeping prices artificially higher. Crony-capitalism of this sort weakens the capacity of an otherwise free market to provide economic opportunity to everyone.

But how can we explain the vast difference between the top income earners and those who work for minimum wage? The answer may be disappointingly simple. Differential ability is compensated differentially. High-paying careers require specialized skill in fields that are in demand. Compensation must be greater than the cost of acquiring the requisite skills for the position, though not greater than the level of productivity the employee provides. In this way,  the worker-employer relationship functions similarly to the mutually beneficial consumer-business relationship. However, we must remember that the job market is a market, and certain skills are valued higher than others. It isn’t simply that time invested in any skill acquisition will result in higher salary; it’s the skills valued by employers that will bring high returns.

Regardless, there are those who still find it objectionable that a CEO might make ten million dollars a year when other people are working at the company for minimum wage. It’s the same reasoning, though, that justifies Simone Biles winning four Olympic gold medals when I can’t even touch my toes. There’s nothing wrong with working for minimum wage, just as there’s nothing wrong with being unable to touch your toes— but if you wish to make more money, you must gain valuable skills, experience, and perhaps start stretching. To belabor the metaphor, CEOs are the Olympic athletes of the business world. They invest a great deal of time and money in a rigorous education only to engage in intense competition with other candidates for executive positions. And once they make CEO, the workload or responsibility certainly doesn’t let up. CEOs on average spend more than  60 hours per week piloting the billion-dollar organizations they lead. For obvious reasons, it’s important to have an extremely competent individual at the helm, and that extreme competence is expensive.

And so comes the objection: “Couldn’t a CEO just take a pay cut so other employees could make more?” Of course, but there’s a difference between voluntarily taking a cut, which does occasionally happen, and a company choosing to pay the CEO less. The former is a perfectly reasonable personal decision, but there’s a big problem with the latter. If a company doesn’t pay its CEO competitively, they’ll go elsewhere, and you’ll get a less competent individual at the helm, who may risk the jobs of everyone. Differential skills are compensated differentially, and so long as employment is voluntarily agreed upon in an open market, there’s nothing wrong with that.

Just as economic inequality isn’t inherently objectionable, economic equality isn’t inherently laudable. Inequality is usually quantified using the Gini index, a measure that indicates the wealth distribution of a population. The number ranges from 0 to 100, with 0 representing perfect equality (where everyone has the exact same amount of wealth) and 100 representing absolute inequality (where one person has everything and everyone else has nothing). It’s often lamented that the United States scores higher (less equal) than some of our European counterparts. However, the United States also has higher inequality than Uganda, Ukraine, West Bank, and Ethiopia, to name a few. It is certainly not the case that in these countries everyone is equal in their prosperity. This can be accounted for by the great equalizers: Disaster, disease, and war. Economic equality often comes in the form of poverty—not in the form of prosperity.

Poverty is the only side of the inequality dichotomy that matters, both pragmatically and ethically. It is the issue of poverty that should concern everyone, as it is indeed a moral crisis. Worldwide, 750 million people are living on less than two dollars per day. These people struggle with the basic needs of food, water, shelter, and they often don’t have access to proper medicine or education. Fortunately, the large-scale solution is in the works, as we’ve already lifted a billion people out of poverty from 1990-2015, a trend that continues today. This was not accomplished through regulated industry and redistribution, but by creating economic opportunity through the spread of free markets.

This is evident when we look at another claim popularized by current Democratic presidential candidates: The Shrinking Middle Class. It’s true that the middle class is shrinking, and this gives the impression that people are getting poorer while the rich are getting richer. It is often untold, however, that not only is the middle class shrinking, but so are the two classes below it, the lower-middle class and the poor. Pair this with the fact that the upper middle class is growing rapidly, and this trope becomes great news! People are being lifted into the upper middle class.

The objection to economic inequality is not only misguided; it is sometimes also wrong. There are those who will argue, regardless of the cause of poverty, that it’s still inherently objectionable for some to be rich while others are poor, even if the wealth of some did not predicate those unfortunate circumstances. This attitude is telling of the true motivations of those who might ostensibly wish to help the less fortunate. These are Nietzsche’s “Tarantulas,”people who operate under the pretense of sympathy for the impoverished, though it’s not that they love the poor: it’s that they hate the rich. A person who accepts that wealthy people are not responsible for the circumstances of the poor and still thinks wealth to be objectionable is clearly possessed of a resentful ideological sentiment.

Economic inequality is a red herring because it distracts from not only the real problem, but the real solution. Free market capitalism provides opportunity for economic growth through private property, voluntary transaction, and competition. It’s this system that’s responsible for lifting billions out of poverty, rewarding people differentially in doing so, but more importantly rewarding everyone. Poverty is the real problem, and free markets are the real solution.

Shaun Cammack is a graduate student in the Social Sciences Division at the University of Chicago. He writes about culture and politics, and you follow him on twitter @shaunjcammack.

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Darren Iversen
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Darren Iversen

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