Income disparities

Increasing income inequality seems to be the main thrust against capitalism these days. I was wondering what kind of views Austrian economists usually have on this? And I don't mean under the current wealth redistribution schemes, but in a completely free market.

George Reisman actually had an excellent piece on this. Here it is. At most, under truly free markets one will see rises in inequality corresponding to natural differences in productive capacity, the ability to exploit opportunities as they arise and so on. And there is no valid argument against this, in my view, except one that stems from a hatred of man's difference in ability. A lot of people assume libertarianism entails extreme inequality (even its advocates, such as Nozick, often think so), but the reverse is true. Remove the State from the picture, and the only inequality will be that caused by the differences in nature's endowments.

-Jon

 If one is able to acquire a great sum of wealth, they had to have done something for it that benifited others enough so that they would pay money for its service.  The growing gap between the rich and poor arises out of government sponsored dependency, and the alliance of corporations with the state.  In a free market the lower class that would usually be getting the government's dirty money would have an easy choice: either work and try to benifit society by applying themself, or go hungry and be forced to beg from private charity.  Most if not all would chose the first one.  There will always be a gap between rich and poor, but in a free market the rich would not get richer and the poor would not get poorer as they do now.  Instead the gap would be narrowed and society as a whole would be better off.  

The income of the poor (or non-working) is always "centered" around zero.  The income of the "rich" (or productively working) has no upward limit.  Therefore, in any growing economy, it's a mathematical certainty that the "income gap" will be growing.  The "income gap" is much higher in South Korea than in North Korea, but it's pretty obvious as to which has the higher standard of living.

 

maxpot46:

Therefore, in any growing economy, it's a mathematical certainty that the "income gap" will be growing.

But if this is true, then doesn't that invalidate capitalism in the long run? If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.

 

Libertas est Veritas:

If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.

 

Maybe their share of the pie is no longer as equal but there would be alot more sugar and good stuff in every slice due to the productivity of the system. For instance in the eighties only the richest people could afford Cd albums. But since there is more collective wealth in the less wealthy groups, not to mention a higher rate of sales, the companies had the incentive to cut costs and make the new technology more affordable. Things like this raise the standard of living for the poor. A poor person might not control one fourth of the gross domestic product but they do have what is now cheap technology that makes life easier to live and hence their standard of living is raised. You will find this in nearly any product market.

Libertas est Veritas:

If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.

Only if wealth is a zero-sum game, but it's not.  Economic exchanges aren't win-lose, they're win-win, hence the rising standard of living associated with growing capitalist economies.  Everyone improves, but obviously the more productive improve to a greater degree than the less productive.

 

Deist:

Maybe their share of the pie is no longer as equal but there would be alot more sugar and good stuff in every slice due to the productivity of the system.

It is quite possible that I am leaving something out of the process, but my problem is that while availability of consumer goods and such will increase, the availability of things like land will decrease (since you can't make more of it). At least is we assume that the income gap will keep growing, instead of stopping at some level. It's pretty much the basic terror scenario from the left, where unchecked capitalism will lead to a massive income disparity.

Libertas est Veritas:

maxpot46:

Therefore, in any growing economy, it's a mathematical certainty that the "income gap" will be growing.

But if this is true, then doesn't that invalidate capitalism in the long run? If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.

Inaccurate.

If your income stays the same and my income increase our income disparity has increased, but your living standard did not change.

What he was saying is that income disparity will change as new wealth is created. If I get richer, I am not making any poorer.

 

 

 

Libertas est Veritas:

It is quite possible that I am leaving something out of the process, but my problem is that while availability of consumer goods and such will increase, the availability of things like land will decrease (since you can't make more of it).

Lets assume the price of land increases as wealth increases. A poor person has the options of selling his land for a high price or to continue owning it. If the poor person chooses to sell his land he is better off because of this disparity, and if he chooses to keep it he is no worse off than before the disparity.

There is no exploitation here.

This is the industrial revolution, where farmers left their land to work in factories.

 

 

JonBostwick:

There is no exploitation here.

I'm not saying it is exploitation. I'm merely trying to understand the process of wealth accumulation in the long run, across generations.

Another important thing to remember is that exchange happens because of mutual benefit. As I get richer, I am making those that I do business with better off as well.

If I build a factory in order to make myself rich, I am providing jobs to many others who did not have the capital to build a factory theirselves. If the business fails I lose my inventment, but the workers can immediately go work for the competitor that replaced me.

In the division of labor it is the unskilled that benefit the most. Without division of labor the smart and the strong would still survive, but with division the weak and the dumb can be productive enough to sustain themselves on only their own labor.

Libertas est Veritas:

At least i[f] we assume that the income gap will keep growing, instead of stopping at some level.

It seems that nothing can grow forever; that other factors become functional as size increases. Thus, I wouldn't expect that the income gap will prove to be the exception. A similar process was conjectured under Malthus.

Libertas est Veritas:

...unchecked capitalism will lead to a massive income disparity.

What is the difficulty caused by massive income disparity?

At least one aspect is a continuing boon-- the high income people provide a market for newer, more expensive innovations, which later often become cheaper and thus available to the lower income people.

 

Junker:

What is the difficulty caused by massive income disparity?

Depends on the distribution. If the outcome is a healthy middle class, then nothing. But if the outcome is a weakening of the middle class, then you will run into problems.

I think it comes down to social mobility. If you can create large amounts of wealth relatively easily and lose it easily as well, then I don't see a problem. But it is hard to gauge, since these days the very rich are more or less creations of government intervention, not to mention being protected by those same interventions.

Libertas est Veritas:

Junker:

What is the difficulty caused by massive income disparity?

Depends on the distribution.

Okay, there seems to be a fundamental misconception here.  Income is not "distributed", i.e. it is not some fixed amount which gets spread unevenly throughout the population.  Income is generated or produced, a consequence of one's acts of making economic exchanges.  By specializing in producing one particular good or service in abundance, marginal utility kicks in for producers, and they are able to make beneficial trades of their product for everything else (or more specifically, money, which can then be traded for anything else).  These trades are win-win, because each partner is trading something he values little for something he holds dear.  Thus, income is created by the mutual beneficial exchange of goods/services produced under the division of labor (which allows marginal utility to lower the value of the product to the producer, allowing for beneficial trades).  Even better, any income left over after consumption becomes savings, which becomes capital, which allows even more productivity and an even better standard of living.  The rising tide lifts all boats (though the analogy breaks down when you realize that the faster, stronger boats somehow rise higher).

Now keep in mind that this is true only in an unhampered market.  As you mention, we have a government out there picking winners and losers.  The bulk of the losers happen to be the poor and middle-class (or as I prefer to call them, the "working" class), who are heavily victimized by the state, primarily by three methods, 1) overtaxation, 2) frivolous imprisonment and/or property seizures, and 3) currency debasement (this is not to say the state doesn't commit thousands of other offenses).  This often results in a poor quality of life that is correlated with being poor or working-class, but has little to do with income per se.  Most folks are making plenty of money to live good lives, if only the government would stop taking half of it and debasing what's left.

maxpot46:

Okay, there seems to be a fundamental misconception here.  Income is not "distributed", i.e. it is not some fixed amount which gets spread unevenly throughout the population.  Income is generated or produced, a consequence of one's acts of making economic exchanges.

Thank you.  This is beautiful.  I'm collecting short, precise and simple explanations to use in discussions with people who may not have considered rational economic thought before.

 

 

I can't remember whether it was Hayek or Mises I was reading who said that wealth inequality is a consequence of the market price structure that serves to exert pressure driving the factors of production towards the market's most urgent uses. The alternative to this is an authoritarian system that allocated the factors according to some central plan. In the former system, there is at least some freedom. In the latter, there is none.

Attempts at reducing wealth inequality weaken the effectiveness of the structure of prices to order the factors of production. In otherwords, a less efficient market.

The problem of wealth inequality though is not economic, it is social. It increases crime rates and general social unrest. Severe inequality is likely to lead to much social friction which could serve to damage or weaken market institutions anyway. Therefore, it is worth considering the possibility that some tempering of wealth inequality might be necessary...