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Inequality Serves a Social and Economic Purpose

November 11, 2002

In a recent article, Paul Krugman pines for the lost America of the 1950s and 1960s, which he characterizes as a "middle class society".[1]  While inequality existed, Krugman tells us, it was not nearly as bad as the Gilded Age where robber barons ran roughshod over the less fortunate.  It is Krugman's contention that the United States has returned to a Gilded Age as extravagant as the original, characterized by the widening gap between the haves and have-nots.  

While pointing out the many social and economic "problems" in the U.S., Krugman fails to offer any recommendations regarding how to fix them.  Here, I would like to focus on two issues that are the foundation of Krugman's analysis.  They are (1) the idea of class distinction, or class struggle, which leads to (2) the notion of inequality as bad and equality as good.  These concepts are not exclusive to Krugman – we hear them used on a daily basis by politicians, the media and economists among others.  It makes sense then to explore them in more detail.

Throughout the article, Krugman warns that he will be accused of "class warfare" for focusing on the topic of inequality.  While we will not fault him for this, we do find fault in his incorrect characterization of class distinction as a struggle between static groups.  Simply put, Krugman obfuscates the problem of inequality by confusing the notions of class and caste.  In a caste society, individuals inherit their caste membership from their parents.  Only in exceptional cases can a man rise to a higher caste; birth determines his position in life.  As Mises, writing on Marx and his theories, indicates:

Where status and caste differences prevail, all members of every caste but the most privileged have one interest in common, viz., to wipe out the legal disabilities of their own caste.  All slaves for instance, are united in having a stake in the abolition of slavery.  But no such conflicts are present in a society in which all citizens are equal before the law.  No logical objection can be advanced distinguishing various classes among the members of such a society.[2]

In a capitalist society, no such distinction of classes as castes can be made.  Any distinction of classes only serves to represent some snapshot in time as movement between classes is continually fluctuating.  This is in stark contrast to the caste system where affiliation with a class or caste is hereditary and largely unchanging.  Turning again to Mises:

It [class membership in a capitalist society] is assigned to each individual by a daily repeated plebiscite, as it were, of all the people.  The public in spending and buying determines who should own and run the plants, who should play the parts in the theater performances, who should work in the factories and mines.  Rich men become poor, and poor men rich.  The heirs as well as those who themselves have acquired wealth must try to hold their own by defending their assets against the competition of already established firms and of ambitious newcomers.[3]

The market provides no privileges and does not discriminate based on sex, religion, income, etc.  Individuals are free to move between classes based on their ability to satiate the desires of others.  All agents, regardless of class are in competition with all other members of society.  Assuming that all individuals are equal before the law, all are free to compete for any and all social positions as they wish.  All that stands in their way is their natural abilities and their ambition to serve the needs of others.

This leads us directly to the notion of inequality.  Only by freezing individual incomes at some moment in time are we able to consider class distinctions.  Having established these clear-cut classes, one is then able to see that some have more relative to others.  That is, they are unequal.  

Initially, we must ask, why is equality the social goal toward which we strive?  This is a broad ethical goal which Krugman completely fails to justify.  Is our end goal a state of the world where all individuals have exactly equal incomes?  Is there some degree of inequality (i.e., an "income gap") that is acceptable?  If so, why?  If not, why not?  These questions aside, let us further consider the notion of equality.  Rothbard provides a clear explanation:

Let us take three entities: A, B and C. A, B, and C are said to be 'equal' to each other (i.e., A=B=C) if a particular characteristic is found in which the three entities are uniform or identical.  It follows…that A, B, and C can be completely 'equal' to each other only if they are identical or uniform in all characteristics.  We see, then, that the ideal of human equality can only imply total uniformity and the utter stamping out of individuality.[4]

Attempts at imposed equality destroy individuality.  Individuality allows for specialization, the division of labor and economic progress.  When it is hampered, so are these outgrowths.  The critic may vociferously object: "Krugman is only calling for equality of income, not equality in all areas of life!"  Our response is that the two are inextricably related.  

Freedom is central to individual progress and hence the development of society as a whole.  Allowing individuals to keep the fruits of their labor is a critical part of this freedom.  Coercively extracting any part of his income directly violates this freedom.  Any attempt to achieve equality is an attempt to erode, and ultimately destroy, individuality.  From this perspective, calling for equality of incomes is the first step toward destroying individuality and attempting to transform men into homogeneous automatons, devoid of any unique and specific traits.  Of course, the one exception is equality before the law since this allows man to develop his unique abilities and talents which in turn leads to economic progress.  

Let us return to our discussion of equal income.  If all are guaranteed the same income, the result will be twofold.  First, there will be widespread government intervention in attempts to redistribute wealth to those who are determined to be "unequal".  Second, the incentive for investment, specialization, creativity and entrepreneurship will be destroyed.  Krugman rejects the latter claim by arguing that U.S. productivity in the 1990s was no better as compared to the great postwar expansion.  

Hence he concludes that incentives are not as powerful as one would think.  Intuitively, this seems peculiar.  If all individuals are making exactly the same income no matter what their effort, what would be man's motivation to act?  Would man's very nature transform so that he would become stronger, wiser, and more harmonious?  Would he rise to the level of Aristotle or Marx as Trotsky predicted?  Krugman fails to provide the reader with a definite answer.

Incorrect ideas must be identified and their errors must be corrected.  Dangerous ideas must be destroyed.  The notions of class distinction and equality no doubt fall into the latter category.  For these ideas stand counter to the foundational underpinnings of freedom, individuality and economic progress.  Only when these ideas are thoroughly eradicated and markets truly embraced will we realize the true potential of mankind as unique and unequal individuals.


Christopher J. Coyne is a Ph.D. candidate in economics and a James M. Buchanan Fellow at George Mason University in Fairfax, VA.  Send him MAIL. See his Daily Articles Archive. See also Roderick Long's essay, Equality: The Unknown Ideal.


[1] Paul Krugman, “For Richer”, The New York Times, Section 6; Page 62; Column 1; Magazine Desk, October 20, 2002.

[2] Ludwig von Mises, Theory and History, Ludwig von Mises Institute, [1957] 1985: 113.

[3] ibid, 114.

[4] Murray N. Rothbard, Freedom, Inequality, Primitivism, and the Division of Labor, reprinted as a pamphlet by the Ludwig von Mises Institute, 1991: 58.  The article was originally prepared as an essay for the Symposium on Human Differentiation, held in August of 1970 at the Institute of Paper Chemistry in Wisconsin.  It was originally published in Modern Age 15, no. 3, Summer 1971: 85-126 and is also reprinted in The Logic of Action Two, Ludwig von Mises Institute, 1997: 3-35.


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