5 Inequality Myths

Antony Davies,

Release Date
October 2, 2017


Basic Economics Economics

If you really want to understand how the world works today, you need to rethink almost everything you’ve been told about inequality. Prof. Antony Davies explains.

    1. Debate: Is There Too Much Inequality in America? (video): Prof. Steve Horwitz and Prof. Jeffrey Reiman debate the topic of inequality in America. 
    2. Income Inequality or Income Mobility: For What Should We Fight? (blog article): Anne Bradley explains why it’s better to place our focus on income mobility than on income equality. 
    3. Income Inequality and the Effects of Globalization (video): Prof. Tyler Cowen describes the amazing reductions in global income inequality that have occurred over the last 20 years. 

Antony Davies: Myths about inequality. Myth number one. Profit and plunder are the same thing. Imagine a person who provides services to society. Maybe he mows lawns, or fixes cars, or paints houses, and in return for these services he provides to others, he asks for something in return, maybe some food, clothing and shelter. Now, suppose it’s the case that the society values what this person provides tremendously, maybe because these are things that society really needs, or maybe because there are very few people who are able to do these things. But, for whatever reason, society places a great value on the things this person contributes. And let’s suppose, also, that society places a relatively low value on the things that he asks for in return. Perhaps it’s because these things are easy to produce. There’s lots of them laying around. For whatever reason, imagine that society places a low value on the resources this person asks for in exchange.
We would look at this person and say, “This is a person who we would like to have. He contributes more to society than he asks for in return.” But, now take this person and superimpose on top of him a monetary system, where instead of exchanging the things he does for society’s resources, he exchanges the things he does for money and uses the money to buy resources from others. This is what this would look like. The person provides value to society and society gives him dollars in return, and the dollars are commensurate with the value that society places on these things he offers. Society highly values the services, and so people are willing to pay him a lot of money for these services. And then in return, the person takes some of this money that he’s earned, and he buys resources from society. And because society does not place a large value on the things he’s asking for in return, they don’t ask for much money for these.
And so if you look at the system, what’s happening is that the person is accumulating dollars. He will have more dollars coming in than there are dollars going out. We call this profit. Now, many people look at profit and say that profit is, in some sense, a bad thing because it represents something that someone is taking from society, but if you look at it in this context, profit is actually an indication that this person has done something good, that he has provided more value to others than he has asked for in exchange. And so as he provides this value and asks for things in exchange, he accumulates these dollar bills. We call them profit.
Steve Jobs with $80 billion in the bank, and he’s an example of this person. Where did Jobs come up with this $80 billion? He came up with the $80 billion because these people liked the things he was offering better than they liked the dollars in their pocket, and so they gave dollars to Steve Jobs and Steve Jobs gave iPhones to the people. This was the transaction. At the end, Steve Jobs dies with lots of money in the bank, but the world ends up with lots of iPhones as the other half of the exchange. Profit is not a sign that people need to give back to society. In fact, it’s the reverse. Profit, when attained in a free market environment, is a sign that society actually owes the person more goods and services than he has already consumed.
Now suppose, conversely, the person accumulates dollars not by offering goods and services to society, but instead by co-opting the government and using the force of government to take money from others and putting it in his own pocket. Then, in that case we have this kind of situation where the person just simply is using the force of government to take money from the people. The person then uses some of this money to buy goods and services, and maybe he has some leftover. But this, although it looks like the same pile of dollar bills, we no longer call it profit. We now call it plunder, because although it’s the same pile of dollar bills, how the person came about those dollar bills is very different. He did not come about them by offering someone something in free exchange for something else. Instead, he came about them by co-opting the power of government to take money from others.
We have plenty of examples of this. The agricultural lobby lobbies government for things like ethanol requirements, despite the fact that there are many studies showing that ethanol is not necessarily good for the environment. It does not give you better gas mileage. It doesn’t reduce our dependence on foreign oil, and yet big industries will lobby the government for ethanol requirements because these industries make their money from growing corn. And so what happens is, these large industries collect lots of money in exchange for providing people with nothing in return. This is the difference between profit and plunder, so myth number one, profit and plunder are the same thing. The fact is, profit is good. It indicates someone is providing something for society. Plunder is not. It indicates that someone has actually taken something from society.
Myth number two. One can be for equality. These three kids face equal opportunities, although unequal outcomes. Each one stands on a box. They have equality of opportunity, but because they are different heights, one can see the game. One can’t. They have inequality of outcomes. These three kids face equality of outcome, but inequality of opportunity. One has two boxes. One has no boxes. Their opportunities are unequal. Despite the fact that all three can see the game, their outcome is equal. The moral of the story is, you cannot be for or against equality. You can only be for or against a particular combination of equality and inequality. If you are for equality of opportunity, then by definition, you are also against equality of outcome. And if you are for equality of outcome, then by definition, you are also against equality of opportunity.
And the reason for this is because people are different. Some people are born smarter than others. Some people are born luckier than others. Some people are born faster or stronger than others. And because people are born into different circumstances, when we leave them alone, we give them equality of opportunity. Some will naturally rise higher than others and we will have inequality of outcomes. In fact, because people are different, the only way to achieve equality of outcome is to impose an inequality of opportunity to boost the people who are less smart, less skilled, less educated and hold back the people who are more. So, myth number two, one can be for equality. The fact is that equality and inequality are actually inseparable. We can only be for a combination.
Myth number three. We understand what equality means. These children are suffering, but they’re not suffering because they’re unequal. They’re suffering because they’re poor, and to the extent that we focus myopically on equality. We run a real risk of missing a real problem. The real problem being poverty. Look at these people. Let’s suppose that the people on the left earn $30,000. These people earn $40,000. Those earn $60,000. And the people on the far right earn $70,000. We can look at this and we see that there’s lots of inequality here. But, imagine that these people are in different stages of their careers. The people on the left have just started their jobs. The people in the middle are mid level career people. These are people, on the right, who have spent lots of time in the workforce. They’ve achieved lots of education, lots of experience, and commensurately high incomes.
To the left of these people are students who are learning skills and preparing to enter the workforce. We have inequality here. And if I move time forward, you will see that this inequality persists. Always we have inequality. People on the left earning less. People on the right earning more. However, over time each person has moved through each circle, and so each person has earned, over the course of his or her career, a total of $200,000. That is in this example. We have persistent inequality, and yet everyone is completely equal. That’s not to say that there is no such thing as inequality in outcome. But, it is to say that when we talk about inequality, we tend to take a snapshot. We look at the world and we see some people who are poor, some people who are middle class, and some people who are rich. And we say, “Look at the inequality,” when the right way to do this is to look over time and watch over time how people move. Some from the poor to the rich, some of the rich move down to the poor. And if we look over time, we will still see inequality, but we will see markedly less than we see when we just take a snapshot.
Steve Jobs, as we said, died with $8 billion in the bank and he got his money from people like clip art woman, who handed it over to him in exchange for I things. Now, when we talk about inequality, we focus on the flow of the dollars. We completely ignore the flow of the goods and services. Next time you’re in a crowd of people, ask for a show of hands. How many people here have at least $50,000 in the bank? And you’ll find very few hands going up. Then ask. How many people here have a smartphone? And you’ll see every hand go up. Notice the difference. When we look at dollars, we will tend to see inequality, but if we look at the goods and services that arise in response to those dollars, we’ll actually see tremendous equality.
Economists measure inequality on the Gini Index. Zero means everybody’s equal. One means one person is incredibly rich and everybody else is destitute. The two most equal countries in the world are Sweden and Afghanistan. On the Gini index, they rank .25 and .28. In terms of planet Earth, this is as equal in income as countries can get. And yet, if you look at these two countries, what you will find is that the average income in Sweden is $54,000, while the average income in Afghanistan is $600. That is, equality doesn’t necessarily mean that we’re all well off. We can be equally miserable.
So, problems with inequality. First, inequality diverts our attention from a real problem. The real problem being poverty. Second, people can be unequal persistently, and yet perfectly equal if we look at them over time. Third, inequality ignores completely half of the economy by focusing on dollars, not goods and services. And then finally, when we’re done, equality isn’t necessarily good anyway. So, myth number three is, we understand inequality, and the fact is, most of us actually don’t. We confuse it for, equality exists at one point and time for equality that actually is much less over time. And at the end, we actually end up thinking equality is necessarily good, when in fact, it may not be.
Myth number four. The middle class is disappearing. This is the distribution of households in the United States in 1970. All the numbers here are adjusted for inflation. The height of the bar is not income. It’s the fraction of households that exist in the income level, so here we have what today we would call less than $15,000. And in 1970, about 15% of US households had incomes that would be the equivalent of what today we would call less than $15,000. And in 1970, about 10% has $15,000 to $25,000 of income. The largest percentage of households were in the $50,000 to $75,000 range. And then, what you see is, way over here very few households, about 1% in 1970, earned what today we would call more than $200,000. That’s the United States in 1970.
Now, let’s move forward 10 years. Here’s 1980 and you see slightly fewer households in this poorest category. A little bit more here. A little bit more here. A lot less here. A lot less here. And we have more in the rich categories. This is 1980. Here’s 1990, 2000, 2010, and the last year the data is currently available, 2013. Notice a pattern here. As we look at the fraction of households in each income category, amongst these poorest categories, we see far fewer households in this lowest category, about the same in this category, and a little bit less here. So, in total amongst the low income categories, we have fewer American households here today than we did in 1970.
In the middle income households, we have less, fewer households in this category, fewer households in this category, about the same here. Amongst middle income Americans, there are fewer households than there were in 1970. The middle class is indeed disappearing. In fact, so are the poor classes. And where are all these Americans going? They’re going here. From 1970 to the present, of course there are exceptions. But, here we see a trend. The trend is, over time and adjusting for inflation, Americans are leaving the poor categories. They’re leaving the middle income categories, and they’re showing up over here in the rich categories. So, myth number four, the middle class is disappearing. The fact is, it is. It’s joining the upper class. And the poor classes are disappearing, as well.
Myth number five. People are becoming worse off. In 1798, Thomas Malthus published a treatise claiming that over the next few years, we were going to see massive starvation as the population grows and grows, and we are now unable to feed ourselves. And Thomas Malthus wrote in response to looking at the data you see here. This is the world population going back to 10,000 years B.C. up to the time of Thomas Malthus, and you can see what happened. The number of people on the planet was rising exponentially by 1798, so at this point, Thomas Malthus looks at this and says, “If this trend continues, we will never be able to afford people. We’re going to have mass starvation throughout the globe.”
Well, let’s move forwards. This is the point in which your grandparents were born, and population between Thomas Malthus and the time your parents were born had grown by two billion people. This is the point at which your parents were born. We added another one billion people between the time your grandparents were born to the time your parents were born. This is the time most college students were born. And between the time your parents were born and college students were born, we’ve added about two billion people. And from the time today’s college students were born until the present, we’ve added another 1.5 billion. Thomas Malthus was back here looking at this, saying, “How can we possibly feed this many people?” At the time of Thomas Malthus, 98% of the world lived in abject poverty.
Since Thomas Malthus, this is what’s happened to population. And yet, what’s happened to world poverty? In Thomas Malthus’ day, over 95% of the world lived in poverty. By the time today’s college students’ grandparents were born, world poverty had dropped to 65%. By the time their parents were born, world poverty had dropped to just over 40%. By the time today’s college students were born, world poverty had dropped to 30%. And today, world poverty is less than 10%. At the same time that we have seen exponential, astronomical growth in the number of human beings, world poverty has declined from north of 95% down to just 10%. If you want to look at specifics, you could see here.
This is data for the United States, comparing 2011 to 1992 or 1998, what we see here is the number of households who have washing machines, about the same. More households have clothes dryers. More households have dishwashers. About the same number of households today as in the past have refrigerators. Fewer have freezers. More have televisions. More have … About the same have electric stoves. More have microwaves. In almost every category, more American households today have appliances like these, versus American households a generation ago.
This is housing conditions. Fewer households have leaking roofs. Fewer households have problems with pests. Fewer households have plumbing problems. In all sorts of ways, not only does the average American household have more appliances, it also has better housing conditions. The neighborhoods and communities are also better. People’s basic needs are better. In all these various ways, what we see worldwide, we also see in the United States, that on average, people have access to better qualities of life today than they did a generation ago.
Over the past one or two generations, the rate of firearm deaths are down 50%. The rate of nonfatal firearm crimes are down 75%. The rate of deaths due to war are down 95%. Child labor rates worldwide are down 50%. Global income inequality is down 3%. Global gender inequality is down 15%. Global longevity and education are up 20%. And finally, global income is up 40%. All of this stuff over the past one or two generations. So, myth number five is, people are becoming worse off, and the fact is, it’s the exact opposite. The reason this myth persists is because what we see in the news repeatedly are pictures of people starving, pictures of people shooting other people, of wars globally. The reason we see these things is precisely because they’re uncommon. What we don’t see on the evening news are things that happen every day, because they’re uninteresting.
In this way, oddly, the evening news has become a litany of all the things that aren’t true about your life. Conclusion, the fact is, profit is good. Plunder is not. Equality and inequality are actually two sides of the same coin. They’re inseparable. Most of us don’t understand what inequality is. The poor and the middle class are becoming increasingly rich. And finally, the world is actually becoming a much better place to life in than it ever was before.