Fairness and Equality: Part 2

Posted on December 16, 2013 by


I feel the need to clarify my earlier post on “Fairness and Equality” due to the many and varied comments on it and some misunderstanding.  At the outset, I will say that in a blog post it is impossible to address every aspect of a subject or every objection.  So the reader must read the post with a certain sympathy.  Having said that, there are a few important clarifications and additions to be made.

First, my earlier post only mentioned in passing the problem of “crony capitalism,” or what an economist might call rent seeking.  In one version of it, businesses seek to influence government officials to gain some benefit that is not available to other businesses and which amounts to a transfer of resources from consumers and taxpayers to those rent seeking businesses.  Now individuals, bureaucrats, politicians also engage in activities that impose costs on others.  But the point here is that in some cases large businesses do manage to induce government to tilt the “playing field” in their direction.  That produces a degree of inequality that is no part of the ordinary operation of market processes.  It is in fact, anti-market.  And it is unethical as well as inefficient.  My earlier discussion was not intended to sanction such actions or results.

Second, I want to be clear that inequality of income by itself is meaningless.  It tells us nothing about how well off people actually are in terms of their purchasing power and possession of “stuff.”  One can measure this either subjectively, by asking people about their state, or objectively, by using measures such as income relative to prices, the rate of inflation, median income, GDP, etc. Not all of the objective measures are equally useful, but they do tell us about trends in income and wealth over time.  When we look at these measures, we can see that when adjusted for inflation, people in many countries are really better off and have been getting better off for over 100 years.  This is true even if we assume that those at the top of the income pyramid are making much more than they did and that they are getting “richer” faster.  It is true that a CEO might make millions per year while I might make $50,000.  But I am better off than I was, say fifty years ago.  So it doesn’t make much difference what the CEO makes in relation to me—unless he is stealing from me to get it, which is illegal. 

Of course, not everyone is better off.  We still have genuinely poor people, who are poor through no fault of their own.  But this is not cause to criticize markets or inequality in general.  We can legitimately help the truly poor and government has some role here.  But a market system actually enables many more people to escape poverty.  It isn’t perfect.  There is no perfect institutional arrangement.  But for making people better off, it is the best we have on earth.

One more item regarding the price issue.  Some say that many more people can afford many more goods and services than before, but not other goods.  For example, they argue that automobiles cost more relative to income than fifty years ago.  Likewise, they argue for gasoline, bread, and a few other important items.  Are they correct? Let’s take cars.  It turns out that the price of a car adjusted for inflation has hardly changed at all.  In fact since the 1918 Model T, the price has declined.  An $850 Ford in 1918 would sell for about $22,000 in today’s dollars, while the cheaper models widely available today are about $10, 000 to $12,000.  And the Volkswagen Beetle that sold for $2,000 in 1972 would sell  for about $11,000 in inflation-adjusted dollars, just about the same as many lower-end models.  On top of that, the features available on the current models would boggle the mind of Henry Ford.  Finally, income has increased in the past 100 years.  So we have cheaper cars and higher income on the average.  This situation can be repeated for many other goods and services.

But that about the “staple” gasoline?  It certainly looks as if the price hurts our well-being, and it does.  But a few facts are in order.  The price is partly a result of the OPEC cartel, formed in 1972 to limit supply and, yes, to raise prices as a result.  It has worked somewhat well, but not as well as the Gulf states might have wished.  Moreover, many states have enacted large gasoline taxes for each gallon purchased, some as much as one-third or more of the price per gallon.  But interestingly, when we adjust the price for inflation, the price is lower now (late 2013) than it was in 1918!! It is also lower than it was in 1981, though it is true that the price has been higher in most recent years.  We get gasoline more cheaply overall, even in a partially cartelized (monopoly-like) environment.

Once again too, incomes have risen.  It is obvious to one who looks at the statistics that nominal income has increased in the last century.  But what about income when adjusted for inflation?  And what about inequality of income over time?  These last two get at the contention that incomes have declined and in particular that the poor are poorer than in the past while the rich are richer.  The US Census Bureau’s figures since 1967 tell us that though median household income has declined slightly in the last five years (recession and after-effects), it has increased consistently over the 45 years before, when adjusted for inflation and accounting for the usual temporary downward trends in stagnant economies.  As for inequality, the figures show that the rich have become richer, but the poor have not become poorer. (see United States Bureau of the Census (see http://www.census.gov/hhes/www/income).

These figures are for the United States, so many nations do not reflect this increasing prosperity across income groupings.  But as Wayne Grudem and Barry Asmus, in their new book entitled The Poverty of Nations (2013), there are many factors that lead nations into poverty, none of which have anything to do with market structures.  In fact, real, functioning markets would help those nations move out of poverty and create wealth for their citizens. 

Finally, we ought to speak out for justice for those oppressed by the abuse of governmental authority.  But this is a different issue than blaming markets for the problems in the first place.  The problem here is government failure, failure in a fundamental way.  We must attack that problem without attacking the wrong cause for it.