The Price of Equality

It has become increasingly difficult to discuss sensitive but extremely important subjects such as the distribution of wealth without being labeled as immoral or heartless, especially if you are in favor of an unequal distribution of wealth. Indeed, there is one thing that egalitarian social scientists successfully did, it was to establish a symbiosis between equality and morality. Whoever is in favor of a “fair redistribution of wealth” is perceived as a person of high virtue and moral standards while the one who opposes that very phenomenon is seen as a person who simply lacks any moral compass. The ordinary person today is more than ever convinced that wealth must be redistributed equitably and that the rich must pay their “fair share.” This strong support for the “fair redistribution of wealth” is rooted in moral purposes rather than economic purposes. Most people support it on moral grounds without fully comprehending the economic mechanisms behind the process of the distribution of wealth. The problem with utilizing morality as a tool to redistribute wealth equally is that morality cannot change the nature of the process of this economic phenomenon.

Egalitarian social scientists are very cunning about the use of semantics to rally public opinion to their cause. They use the word “redistribution” rather than “distribution.” Using the word “redistribution” implies that there was a previous distribution, and this previous distribution was ill-processed, which resulted in the unequal share of income and wealth across society. In his book entitled The Price of Inequality, Nobel Prize-winning economist, Joseph Stiglitz argued that the unequal distribution of wealth was based on the fact that the wealthy used their power and influence and manipulate and rig the political and economic system in their favor at the expense of the middle-class and low-income groups. For the 2001 Nobel Laureate, this is because capitalism is a permissive system in which the rich are ruthlessly manipulating its loopholes, and that globalization and technological progress also exacerbated social inequalities. Professor Stiglitz then believes that government should be in charge of redistributing the wealth since the market is an unstable economic system that generates more inequalities. In his eyes, government would be able to correct market failures and reduce inequalities than the market would by self-regulation. It is important to explain in simple terms how wealth is distributed across society in its rudimentary form before talking about “redistribution.”

The Rudimentary Form of Wealth Distribution

How is wealth distributed across society in a competitive market economy (capitalism)? In a competitive market economy, incomes are earned in the production of goods and services, and that the value of the productive factor (land, capital, and labor) reflects its contribution to the total output. Capital, land, and labor, as factors of production, interact together in the physical production process to produce an output good.[1] Each of the factors then receives its fair share of the income created. This is the rudimentary process of wealth distribution in a competitive market economy. This process was theoretically developed by American neoclassical economist John Bates Clark in his pathbreaking book titled The Distribution of Wealth (1899). However, it was already recognized at the outset of the nineteenth century by French classical economist Jean-Baptiste Say who is famous for coining the phrase “supply creates its own demand.”

The elementary truth about distribution is that the product accrues to the factors that producing it, each factor getting the values of its contribution. Production and distribution are not two distinct phases of a process. In a reasonably competitive market economy for labor and capital, the share each receives is determined by their marginal contribution to total output. Capital and labor will be devoted to producing output as long as the marginal product of each is not less than their price. When marginal products are equal to factor prices and when the number of outputs that it is worthwhile to produce at these prices is equal to the number of outputs the owners of these factors want to buy, then everything is adequate.[2]

It is important to emphasize that the factors of production are not homogenous. The labor of one person may be worth many times the labor of another depending on the brains and muscles, various talents or the lack of them, the character of its absence, and the level of education of each. These personal endowments play a critical role in the production of output.[3] This then leads to an unequal distribution for two essential reasons: (1) personal endowments are intrinsically different and so are the resulting marginal contributions of members of the labor force. (2) The proportion saved from high incomes is generally higher than from low ones, and capital accumulation from an unequally distributed total is higher than from an equally distributed one.[4] Both reasons tend not only to speed up economic growth but also further promote inequality due to the unequally distributed ownership of capital. If capital accumulates faster than the growth of the labor force, and technical progress is not biased in favor of capital, the demand for labor then will grow, the marginal product of capital will decline relative to that labor, and the share of wages in national income will shift in favor of labor.[5]

Income and wealth are distributed unequally in competitive market economies because of the enormous expansion of the supply of unskilled and semi-skilled labor. Unskilled and semi-skilled workers migrate from rural areas to urban areas and work in the industrial sector to produce tradeable goods. These workers are remunerated according to their marginal contribution to total output. Their remuneration may be low at first because of their low-level skills. As they are sharping their learning curves and increasing their productivity, their income also increases because their marginal contribution to total output is also increasing. The more skilled and experienced they become the higher becomes their income and their ability to move upward in the income brackets. Hence, the rich may be becoming richer, but the poor also becomes richer.

We can clearly see that the distribution of wealth in its natural and rudimentary form is surely unequal but adequate because each factor of production is remunerated according to its marginal contribution to total output. This is because of competition. Competition stimulates the accumulation of profit, and the maximization of profit is the sole incentive known to man that is satisfied by behavior that happens to conform to the optimal allocation of resources.

The Price of Equality of Outcome

What price do we pay for attempting to equalize outcomes? We generate more inequality than intended because the equalization of outcome necessitates the distortion of the natural distribution process. Let us remember that distribution and production are not two separate phases of the process. When we use the political process to interfere in the distribution process, it also distorts the production process. In distorting production, the political process undermines the critical role that personal endowment plays in marginal contributions. The political process then is attempting to put the high-skilled and the low-skilled workers to the same level in order to produce the same level of output. This will result in an unequal and inadequate distribution of income where the high-skilled workers are paid less than what they are truly worth, and the low-skilled workers are paid above what they are truly worth also. This is blatantly immoral for those who believe that equalizing outcomes is the moral thing to do. To equalize outcomes is to deprive those who have been endowed to exercise these endowments to the best of their abilities.

Nature is not an equal environment. In the animal kingdom, there are apex predators such as lions, crocodiles, and Komodo dragons, which are carnivores, and there are preys, such as gazelles, and antelopes…etc., which are herbivores. Apex predators mercilessly eat their preys, but they do so not out of cruelty but out of survival. How can we equalize nature to make it fair for all animals in the wilderness? Should we undermine the endowments of a lion to make it fair for the gazelle so that it would not be eaten? Undermining the lion’s endowments would not be fair to the lion because it would not be able to survive if it cannot use its abilities to hunt and eat.

Confiscatory measures such as the progressive income tax on the rich, wealth tax, land reform, and the nationalization of private companies and major industries never “redistributed” wealth equally. The Soviet Union has tried that for half a century, and it resulted in equality in poverty and misery for all Soviets except the members of the Politburo who became significantly wealthier than the providers and recipients combined. If the rich already pay more than everyone else in income taxes every year, then what fair share do they still have to pay? Mr. Stiglitz may mean well in his pursuit of equality and fairness but seeking to equalize by artificial means what is naturally unequal will only further more inequalities and will harm those who were supposed to benefit from it. Consequently, equality does not mean it is morally right and it does not necessarily lead to positive outcomes. If equality always leads to positive outcomes, socialist economies would have never failed.

[1] Herr, Hanjörg (2018), Karl Marx’s Thoughts on Functional Income Distribution: A Critical Analysis. Working Paper, No. 101/2018, Institute for International Political Economy. [2] De Jasay, Anthony (2014) “The Millstones of Egalitarianism, Part 1” Economic Sense and Nonsense: Reflections from Europe, 2008-2012, p. 269. Liberty Fund Inc. Indianapolis. ISBN: 978-0-86597-878-2 [3] Ibid. p. 269 [4] Ibid. p. 270 [5] Ibid. p. 270