Monday, 7 December 2015

Inequality - 5 Myths Debunked: Myth 1

It's fast becoming clear to me that just about everyone you encounter (barring a few pleasing exceptions) has become convinced that inequality is one of the world's biggest problems that needs urgently addressing. Alas, it's one of the biggest myths that inequality is a massive problem. It is not. What matters primarily is absolute well-being, not relative well-being. If increased inequality was making poorer people poorer then it would be a problem - but that's not happening, because the economic pie is not fixed, and because wealth creation is not a zero sum game. As wealth is created, pretty much everyone's well-being increases in absolute terms.

There are many social commentators from the left misleading their readers with dodgy economics that on the surface can be made to sound reasonable - like, for example, when they tell us how unjust it is that the top 1% of the world’s population owns half the world’s wealth. It's easy to make such a fact sound outrageous, but only if you distort the reality of economics and make people believe that a terrible global injustice is occurring. Such views about inequality are mostly centred on 5 myths, which I will set about dispelling.

Myth 1: Inequality = injustice.

Reality: Inequality does not mean injustice.

Too often we hear that it's an 'injustice' that high earners can earn hundreds of thousands of pounds while other people in the same country are out of work and on benefits struggling to get by. In fact, that kind of redistributionist philosophy is at the heart of the socialist ethos. In the real world, though, while it's a nice aspiration, in economic analysis it doesn't make much sense. It's certainly a shame that unemployed people are out of work and on benefits, but when people call this an 'injustice' they misuse language, a bit like when someone says that an hour is fat or an obese person is sixty minutes. Out of work people claiming benefits are given money by the government and they have their rent paid. That's the right thing that should happen, but to call it an injustice is absurd.

When a guilty rapist gets an undeserved outcome by being found not-guilty in a court of law, there is an injustice; the injustice is commensurate with the extent to which the victims suffer, and the extent to which ordinary citizens are unsafe due to his being free. People's well-being is generally not of this nature. In a great many cases, even if you think X has received an undeserved outcome, it doesn't mean that you've suffered an injustice. Did we suffer an injustice (as some claimed) when lottery lout Michael Carroll won the jackpot? No. It’s true we might have wished it was us, and thought how much more we could have done with the money, but there was no injustice suffered by us in his winning the lottery.

What about when an auntie gives four of her nephews £10 for Christmas and her favourite nephew Tim £20 - have the four nephews suffered an injustice? No. Maybe their aunt's decision was unwise, or petulant, but perhaps in this case it wasn't. Either way, it was her money to do with it as she pleased - and surely she has reasons why she thinks Tim is more deserving. Perhaps he earns less; perhaps he helped her out in the summer; perhaps he's the kindest and most thoughtful - there are plenty of reasons.

Now when it comes to the market, there is inequality in wealth and earnings not because of systematic unfairness, but because people have different talents and they make different life choices. Wages and prices evoke lots of hostility largely in the people who have a curious sense of entitlement and not much understanding of price theory. In recent times since the financial crisis people have been keen to pontificate about the apparently 'excessive' pay of chief executives, politicians, bankers, top sports stars, and so on. Top sports stars probably are overpaid (for reasons you may not expect, which I talk about in this Blog post), but the rest aren't obviously so.

Pascal said famously "The heart has its reasons of which reason knows nothing". Of course, in this case reason knows why people think this way about perceived injustices and entitlements - it is down to this peculiar sensibility called 'fairness' on the one hand, and this disagreeable trait called 'envy' on the other hand. Envy can be good if it catalyses innovation: if Owen envies Bob's success in retail he might work extra hard to achieve similar successes. But envy is bad when it causes Owen to become resentful towards other people's fairly earned successes in a competitive market. Fairness is good but often hard to measure. If Tommy and Billy are told to share evenly a £5 gift from grandma then it is fair that they each get £2.50, and easy to see when fairness has not occurred. But if Paul earns £200,000 a year more than Chris that's not necessarily, and almost certainly isn't, a sign of unfairness. This will lead us nicely to the second myth in tomorrow's blog post.

One final point on this - the other thing that happens when people look for injustice in inequality, particularly in the UK and America, is that they start to become blind to the reasons poorer people are doing less well. The key factors in people's income are work and skills. Households in the top 20% usually have two people working in jobs that require higher skills. Households in the bottom 20% usually have either one person working, nobody working, and often only one adult in the house.

Research by David Henderson at the National Centre for Policy Analysis showed that 81% of families in the top income quintile had two or more people working, whereas in the bottom quintile only 12% of families had two or more people working, and nearly 40% of households had no one working. If you translate that into average number of earners per household, it works out that the top households are three times those at the bottom. Once you factor in education and skills as vital tools for increasing earnings, it is evident that where you are in society is not usually a matter of injustice, it is a matter of lifestyle decisions people have made. Don't misunderstand, many people fall on hard times, they are let down by others, and they have less than ideal family backgrounds. That certainly should elicit sympathy, and a concerted effort to be helped - but it's certainly a misuse of language to call it injustice.