Understanding Inequality Better, In Three Easy Steps

 

Pretty much all commentary on inequality is misjudged, and it's largely for three reasons; one is to do with overlooking the inevitable dynamic, two is in misunderstanding what should be measured, and three is in overlooking the scale of measurement. Let's take them in turn.

The inevitable dynamic is basically that in a free country, where people have the opportunity to contribute according to their skills, intelligence, industriousness and competence, wealth will be distributed unevenly. When measuring capital, wealth distributions follow a near-inevitable power law, whereby the top 10% percent are going to have a large proportion of the wealth, and the bottom 50% are going to have significantly less, despite substantially outnumbering the top 10%. I have lots of individual blog posts in my 'Inequality' tab that explain why in more detail.

Regarding the misunderstanding of what should be measured, if you only measure capital, then you have a distorted picture of inequality, because you are disregarding all the things already in place that make us more equal. Once you factor in the many goods and services provided by the state - the health service, social services, the state pension and the many public services - they add up to a lot of value that narrows the wealth gap. Because equality, you see, isn't just about capital, it's mostly about consumption. We also have to factor in the knock-on effects of all this economic growth, like having access to the entire world's knowledge, having more leisure time due to technological enhancements, and all the other concomitant benefits associated with human innovation.

Lastly, on top of overlooking the inevitable dynamic, and misunderstanding what should be measured, there is also the overlooking of the scale of measurement. Where you are in particular stages of life says a lot about your capital and assets, but it often creates a distorted view of a nation's inequality. Students are an obvious case in point - when graduating, they start life in debt, but most go on to earn substantial wages, retire with their own property, and across their life timescale go from negative wealth to reasonable wealth. This is also applies to many other workers, who start life on lower wages when they are young, and progress through their careers with higher wealth.

Insipid left-wing articles about inequality never factor in how to properly measure wealth and standards of living, they don't factor in the big picture where most people get better off with age, and they ignore the fact that in any economically free society, an uneven distribution of wealth is an inevitable outcome of a thriving society.

Given the foregoing, my three easy steps to thinking about inequality correctly are as follows:

Step 1 - Be precise in your language, and define ‘inequality’ properly. Are you talking about inequality of capital assets, consumption, or income? Do you mean inequality before the state has taken tax and passed on public sector benefits or after? And are you factoring in the many other social benefits that reduce inequality in other ways, due to increased standards of living?

Summary: Define before you complain.

Step 2 – Be clear on the economic and social dynamic that causes inequality. Skills, intelligence, industriousness and competence are the biggest causes of most kinds of inequality, and they are good things. Good things cause most inequality. Every time you buy a best-selling book, go to a music festival, shop on Amazon, do your shopping at Tesco, renew your Microsoft subscription, etc, you make the world a little more unequal. But you do these things because you are supporting other people’s prodigious skills, intelligence, industriousness and competence.

Summary: Understand how the world works before you complain.

Step 3 – Be aware of the big picture regarding where, why and when people’s individual life circumstances contribute to the distribution curves of the Gini coefficient, and how those contributions change over time.

Summary: Be mindful that (in)equality is dynamical, not static, before you complain.

Finally, some more insight to digest. Suppose Rich Roger has accumulated lots of capital through market transactions. He's done so by providing value to society. But it doesn't end there. Roger's accumulation of capital is going to be two other things; if he spends it, it creates a living for other people; and if he conserves his capital, then in spending less than he is saving he is leaving more goods and services available to everyone else (and at a slightly cheaper price).

Diversity is so often rightly celebrated in society - diversity of looks, talents, age, specialisations, interests, passions, culture, personalities, etc - and diversity in wealth, income and consumption are a fundamental part of, and result of, those other diversities we celebrate. I think we need to get out of the habit of using the loaded term 'income inequality' and simply call it 'diversity of assets', because that's what it really is, and society is all the better for it.