No Reason to Automatically Resist High Income Inequality

Suppose some left-leaning organization (Oxfam, for example) produces a table of income statistics showing that less than one percent of a given population owns slightly more than half of the total wealth. A quick glance at the raw numbers might raise some eyebrows. Surely such a “distribution” of wealth is a drastic aberration from the normal course of things. Who in their right minds would oppose with hard hearts efforts from public minded politicians who promise to make things more equal?

Enter Gary North, who recently posted and offered a counter-intuitive conclusion–“economic inequality hasn’t increased since at least 1897.” In fact, North argues that such a wide disparity in incomes or wealth ownership–which today is all the rage for those Americans on the political left–isn’t really an aberration at all.

For support, North leads our attention to the Pareto Principle, discovered in 1897:

The Pareto principle is a principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes. Also referred to as the “Pareto rule” or the “80/20 rule”.

This principle serves as a general reminder that the relationship between inputs and outputs is not balanced. For instance, the efforts of 20% of a corporation’s staff could drive 80% of the firm’s profits. In terms of personal time management, 80% of your work-related output could come from only 20% of your time at work.

The Pareto Principle can be applied in a wide range of areas such as manufacturing, management and human resources. In Pareto’s case, he used the rule to explain how 80% of property in Italy was owned by 20% of the country’s population.

(Via Investopedia)

In 1896, Pareto observed in his garden that 20 percent of the peapods contained 80 percent of the peas, and proceeded to show that about 80 percent of the land in Italy was owned by just 20 percent of the population. In other words, Pareto discovered the principle in which a natural social order (whether in a garden, a private company, or even a national economy) will tend to produce about a 20/80 relationship between inputs and outputs.

In identifying how the social world naturally operates (namely, unequally), it immediately extirpates any notion that 1)an equal distribution of incomes within a given nation has historically been the long term trend, that 2)a highly unequal society (in terms of income, not political, equality) is an immoral one, and that 3)the government has a moral duty to fight income inequality.

The left’s balloon full of hot air has been refreshingly popped.

Unfortunately I haven’t seen many conservatives/libertarians using the Pareto Principle to counter the left’s incessant assault on economic liberty during their crusade to make a group of central planners responsible for distributing incomes. I know for a fact I heard Tom Woods bring it up in one of his brilliant podcasts, but he and North are the minority.

I’m currently reading Equal is Unfair, a new book from Don Watkins and Yaron Brook. I’ll be thrilled if they included such a discussion.

P.S. As I’ve noted before, income inequality per se isn’t even an issue. What matters is the means which people employ to seek economic gain, and so long as they’re of a productive nature, as opposed to a predative nature, then the resulting inequality is of absolutely no concern to me. Furthermore, in terms of our moral outrage, the resulting income inequality from predative behavior doesn’t trump the injustice/immorality of the behavior, so that I repeat: income inequality per se is no issue.

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I DON’T GIVE A DAMN ABOUT INCOME INEQUALITY

When asked in an informal conversation about income inequality, sometimes hyped as the defining challenge of our time, I’ll look into my peer’s eyes with sincerity, and quite frankly admit that I don’t give a damn. And then, like Clark Gable I turn my back and disappear into the fog, the most dramatic mic drop of all time.*

Let us remember that individuals have essentially two alternatives for economic gain: either through predation or through production.

Predation can take many different forms: robbing a bank, sending out false information, lobbying politicians for monopolistic privileges or barriers to entry, et cetera. The distinctive feature is that the “winners” only gain at the expense and to the harm of the other parties (simply because the other parties–the “losers”– did not consent to the “transaction”).

Productive economic behavior–exchange based on mutual consent–has no such losers. As economists wonderfully point out, we all gain from trade. When Apple (which today has gone over the hill) sells a new iPhone or laptop to a customer, has anybody “lost”? Both parties voluntarily consented, and it’s not in human nature to voluntarily shoot yourself in the foot.

Both species of economic behavior will affect the so-called income distribution. But so what? As a libertarian I don’t reflect with joy when Apple posts high profits on the basis that the resulting income inequality is “the good kind.” I’m simply happy that 1)Apple is filling consumer desires by pursuing its own self-interest, that 2)the profits are an invitation to other companies to enter, and 3)that scarce resources are being used efficiently. On the flip side, when news surfaced that Boeing essentially operates the federal government created Ex-Im bank, and can grant itself exclusive privileges not available on the free market, I didn’t pause bitterly on the “bad inequality” that was sure to follow. I was outraged by 1)the economic folly propagated by intellectuals, by 2)the injustice of the situation, and 3)by the fact that scarce resources were being allocated via political channels.

The real meat of the matter, then, is not what kind of inequality is desirable or undesirable, but rather how individuals are pursuing their self-interest.

Just this one mental adjustment has a few really important implications in the inequality debate.

Most importantly, fighting income inequality as an end in itself would no longer hold such popular appeal. With the focus now on the means employed for economic gain, people would debate less on class issues and more on questions of principle. “The rich have become richer and the poor have become poorer” would become “we must protect the producers from the predators.”**

This implication would translate into completely different political responses than those being thrown around by Sanders, et al. “The rich” as such would not be identified as a monolithic entity of capitalists who have it out for the little guys. Instead we would see each individual as a unique end in himself, regardless of how much income he earns, and therefore would not propose sweeping solutions that only penalize or “reward” folks on the basis of association. In other words, under the current terms of debate, those rich producers stand to be penalized simply because they earn a comparable income to the rich predators. It’s guilt by association, and the way I see it, that’s morally objectionable.

My apathy of income inequality, then, is not the product of an apathy for the welfare of my fellow man. Just the opposite is true: I wish to stand up for the producers and expose the predators. It’s based on morality, and from the conviction that this will make the world a better place.


*Actually this only happens in my mind. In reality what normally happens is my counterpart informs me just how devastated the middle class and poor are in this country, and why it’s so important that we elect leaders who are actually committed to “doing something about it.”
**Producers vs. Predators is not synonymous with Rich vs. Poor. Producers are anybody–rich and poor–who earns their lot through free exchange based on mutual consent and value creation. Predators are anybody–rich and poor–who gain economically through coercion, i.e., through transactions not based on consent.