This is part of a three-part series.
In the last two centuries, the world has seen great progress. People live longer, are richer and better educated, and enjoy more political freedom. (I previously explored the role of cities as engines of such progress for the Liberty Fund’s AdamSmithWorks project). But has that progress been enjoyed by only a few? Has the improvement in living conditions accrued primarily to the elite few, leaving the rest of the world behind?
What many don’t realize is that this development is widely shared. It seems that globalization and the liberalization of markets—the forces of which Adam Smith recognized more than two centuries ago—have raised the overall standard of living to unprecedented heights. again reduced overall inequality. The country is not only rich but also equal.
In this series, I will discuss what inequality is, how it is measured, and how to understand its decline.
Part 1: Understanding Inequality
The popular saying “the rich get richer and the poor get poorer”—contains the idea that progress is only enjoyed by a few. In a much-quoted passage subject to various interpretations, Smith wrote, “Wherever there is great wealth, there is great inequality. For one very rich man, there must be at least five hundred poor people, and the wealth of the few shows the poverty of the many.” How readers understand Smith’s words about inequality often depends on whether and to what extent they view inequality as a problem.
Smith was not the first to bring attention to the issue of inequality. Some research even suggests that anxiety about inequality may be adaptive. The human mind evolved at a time when people lived in small groups of hunters who often divided the meat evenly. Society has changed a lot, but moral ideas have remained the same—a very unequal distribution of resources often makes people unfair.
Of course, our genetic predispositions to think in certain ways should not be given undue weight: human emotions can be bad and good. What Smith calls “the loathsome and loathsome passion of envy” is sometimes involved in the desire to reduce inequality and has long been seen as evil in sources such as the Bible’s book of Proverbs (“envy rots the bones”) and playwright William Shakespeare (who wrote that “envy causes unkind divisions”) . The tendency to focus on relative, rather than absolute, measures of well-being can also be dangerous because absolute rather than absolute measures of progress are a better standard for evaluating the success of various institutions and policies.
Furthermore, the majority of people do not object to the inequality achieved due to meritocracy, and there is no evidence of increased unhappiness caused by inequality. In developing countries, the increase in economic inequality that occurs as a proportion of people escaping poverty is often seen as comforting—proof that upward mobility is possible—and may be accompanied by a greater measure of happiness. Studies have similarly found “a complete lack of any effect of inequality on the happiness of America’s poor.”
Of course, when the rich are protected because of special privilege in the law, inequality seems to be more worrisome. Smith noted that existing businesses sometimes receive unfair privileges from the government—in the form of laws that stifle competition, for example:
The interest of merchants, however, in any branch of commerce or manufactures, is always somewhat different, and even opposed to that of the public. Expanding the market and reducing competition, is always in the interest of sellers. . . . The proposal of any new law or commercial regulation arising from this order should always be listened to with the greatest caution, and should never be accepted until after a long time and carefully examined, not only with the most cautious, but with the most suspicious attention. (The Wealth of Nations, Bk 1, Ch 11)
The growth of government since Smith’s time made that concern even more important. Examples of such laws range from an unnecessarily expansive occupational licensing system that prevents competitors from entering the industry and excessive regulatory barriers that prevent new businesses from entering the industry to bailouts, regulations, and subsidies that artificially promote sales and entire industries. The inequality that comes from those friendly government policies is concerning, and reforms to prevent governments from increasing inequality in this way are a smart idea with broad appeal.
There are other possible causes of inequality, especially in rich countries. Consider income inequality. As countries develop economically, income inequality is becoming less useful as a measure of well-being. In a subsistence economy, everyone is involved in the same struggle for survival. In contrast, people perform a variety of activities in rich societies because such societies offer a variety of means of fulfillment.
While some people want to increase their income, others may choose low-paying jobs that they find enjoyable or meaningful or offer prestige or greater flexibility. People can choose a job that allows more time for leisure or to take care of their children. Smith realized that each person pursues self-centeredness– “taking care of his own happiness, that of his family, his friends, his country” -but as Lauren Hall previously commented on AdamSmithWorks, “Smith has never been against that. economics interest is or should be the sum of all human activities” (emphasis added).
When income inequality is the result of personal decisions made by some people to pursue things other than material prosperity, it is hardly a good measure of well-being. Income inequality in such societies reflects personal preferences, not overall well-being. In other words, developed economies provide more paths to happiness, reducing the importance of income inequality. Fortunately, there is a reasonable way to measure inequality which I will discuss in the second part of this series focusing on the Inequality of Human Progress Index (IHPI) created by me and Vincent Geloso.
Want more?
Vincent Geloso on the Great Antidote podcast on Global Inequality at AdamSmithWorks
Chelsea Follett’s Cities as Centers of Innovation: Lessons from Edinburgh and Paris at AdamSmithWorks
Pedro Schwartz, Poverty and Inequality, Econlib.
Chelsea Follett is the managing editor of HumanProgress.org, a project of the Cato Institute that seeks to educate the public about global social progress by providing free information on long-term progress.
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