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Income disparities

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Libertas est Veritas Posted: Wed, Apr 23 2008 11:40 AM
Increasing income inequality seems to be the main thrust against capitalism these days. I was wondering what kind of views Austrian economists usually have on this? And I don't mean under the current wealth redistribution schemes, but in a completely free market.
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George Reisman actually had an excellent piece on this. Here it is. At most, under truly free markets one will see rises in inequality corresponding to natural differences in productive capacity, the ability to exploit opportunities as they arise and so on. And there is no valid argument against this, in my view, except one that stems from a hatred of man's difference in ability. A lot of people assume libertarianism entails extreme inequality (even its advocates, such as Nozick, often think so), but the reverse is true. Remove the State from the picture, and the only inequality will be that caused by the differences in nature's endowments.

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 If one is able to acquire a great sum of wealth, they had to have done something for it that benifited others enough so that they would pay money for its service.  The growing gap between the rich and poor arises out of government sponsored dependency, and the alliance of corporations with the state.  In a free market the lower class that would usually be getting the government's dirty money would have an easy choice: either work and try to benifit society by applying themself, or go hungry and be forced to beg from private charity.  Most if not all would chose the first one.  There will always be a gap between rich and poor, but in a free market the rich would not get richer and the poor would not get poorer as they do now.  Instead the gap would be narrowed and society as a whole would be better off.  

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maxpot46 replied on Wed, Apr 23 2008 12:23 PM

The income of the poor (or non-working) is always "centered" around zero.  The income of the "rich" (or productively working) has no upward limit.  Therefore, in any growing economy, it's a mathematical certainty that the "income gap" will be growing.  The "income gap" is much higher in South Korea than in North Korea, but it's pretty obvious as to which has the higher standard of living.

 

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maxpot46:
Therefore, in any growing economy, it's a mathematical certainty that the "income gap" will be growing.
But if this is true, then doesn't that invalidate capitalism in the long run? If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.
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Deist replied on Wed, Apr 23 2008 1:31 PM

 

Libertas est Veritas:
If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.

 

Maybe their share of the pie is no longer as equal but there would be alot more sugar and good stuff in every slice due to the productivity of the system. For instance in the eighties only the richest people could afford Cd albums. But since there is more collective wealth in the less wealthy groups, not to mention a higher rate of sales, the companies had the incentive to cut costs and make the new technology more affordable. Things like this raise the standard of living for the poor. A poor person might not control one fourth of the gross domestic product but they do have what is now cheap technology that makes life easier to live and hence their standard of living is raised. You will find this in nearly any product market.

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maxpot46 replied on Wed, Apr 23 2008 1:43 PM

Libertas est Veritas:
If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.

Only if wealth is a zero-sum game, but it's not.  Economic exchanges aren't win-lose, they're win-win, hence the rising standard of living associated with growing capitalist economies.  Everyone improves, but obviously the more productive improve to a greater degree than the less productive.

 

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Deist:
Maybe their share of the pie is no longer as equal but there would be alot more sugar and good stuff in every slice due to the productivity of the system.


It is quite possible that I am leaving something out of the process, but my problem is that while availability of consumer goods and such will increase, the availability of things like land will decrease (since you can't make more of it). At least is we assume that the income gap will keep growing, instead of stopping at some level. It's pretty much the basic terror scenario from the left, where unchecked capitalism will lead to a massive income disparity.
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Bostwick replied on Wed, Apr 23 2008 2:48 PM

Libertas est Veritas:
maxpot46:
Therefore, in any growing economy, it's a mathematical certainty that the "income gap" will be growing.
But if this is true, then doesn't that invalidate capitalism in the long run? If the gap keeps widening, then the living standard of the 'poor' is actually going down, since their share of the pie keeps diminishing.

Inaccurate.

If your income stays the same and my income increase our income disparity has increased, but your living standard did not change.

What he was saying is that income disparity will change as new wealth is created. If I get richer, I am not making any poorer.

 

 

 

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Bostwick replied on Wed, Apr 23 2008 2:56 PM

Libertas est Veritas:


It is quite possible that I am leaving something out of the process, but my problem is that while availability of consumer goods and such will increase, the availability of things like land will decrease (since you can't make more of it).

Lets assume the price of land increases as wealth increases. A poor person has the options of selling his land for a high price or to continue owning it. If the poor person chooses to sell his land he is better off because of this disparity, and if he chooses to keep it he is no worse off than before the disparity.

There is no exploitation here.

This is the industrial revolution, where farmers left their land to work in factories.

 

 

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JonBostwick:
There is no exploitation here.


I'm not saying it is exploitation. I'm merely trying to understand the process of wealth accumulation in the long run, across generations.
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Bostwick replied on Wed, Apr 23 2008 3:10 PM

Another important thing to remember is that exchange happens because of mutual benefit. As I get richer, I am making those that I do business with better off as well.

If I build a factory in order to make myself rich, I am providing jobs to many others who did not have the capital to build a factory theirselves. If the business fails I lose my inventment, but the workers can immediately go work for the competitor that replaced me.

In the division of labor it is the unskilled that benefit the most. Without division of labor the smart and the strong would still survive, but with division the weak and the dumb can be productive enough to sustain themselves on only their own labor.

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Junker replied on Wed, Apr 23 2008 4:03 PM

Libertas est Veritas:
At least i[f] we assume that the income gap will keep growing, instead of stopping at some level.


It seems that nothing can grow forever; that other factors become functional as size increases. Thus, I wouldn't expect that the income gap will prove to be the exception. A similar process was conjectured under Malthus.


Libertas est Veritas:
...unchecked capitalism will lead to a massive income disparity.


What is the difficulty caused by massive income disparity?

At least one aspect is a continuing boon-- the high income people provide a market for newer, more expensive innovations, which later often become cheaper and thus available to the lower income people.

 

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Junker:
What is the difficulty caused by massive income disparity?


Depends on the distribution. If the outcome is a healthy middle class, then nothing. But if the outcome is a weakening of the middle class, then you will run into problems.

I think it comes down to social mobility. If you can create large amounts of wealth relatively easily and lose it easily as well, then I don't see a problem. But it is hard to gauge, since these days the very rich are more or less creations of government intervention, not to mention being protected by those same interventions.
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maxpot46 replied on Thu, Apr 24 2008 2:13 AM

Libertas est Veritas:
Junker:
What is the difficulty caused by massive income disparity?


Depends on the distribution.

Okay, there seems to be a fundamental misconception here.  Income is not "distributed", i.e. it is not some fixed amount which gets spread unevenly throughout the population.  Income is generated or produced, a consequence of one's acts of making economic exchanges.  By specializing in producing one particular good or service in abundance, marginal utility kicks in for producers, and they are able to make beneficial trades of their product for everything else (or more specifically, money, which can then be traded for anything else).  These trades are win-win, because each partner is trading something he values little for something he holds dear.  Thus, income is created by the mutual beneficial exchange of goods/services produced under the division of labor (which allows marginal utility to lower the value of the product to the producer, allowing for beneficial trades).  Even better, any income left over after consumption becomes savings, which becomes capital, which allows even more productivity and an even better standard of living.  The rising tide lifts all boats (though the analogy breaks down when you realize that the faster, stronger boats somehow rise higher).

Now keep in mind that this is true only in an unhampered market.  As you mention, we have a government out there picking winners and losers.  The bulk of the losers happen to be the poor and middle-class (or as I prefer to call them, the "working" class), who are heavily victimized by the state, primarily by three methods, 1) overtaxation, 2) frivolous imprisonment and/or property seizures, and 3) currency debasement (this is not to say the state doesn't commit thousands of other offenses).  This often results in a poor quality of life that is correlated with being poor or working-class, but has little to do with income per se.  Most folks are making plenty of money to live good lives, if only the government would stop taking half of it and debasing what's left.

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maxpot46:
Okay, there seems to be a fundamental misconception here.  Income is not "distributed", i.e. it is not some fixed amount which gets spread unevenly throughout the population.  Income is generated or produced, a consequence of one's acts of making economic exchanges.

Thank you.  This is beautiful.  I'm collecting short, precise and simple explanations to use in discussions with people who may not have considered rational economic thought before.

 

 

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Fried Egg replied on Thu, Apr 24 2008 10:06 AM

I can't remember whether it was Hayek or Mises I was reading who said that wealth inequality is a consequence of the market price structure that serves to exert pressure driving the factors of production towards the market's most urgent uses. The alternative to this is an authoritarian system that allocated the factors according to some central plan. In the former system, there is at least some freedom. In the latter, there is none.

Attempts at reducing wealth inequality weaken the effectiveness of the structure of prices to order the factors of production. In otherwords, a less efficient market.

The problem of wealth inequality though is not economic, it is social. It increases crime rates and general social unrest. Severe inequality is likely to lead to much social friction which could serve to damage or weaken market institutions anyway. Therefore, it is worth considering the possibility that some tempering of wealth inequality might be necessary...

 

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But who is to say severe inequality would result from unhampered markets? The only examples of it we have, combined with a lack of social mobility, come from manifestly statist economies, which take no exception to privileging certain classes of citizens.

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Fried Egg replied on Thu, Apr 24 2008 10:35 AM

Jon Irenicus:
But who is to say severe inequality would result from unhampered markets? The only examples of it we have, combined with a lack of social mobility, come from manifestly statist economies, which take no exception to privileging certain classes of citizens.

I don't think the unwashed masses will likely draw a distinction between those filthy rich who have earned their billions by serving the market well and those who have earned theirs through privillage.

Would any one truly dare to say that severe wealth inequality would not arise in an umhampered market?

 

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Inquisitor replied on Thu, Apr 24 2008 11:05 AM

That'd depend on what one means by an unhampered market. If it means the absence of IP law, monopoly (both state and state-aided), inflationary banking practices, subsidies, various government restrictions (e.g. tariffs), the minimum wage, the internalization of all costs of doing business &c. I see no reason why it should lead to extreme wealth disparities. Besides, as Nozick pointed out, if for some reason people feared the concentration of wealth due to inheritances, they could always choose to band together and collectively avoid leaving large sums of wealth to their natural heirs under their particular social arrangement.

 

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It seems Inquisitor beat me to it... yes, pretty much what he said.

-Jon

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Could you explain "collectively avoid..."?

This is one area I do not have a good understanding of.  Because at one point, I would think that X amount of wealth and property could be consolidated, squeezing people out.

 

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maxpot46 replied on Thu, Apr 24 2008 1:29 PM

Fried Egg:
The problem of wealth inequality though is not economic, it is social. It increases crime rates and general social unrest. Severe inequality is likely to lead to much social friction which could serve to damage or weaken market institutions anyway. Therefore, it is worth considering the possibility that some tempering of wealth inequality might be necessary...

These social issues are not caused by income inequality per se, but rather by state policies that heavily victimize the poor and working class.  What's needed is not to distribute wealth "better" but for the state to stop assaulting people's productivity. 

It's also important to note that income and wealth are different things (and thus "income inequality" and "wealth inequality" are different things).  Income is how much you make, wealth is how much you have.  People seem to be using these terms interchangeably and it's making things confusing.

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maxpot46 replied on Thu, Apr 24 2008 1:38 PM

Fried Egg:
Would any one truly dare to say that severe wealth inequality would not arise in an umhampered market?

Of course it would (keeping in mind, of course, that wealth is how much people have).  Ants have more wealth than grasshoppers, though not necessarily any more income.  A productive family can have generations worth of savings (i.e. wealth) and less productive families can be relatively destitute.  However, none of this is "unfair" because wealth is not zero-sum -- the productive family did nothing to harm the less productive family and can't be held responsible for their well-being.  The lazy and unproductive are poor precisely because they are lazy and unproductive, not because the industrious and productive have taken anything away from them.  It ain't Shaq's fault that the poor Robinson family is starving, but rather that of Mr. Robinson.  Envy is not grounds for property siezures (which is where wealth redistribution has to start).

 

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maxpot46 replied on Thu, Apr 24 2008 1:43 PM

liberty student:
at one point, I would think that X amount of wealth and property could be consolidated, squeezing people out.

By what right do those being "squeezed out" stay, if they own none of the wealth and property?  Remember the fact that one person has a lot of wealth and property doesn't mean that no one else can gain wealth and property (even though property is finite, it can still change ownership through purchase, so anyone can buy land if they are industrious enough).  The reason that person is wealthy is because he's produced so much of a desired good/service that other people give him lots of money in exchange.  This person is a hero of our society, not a villain.

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Deist replied on Thu, Apr 24 2008 2:07 PM

 I think it is important to note that wealth inequality is not what drives up crime rates and social unrest but low standards of living do. Even with countries with some of the highest levels of wealth inequality (the developed world) they do not have a high crime rate as long as they have good opportunities which is usually what the unequal market brings. Countries with high rates of crime tend to also depress economic development due to higher capital costs and little protection of property rights. Essentially crime perpetuates it's own existence if it is not stopped.

Another thing that is just related to this thread in general is that all the statistics dealing with the wealth gap leave out a few important details.

1) Life time income: people have fluctuating incomes and the poorest people are overwhelmingly those just getting started in the labor market. The average Wealth gap stat takes a one year snap shot and then says that this is the constant model and that everyone stays in their income level.

2) The income quintiles: at least in the United States they measure the wealth by household NOT population. That means two income families with kids are in the upper brackets whereas people like me are in the lower brackets even though I am perfectly all right and have little financial worries.

Here is a little link on the real population by quintile. Just so you know it is from a neoconservative website but the source is definitely the US governments own records despite the fact they do not loudly proclaim this population break down in official releases and only tout the one that makes the wealth gap look more dire: http://www.heritage.org/Research/Taxes/images/78673969.gif 

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Deist replied on Thu, Apr 24 2008 2:22 PM

 Another thing about all land and resources being monopolized by the rich is that the market would never let that happen for a multitude of reasons. For instance how could someone buy all this land when there is this much competition for it. Also many people do buy land to develope it and then sell it to make a profit since the demand makes it so profitable to sell rather than simply hoard it for oneself.

As for the real culprit in land concentration, please check out Zoning laws. They are the most subtle and dangerous of market distortions and it creates lilly white upper income towns, drive up the cost of houses and land, and make job allocation difficult. They are also from local governments so I have little faith that decentralization of government reduces tryanny.

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I guess I just have concerns about the concentration of property ownership becoming a series of large consolidations.

There is nothing to prevent someone from refusing to sell, and continuing to amass property, until property is not only scarce and very expensive, but it is simply unavailable.

I could see a form of pseduo-feudalism creeping up in that circumstance.

 

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maxpot46 replied on Thu, Apr 24 2008 2:54 PM

liberty student:
There is nothing to prevent someone from refusing to sell, and continuing to amass property, until property is not only scarce and very expensive, but it is simply unavailable.

There is something, actually.  It's called the law of marginal utility, which states that multiple units of a good are less valuable (per unit) than a single unit.  If one person began to amass land, each bit would become less and less valuable to him.  Eventually, the value of land (to him) decreases to the point that he would value something else more, and thus purchase that something else instead. IOW, your fear depends on an inhuman actor, who doesn't experience marginal utility and thus continues to value land above all else.

Additionally, this scenario doesn't take account of Say's Law, which states that one can only buy things that he's earned the money for (that is, production must precede consumption).  What is your hypothetical actor producing in such abundance that he can afford to purchase all this land? 

In short, your scenario is not something that could ever manifest in real life.  It's not a legitimate argument in support of wealth or income redistribution.

 

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Ego replied on Thu, Apr 24 2008 2:56 PM

Not only that, but the more land he buys, the more valuable the remaining land becomes.

Don't allow leftists to play games with definitions! Some of the libertarian-leaning leftists at this forum will try to redefine "left-wing" back to its original defition (Third Estate, limited government, free-markets, laissez-faire reforms, etc.). Fine! We non-leftists can't stop them from using their own personal definitions; they can use whatever labels they want to describe any concept they want.

However, they have the audacity to then use their personal definition of "left-wing" (remember, the original definition, which is no longer valid) to prove that modern leftists are more libertarian than modern rightists! They will say that libertarianism is "inherently leftist" (again, using the original, no longer valid definition), and use that to insist that we should prefer and side with modern leftists over modern rightists.

Question their motives.

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Bostwick replied on Thu, Apr 24 2008 3:31 PM

Fried Egg:

Would any one truly dare to say that severe wealth inequality would not arise in an umhampered market?

 

More importantly, the type of activities that cause this wealth disparity would change.

Athletes that work for a living would continue to make lots of money, but Record Labels that produce nothing, and exist solely to distribute an artifically scarce good, would disappear.

 

 

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maxpot46:
In short, your scenario is not something that could ever manifest in real life.  It's not a legitimate argument in support of wealth or income redistribution.

I wasn't trying to make an argument for something per se.  Just a concern I had.  I'm obsessive and focused enough to accumulate a lot of land if that was my objective.  I'm quite sure I could defer buying other things, if that was my goal.

And needless to say, whoever controls the most of a finite resource, has a lot more power/potential.  If someone or someones set their mind to owning massive chunks of property, maybe the only workable land, that could be a near impossible inequity to overcome.

I'm trying to embrace anarcho-capitalism, but have a lot of questions and hypothetical concerns I need to understand first.

Thanks a lot for your reply.

 

 

 

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Fried Egg replied on Fri, Apr 25 2008 6:09 AM

I think it is important to note that wealth inequality is not what drives up crime rates and social unrest but low standards of living do.

Actually, I doubt that that is true. People, rightly or wrongly, judge their standard of living according to social norms and as it improves for others around them, they feel poorer if they do not keep up (even if they are the same in absolute terms).

An I think a point that many people are forgetting here is that it doesn't matter how much fairer and just the inequality of wealth might be in an unhampered market (compared to now), and I fully agree with them, it's that it will innevitably cause social unrest. Whether that's down to misguided ideas about social justice or just pure envy, it cannot be ignored.

We might have to temper wealth inequality to some extent, not to make wealth distribution more fair, but to make it sufficiently palatable for the masses to accept.

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maxpot46 replied on Fri, Apr 25 2008 11:10 AM

Fried Egg:
We might have to temper wealth inequality to some extent, not to make wealth distribution more fair, but to make it sufficiently palatable for the masses to accept.

Hmm...  perhaps you should bring it up with the Central Planning Committee, once they're done divvying up the hot blondes.

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Deist replied on Fri, Apr 25 2008 12:08 PM

Fried Egg:
Actually, I doubt that that is true. People, rightly or wrongly, judge their standard of living according to social norms and as it improves for others around them, they feel poorer if they do not keep up (even if they are the same in absolute terms).

 

I am not saying that crime is always induced by low standard of living and I dont deny the insecurity from wealth inequality might inspire people to commit crimes but I don't think it is as simple as any statements we are making so far. Many social pathologies come into play when it comes to crime. We need to realize that the overwhelming amount of people who are poor (by wealthy country standards but also by third world standards) are not criminals.

As far as low standards of living effecting the crime rate it with out a doubt does. Many studies done on the rate of petty crime and corruption (even outside the government) in the cultures of poor countries validate this fact despite that these countries tend to have more general level of equal wealth distribution. That is why you see alot of these countries have tribes and clans that they deal with mostly since they do not trust many outside their social units. This has massive social costs just think of the economic analogy of if every family made most or all of their goods and did not trade or interact with others. Poorer countries pretty much have a much larger amount of amoral familialsm going on.The facts of their surrounding environment makes crime seem more justified in order to live and get by since their opportunities are so few and they have such scarce wealth. To them life is a zero sum game. Yet in the more unequal wealthy countries crime does happen (and always will) but it is far less pervasive.

You are right  in that we need to spread the idea and message of how wealth inequality operates and why to make society in general more accepting of it since it is part of a system that aids all of us.

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Spideynw replied on Fri, Apr 25 2008 4:00 PM

Libertas est Veritas:
Increasing income inequality seems to be the main thrust against capitalism these days. I was wondering what kind of views Austrian economists usually have on this? And I don't mean under the current wealth redistribution schemes, but in a completely free market.

 

The freer the market, the greater the wealth for society overall.  The simple reason being that all victimless crimes are a waste of resources.

At most, I think only 5% of the adult population would need to stop cooperating to have real change.

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