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More Thoughts on Economic Inequality

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Here’s a letter to a rising high-school senior in New Jersey who plans to major in economics when he goes to college.

Mr. Ben Ercetin

Mr. Ercetin:

Many thanks for your e-mail.  I wish you much good luck in your senior year – and beyond!  Please consider applying to George Mason. ?

You ask if I “grant [that] rising income inequality is a cost of economic growth” even “if you and I agree that its benefits are more than its costs.”  Your question is excellent.

I grant that rising differences in people’s monetary incomes and wealth are a consequence of economic growth.  I do not, however, regard this outcome as a cost of economic growth.  My reasons are many; I share with you here two of them.

First, because market-driven economic growth, wherever it occurs, dispenses disproportionately larger benefits to the poorest in society (by improving their consumption by far more than it improves the consumption of the richest), the trend in financial measures of well-being is, for me, largely irrelevant.  What I care about is people’s actual, absolute living standards.  If these improve – and especially if the living standards of the poorest improve – then I celebrate the system that brings this improvement.  And if the improvement in the living standards of the poorest is disproportionately greater than is the improvement of the living standards of the richest, then, in my view, that society is becoming economically more, not less, equal regardless of what is happening to the distribution of monetary incomes and wealth.

Second, in a market economy rising monetary inequality is evidence of the expansion of choice and diversity made possible by economic growth.  As society becomes materially richer – that is, as consumption goods become less costly and more abundant even for poor people – individuals enjoy a greater range of options of how to spend their time and lives.  In a desperately poor society, everyone must work to produce as much as possible.  But in a wealthy society such as ours, we all have many options.  Those of us who are highly materialistic have the option of working extra long hours to earn as much money as possible.  Those of us who are less materialistic – those of us, for example, who prefer the non-monetary satisfactions of earning a living by writing poetry over the extra monetary satisfactions earned by working in the financial sector – have the option, in a wealthy society, to live less materialistically than many of our fellow citizens.  One consequence of people exercising these different options is that monetary income and wealth differences grow.  But surely in this case the growing financial inequality is not a cost of economic growth; it is, instead, evidence of some of the benefits of that growth.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercator Center
George Mason University
Fairfax, VA  22030

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