Economic Inequality and a Booming Economy

As in my last post, I made the following comments on Amazon.com, in the back and forth of readers' discussions of Piketty's Capital in the Twenty-First Century.

A Piketty supporter asks: "Tell me the time in the [sic] history when the inequality was high but the economy was booming."

Answer: Broadly speaking, throughout the English-speaking world from about 1775 to the present day; the rest of the western world from about 1800 to the present day; Japan from about 1960 to the present day; South Korea from about 1970 to the present day; and China from about 1980 to the present day.

In these years, waves of continuous economic progress began in the areas named, that on the one side created multi-millionaires and billionaires, and on the other side provided growing masses of wage earners with the ability to afford, first, such things as cotton underwear, shoes, new clothes, improving diets, and then railroad and steamship travel, and then electricity, radios, vacuum cleaners, air conditioners, refrigerators, washer/dryers, flush toilets, automobiles, motion pictures, television sets, computers, cell phones, tablets, and, of course, antibiotics and all kinds of other pharmaceuticals as well as all kinds of surgical procedures.

The introduction of the innovations resulted in high profits for the businessmen who introduced them. The profits were heavily saved and reinvested, and served in the expanded and improved production of the very kinds of goods whose production provided the profits. The inequality was/is in the height of the profits and in the consequent wealth invested in producing the goods that the masses buy. That same wealth is the base of the demand for the labor that the masses sell.

This is an answer spanning centuries and many millions of square miles. For elaboration, read my book Capitalism: A Treatise on Economics. For a brief introduction, read my Kindle essay "How the 1 Percent Provides the Standard of Living of the 99 Percent."

 

The Threefold Disaster that Comes from Imposing Economic Equality

I made the following comments on Amazon.com, in the back and forth of readers' discussions of Piketty's Capital in the Twenty-First Century.

 

People are unequal in their genetic inheritances, their upbringings and environments, and, above all, in the important choices they make over the course of their lifetimes. An inevitable result is economic inequality.

Imposing economic equality nonetheless has at least three enormously destructive effects:

1. It is tantamount to the destruction of the law of cause and effect in the realm of production. For example, under economic freedom, an individual who produces twice as much, while everyone else continues to produce the same, will be able to enjoy twice as much. But if his doubled production must be shared equally by the the 7 billion-plus inhabitants of the globe, this individual instead of receiving twice as much as the result of his doubled production will receive only one 7-billionth of twice as much, which is to say, for all practical purposes, nothing whatever. Under the freedom of economic inequality, an individual is capable of improving his own and his family’s economic well being dramatically. But when the requirement is that in order to improve his own well-being, he must improve the well being of the whole population of the world to the same extent, then he can accomplish nothing. It is like seeing that an individual’s legs are strong enough to enable him to walk, and then demanding that to walk, his legs must be sufficiently strong as to be able to carry the weight of the whole world’s population.

2. Economic inequality is essential to enable less capable people to outcompete more capable people and thus to be gainfully employed in the economic system. For example, here are two workers, one of whom is twice as productive as the other. What is required to induce an employer to prefer the employment of the less capable worker? The less capable worker must be willing, and legally free, to work for less than half as much as the more capable worker. In that case, he becomes the less expensive worker per unit of output. Imposing economic equality, or any measure in the direction of economic equality, such as minimum wage laws or increases in the minimum wage, prevents less capable workers from competing, and forces them into unemployment and a life of permanent poverty.

3. Imposing economic equality wipes out the enormous gains that the average person derives from the greater wealth of others. In a market economy, the wealth of the rich is not in piles of personal consumers’ goods, but in means of production, in which capacity it produces the goods and services that everyone buys and is the foundation of the demand for the labor that the wage earning masses sell. The greater the wealth of businessmen and capitalists, the greater is the production and supply of goods and services and the greater is the demand for labor, and on this foundation the lower are prices and the higher are wages, and thus the higher is the general standard of living.

For further discussion, see my Kindle essay "How the 1 Percent Provides the Standard of Living of the 99 Percent" and my magnum opus Capitalism: A Treatise on Economics also available in the Kindle store . A complete list of my 16 Kindle publications on free enterprise appears at http://www.amazon.com/-/e/B001KCWY0Q