Recently the actor Simon Pegg, star of Shaun of the Dead, was one of 120 wealthy signatories from around the world to a letter calling for higher taxes on the rich. The letter, entitled ‘Millionaires Against Pitchforks’ repeated the common refrain that “inequality is growing across the globe” and claimed that “every solution to this global crisis requires higher taxes on millionaires and billionaires like us”. “Inequality is not inevitable, it’s a policy choice,” Mr. Pegg opined in a column in The Times, “It’s the product of governments passing policies that favour the very wealthy at the expense of the less fortunate”.
The notion that inequality is designed by nefarious politicians is commonplace. So is the notion that the only way to address inequality is through redistribution; only by making the rich poorer can we make the poor richer. Similarly, most people believe that inequality is growing. The French economist Thomas Piketty rose to global fame with his book ‘Capital in the 21st Century’ where he claimed that inequality has surged in the West in recent decades. In his recent book he calls for a 90% wealth tax to combat rampant inequality. This is the popular narrative, repeated ad nauseam in news and social media. But is it true?
Let’s address the last claim first. Is inequality rising? There is no accepted standard measure for inequality on a global level, but given that the share of the world’s population living in absolute poverty has been inn freefall since the middle of the last century, the poorest on the planet have clearly benefitted from recent economic developments.
On a country by country basis, a common measure of inequality is the Gini coefficient, a statistical measure that quantifies income distribution as a number between zero and one, with zero being total income equality. According to the World Bank, there has been little change in the Gini coefficient in the US, Germany or France in recent years, whereas the UK experienced a drop in this measure of inequality in the years following the Great Recession.
GINI index (World Bank estimate) – United States, United Kingdom, Germany, France
But what about the claims in Piketty’s bestselling book? It turns out it is fiendishly difficult to measure inequality. Just choosing the data set is highly subjective. Piketty relies on household income, but as marriage rates have declined disproportionally among those on lower income, their total income is spread over more households. Similarly, different treatment of business or capital income skew the results. Unsurprisingly, by employing alternative methods to Piketty, other economists have come to different conclusions. In other words, the assertion that poverty is rising is at best debatable, at worst misleading.
Next, idea that inequality is a political choice. In one sense this is clearly untrue: inequality of outcome is the manifestation of inequality of innate talent. In the absence of politics, inequality is the natural result of individuals being individuals. But in another sense, inequality can be said to be a political choice, to the extent that it is within the power of politicians to at least attempt to achieve total income equality. Regimes from the USSR to Pol Pot’s Cambodia have tried but apart from the fact that the political leaders never saw themselves as part of their egalitarian experiment, the end result has of course always been the equal sharing of misery, to paraphrase Winston Churchill.
But the most dangerous notion is that inequality is undesirable. In fact, inequality is necessary. It is inherent in the human condition to strive for something better and a society that does away with economic aspiration runs counter to basic human nature. Inequality is of course also an indispensable by-product of any successful, entrepreneurial economy. It is obvious that the concept of entrepreneurship implies inequality. The successful entrepreneur must expect bigger rewards than the salaried worker, or he would choose salaried work. Similarly, he must accept lower current income than the salaried worker, or everyone would be an entrepreneur in the hope of striking it rich.
So Mr. Pegg is wrong. Not only is inequality desirable, it is inevitable. Inequality does not mean that some are poor, but that some are richer than others. Only an system that allows the inequality in innate talent to manifest in unequal outcomes can work. Political attempts to eradicate inequality have all eventually failed after leaving a trail of human suffering, only to be replaced by an economic order that accepts reality: that inequality is an inherent feature of the human condition.