Here's the latest piece from economist John Hearn who has this to say on the inequalities of wealth/income

Equality or inequality: a non-conforming economist`s view.

There is a lot of debate, misunderstanding and debatable conclusions about inequalities in income and wealth so it is time to look at the facts and the myths.

Starting with wealth, and depending on what is in and out of the calculation, there is a very uneven distribution of wealth in almost all societies that accommodate private property rights. We often hear that 10% of the population own 80% or even 90% of the wealth. Even if this is correct I would argue that it is not necessary to do anything about it. People have, inherited wealth, been lucky, worked hard, are old, were in the right place at the right time, won the lottery: so what! There is very little that can be done to help the economy by trying to redistribute wealth except where it was obtained illegally. The reasons for this are:-

  • Wealth derives only a small proportion of the income that determines standards of living.

  • Income derived from wealth is a better target for tax

  • A tax on wealth gradually destroys the source of the tax

  • It can break-up capital and remove efficiencies gained by economies of scale

  • It can impact negatively on growth and job creation

  • It can take away the incentive to invent and innovate

For many years the mantra that "10% own 90% of the wealth" has been used to argue for a redistribution of income. This is of course a non-sequitur as the argument for redistributing income should be derived from the unequal distribution of income not wealth. In fact income statistics are much less supportive of redistributive polices which is probably why those who support redistributive policies made the link between an unequal distribution of wealth and the need for a more equal distribution of income.

Again depending upon what is in and out of the calculation the top 10% usually receive between 20% and 30% of income in most democracies. Although there is a considerable difference in the data when comparing gross incomes and net incomes after tax and benefits are taken into account. Arguably it is this very inequality that is the engine of growth as it provides incentive and fulfils the aspirations of young people by giving them a direction to build their career. In addition to this it brings about a more efficient allocation of resources to labour markets, and because the distribution of income is forever changing it reflects changing patterns of consumption. In contrast, the distribution of wealth tends to change much less overtime.

A very interesting set of statistics that I came across in the late 1970`s, (and I can no longer verify the source so perhaps someone reading this may be able to confirm that I did not dream these numbers), illustrated the importance of free market capitalism in creating equality of income. Alongside this it also illustrated a huge government deception.

The statistics compared the ability to consume goods and services as an imprecise, but useful, measure of living standards. This was difficult to do as two of the counties were communist command economies who did not provide easy access to information. The statistics compared the top 10% with the bottom 10% in four countries. The countries were:-

  • China

  • USSR

  • UK

  • USA

And the ratios, in order, of the top 10% to the bottom 10% were:-

  • 22/1

  • 16/1

  • 4/1

  • 2.5/1

So in China the top 10% were twenty two times better off than the bottom 10% and in the USA they were two and a half times better off.

And what was even more fascinating was that revolutions in the USSR (1917) and China (1949) had been undertaken to create equality and the USA and UK had remained capitalist economies, and we all know that market capitalism is not noted for its aim to create equality. The Chinese and Soviet revolutions had created an equality of wealth over night by removing private property rights, but entrenched an inequality of living standards on their population with no incentive to change as the decision making political elite were in the top 10%. This is the "huge government deception" referred to above. In contrast, freedom of contract, respect for private property rights, the profit motive and free enterprise were the very things that were turning an unequal society into a much more egalitarian society.

Since the 1970`s in the UK it is certainly the case that the distribution of disposable income has become more unequal, but we should not automatically jump to the conclusion that this is bad for the economy in the same way that we should not assume it has been good for the economy. If we are talking about the necessary distribution of income that will produce the highest rates of economic growth and sustain the fastest growth in living standards over time, then like many things in economics we know that it is there, but we cannot prove what it is. It is likely that when, in the 1970s, high marginal rates of income tax were 98p in the £ that this was a disincentive to work and had a damaging effect on growth. However it is not clear whether current rates of tax are too high, too low or just right. All we can say is that the issue needs to be debated openly.

Final thoughts:-

  • The best way to create a more equal society is not to try and create a more equal society.

  • Free market capitalism is the best engine for growth and the only proven way of creating equality.

  • There is a limited role for government which is to collectively purchase the non-rival, non-excludable public good and provide support for the merit goods of education and health.

  • There needs to be a legal framework for supporting a free and fair competitive economy where government acts as a referee, not as a player

  • A tax system needs to ignore the uneven distribution of wealth and concentrate on a minimal redistribution of income that genuinely helps the poor and disaffected. In doing this it is necessary to recognise that inequality of income is an essential driving force that makes us all better off by incentivising labour and allocating and reallocating resources to where we most need them.

John Hearn 19/6/15