This is part one of a three-part series.
The world has seen this over the past two and a half centuries significant progress. People live longer, are richer and better educated, and enjoy greater political freedom. (I have previously played the role of cities as engines of such progress for the Liberty Fund’s AdamSmithWorks project). But has that progress been made by only a few? Has the improvement in living conditions mainly benefited a small elite that has left a large part of the world behind?
What many do not realize is that these improvements are indeed widely shared. It seems that globalization and market liberalization – the power of which Adam Smith recognized more than two centuries ago – have raised absolute living standards to unprecedented levels And reduced overall inequality. The world is not only richer, but also more equal.
In this series, I discuss what inequality is, how it is measured, and how to understand its decline.
Part 1: Understanding inequality
A popular saying states that “the rich get richer and the poor get poorer” – summarizing the view that only a few can benefit from progress. In a much-quoted passage that is open to different interpretations, Smith wrote‘Wherever there is a lot of property, there is great inequality. For one very rich man there must be at least five hundred poor, and the prosperity of a few presupposes the poverty of many.” How readers understand Smith’s words about inequality often depends on whether and to what extent they see inequality as a problem.
Smith was hardly the first to draw attention to the subject of inequality. Some research even suggests that concerns about inequality may be evolutionarily determined. Human psychology has evolved at a time when people lived in small hunter-gatherer bands that tended to distribute meat in an egalitarian manner. Society has changed significantly, but moral intuitions remain largely unchanged; highly unequal distributions of resources often strike people as unfair.
Of course, too much weight should not be given to our genetic predisposition to think in a certain way: human impulses can be bad as well as good. What Smith calls ‘the odious and odious passion of envy’ is sometimes involved in the text desire to reduce inequality and has long been characterized as negative by sources such as the Bible book of Proverbs (which says that “envy rottens the bones”) and the playwright William Shakespeare (who wrote that “envy breeds unfriendly divisions”). The tendency to focus on relative, rather than absolute, measures of well-being can also be harmful, because absolute rather than relative measures of progress are the best benchmark for assessing the success of various institutions and policies.
Furthermore, the majority of people do not object to inequality arising from merit, and there is no evidence of widespread inequality-induced unhappiness. In developing countries, greater economic inequality which arises from part of the population escaping poverty, is often seen as encouraging – proof that upward mobility is possible – and can coincide with greater average happiness. Research also showed that there was “a complete lack of any effect of inequality on happiness of the American poor.”
Of course, when the wealthy are protected through privileged status in the law, inequality seems much more troubling. Smith acknowledged that incumbent companies sometimes obtain unfair privileges from the government – in the form of regulations that stifle competition, for example:
However, the interests of the merchants in a particular branch of trade or production are always in certain respects different from and even opposed to those of the public. Expanding the market and reducing competition is always the interest of the dealers. . . . The proposal for any new law or rule of commerce arising out of this order must always be listened to with great caution, and should never be adopted until it has been long and carefully examined, not only with the most painstaking, but with the greatest care. most suspicious attention. (Wealth of Nations, Book 1, Chapter 11)
The growth of government since Smith’s time makes these concerns even more relevant. Examples of such laws range from unnecessarily expansive professional licensing regime from keeping individual competitors from entering a given field and the overbearing regulatory barriers that prevent new companies from entering an industry, to bailouts, mandates and subsidies that artificially boost sales and coddle entire industries. Inequality that results from this Friendly government policy is worrying, and reforms to prevent governments from widening inequality in this way are a sensible idea with broad appeal.
There are of course other possible causes of inequality, especially in rich countries. Consider income inequality. As countries develop economically, income inequality becomes less and less useful as a measure of well-being. In subsistence economies, everyone is engaged in the same struggle for survival. In contrast, in affluent societies, people engage in different pursuits because such societies offer diverse opportunities for fulfillment.
While some people try to maximize their income, others may choose lower-paying occupations that they find enjoyable or meaningful or that confer prestige or greater flexibility. Individuals may prefer jobs that provide more time for leisure or caring for their children. Smith famously noted that each person haunts own sake– “the concern for his own happiness, for that of his family, his friends, his country” – but as Lauren Hall previously noted for AdamSmithWorks: “Smith never claims that economic interest is or should be the sum of all human activities” (emphasis added).
If income inequality is the result of personal decisions that some people make to pursue things other than material prosperity, it is hardly a good measure of well-being. Income inequality in such societies reflects personal choices, not overall well-being. In other words, advanced economies offer countless paths to happiness, reducing the significance of income inequality. Fortunately, there is a more meaningful way to measure inequality, which I will discuss in part two of this series by focusing on the Inequality of Human Progress Index (IHPI), created by myself and Vincent Geloso.
Want more?
Vincent Geloso on the Great Antidote podcast on global inequality at AdamSmithWorks
Chelsea Follett’s Cities as centers of innovation: lessons from Edinburgh and Paris at AdamSmithWorks
Pedro Schwartz, Poverty and Inequality, at Econlib.
Chelsea Follett is the editor-in-chief of Human Progress.org, a project of the Cato Institute that aims to educate the public about global improvements in well-being by providing free empirical data on long-term trends.