The Austrian & the Income Gap By Rick Kelo  

“The state is that great fiction by which everyone tries to live at the expense of everyone else” ~ Friedrich Bastiat

This article is a philosophical treatment of this topic, not a technical one.  This article is an a priori instead of a posteriori treatment, if you will.  For those interested in how to technically refute the study the entire “We are the 99%” movement (“We hate the 1%!” movement) is based upon please see this article:  Income Inequality: A Critique of Piketty & Saez

There is a great problem facing America today.  As a nation we have been voting ourselves more and more benefits for the last 2 generations; benefits we don’t have enough money to pay for.  Any time governments get larger and more activist they drain and distort the economy.  A government that is an activist player in a market economy creates many ill effects opposite of its “do gooder” intentions.

Beyond that there are many places where you can read that the distribution of incomes are uneven in a capitalist economy.  It is one of the most common complaints about free markets: that they end up concentrating wealth in the hands of only a small proportion of the society.  Beyond the question of government policies that add to this gap scarcely has a soul considered if it must be this way, why the distribution of wealth occurs, what the alternative is, and whether it is a good or a bad thing.

1. Must it be this way?

The definition of capitalism is private ownership of the means of production, with the goal of making a profit.  Let’s just imagine a world where there was balance.  In that world the consumer would spend all of his wage on buying things and the business owner would spend all of his on paying a salary.  So every time the worker spends his pay money leaves the economy/the system, every time the employer pays out wages money enters.  In that scenario the amount of goods being produced and trying to be sold just keeps going up.  There is no more money in the system but there are new goods being cranked out every day.  That leads to things being produced for which there isn’t enough money to purchase them. The business owner suffers a loss from the cost of unsold products, and must lower wages.  Now there is even less money able to purchase the rising amount of goods and we have a recession.

Now I hope I didn’t go too fast with that, but it’s a basic example that shows you there cannot be a balanced system.  The business owner must retain some of the money he makes.  If he pays out everything he makes the economy self-destructs.  Savings is what allows there to be spending on research of new technologies, it’s what allows the employee to keep his job when not all the goods he produces are purchased, and it’s what allows the business owner to expand and so on.  You cannot criticize those who have done a lot of saving because the economy that the worker depends on cannot exist without someone being rich.

2. Why does distribution of incomes & wealth occur? 

Well in a free market the wealthiest people are the ones who produce something the common man wants to buy.  If you produce a product that only caters to the rich your business will never be very big.  When I drive down the road on any given day I see a lot of Fords; I don’t see a single Ferrari.  Why?  The reason is because capitalism caters to the common man.  In a free market every producer has an incentive to lower the price of their service so more people want to buy it.  The suggestion that capitalism is somehow against the common working person is a lie.

Now let’s look at every other area of human endeavor.  The best chess players could play thousands of games against you and me and never lose.  Professional golfers could golf against the rest of us forever and never lose.  Not everyone has equal talent.  Making money is no different: it is a specialized talent that not everyone possesses.

Now that deals with the entrepreneur… the business owner… and why he makes more than others.  But what about the rate of pay among employees?  Is it somehow unfair that the brain surgeon who can save your life from the most complex disease ever makes 100 times what the cashier performing a job anyone could do makes?  How about the pilot flying the last airplane you were on?  Is it unfair he makes more than the stewardess serving sodas?  Of course it isn’t.  Now compare that to the discussion of the employee named “the CEO.”  It’s no different; only envy of someone in a higher station of life makes it different.  And for that people blame capitalism; especially once they reach the point in their life that they see their more successful peers pass them by.  In reality though we are only seeing an application of the same principle of the pilot and the stewardess.

3. What is the alternative to inequality?

Easy enough the alternative is “egalitarianism;” it is things being equal which really is to say “the same.”  It’s advocates call for redistributing wealth from the rich to everyone else.  There is a fatal flaw to this argument they rarely consider.  Wealth inequality & the distributions of incomes exist because of our social arrangement.  It is only because humans are incentivized to produce as much as they can under capitalism that any become rich in the first place.  Remove the incentive and you destroy the productivity that goes along with it.

If we are going to have incomes distributed equally then we are going to have to force people to work for free.  Do you think Steve Jobs would have slaved away for 20 hours a day to produce what he did if he could have been paid the same to sit in a cubicle from 9-5?  Of course not, the incentive of money is what generates advances in mankind.  And look next at how many people his company now provides jobs for, and how many consumers benefit from using their products?

There is a deeper problem at play though: redistributing wealth cannot be egalitarian like its proponents suggest.  Egalitarianism suggests you treat everyone equally.  But if you are only taking from some you are not treating all equally.  If I am taking money from the rich and giving it to the poor I am admitting they are not equal, because if they were equal they would have equal rights.  So if the poor & wealthy are equal human beings under the law then the poor have no more right to lay claim to the riches of the wealthy than do the wealthy to exploit the poor (for which we have a great many laws & protections in place).

4. Is unequal wealth distribution bad? 

No it isn’t.  People who claim it is overlook the fundamental issue.  If it were bad then the quality of life of the average person would not be constantly improving.  Why is that happening?  Because you do not have to own a means of production in order to benefit from it.  If the rich own it the common man still benefits from it.  None of us own a clothing factory yet we have, at our disposal, the widest variety, style, materials and price ranges of clothing imaginable.  We are not in need for clothing even though none of us has a way to produce it.

Now most people default to their opinion that unequal wealth distribution is bad because they equate it to the majority of human history when the common man was unable to change his social station.  He was never going to become a king, or the chief of the tribe.  But not so in the capitalist economy!  There is no job in the American economy any person is employed in that has not produced a millionaire in that industry.  And even beyond that just one change in technology can radically alter the landscape of wealth and make entire functions that had been “sure things” obsolete.  Don’t think so?  Go ask Bill Gates how many people were using Internet Explorer 6 years ago.  Then ask him how he now has only 20% of the browser market and lost it to two free, open source products.  That is the power of the innovation inherently inspired under free market capitalism.

Also, many of the people who claim wealth inequality is “unfair” are still using the knowledge of what money is that they learned as a child.  I have 3 kids and when the family has a resource it gets divided equally.  When one kid earns an allowance for doing a chore the others have to be given the same opportunity to make an identical amount.  If not, then they claim things are “unfair.”  Sound familiar?  Except the world isn’t the family you grew up in.  You can’t use the viewpoint of a child to understand the world of adulthood.  Why?  Because wealth is not fixed.  Wealth is created all the time.  Back in the Middle Ages if we surveyed an agrarian village we’d see that some people had granaries and some did not.  Why?  Because only some decided to work hard enough to build them.  They created wealth, and the process is no different today.  But please, no one tell Barack Obama that someone “didn’t build that.”