Inequality, an indicator in search of a problem

Federal Labor leader Bill Shorten made a speech recently in which he claimed to the ALP faithful that inequality was “the biggest threat to our health as an economy and our cohesion as a society”.

In this spirit, the ALP is currently proposing the Productivity Commission Amendment (Addressing Inequality) Bill, which establishes a framework for the Productivity Commission (PC) to regularly report on economic inequality. The stated purpose of this Bill is to improve the quality of information and analysis available about economic inequality in Australia, and to ensure that proper consideration is given to inequality in the public debate about economic policy.

Inequality of wealth is certainly an economic phenomenon worthy of study. However, significant levels of inequality are not an economic problem in itself. One having sufficient and growing wealth ‘pays the bills’, not whether someone else has even more sufficient and growing wealth. This is because wealth creation, in free markets, is inherently win-win not zero-sum. Wealth creation in a world dominated by Big Government and its cronies, well that is another matter.

Inequality only makes economic sense as one possible indicator that something may be askew with real net wealth … be it the levels, trajectory, distribution and especially sources. What is meant by the latter is whether a person, business or charity sources one’s wealth from: A) free market exchange; and/or B) government facilitated exploitation. In other words, quoting Franz Oppenheimer previously in The Rising ‘Cost-of-Living’: Why Is It So?:

[Th]ere are fundamentally two ways of satisfying a person’s wants: (1) by production and voluntary exchange with others on the market; and (2) by violent expropriation of the wealth of others. The first method is the ‘economic’ means for the satisfaction of wants; the second method is the ‘political’ means. The State is trenchantly defined as the organisation of the ‘political’ means.

Real net wealth is not driven by inequality but by factors such as real income and wages versus the real cost-of-living. The latter is partially and imperfectly measured by the consumer price index (CPI), which nevertheless still clearly shows why poor and middle-class Aussies continue to struggle. As can be seen in the first graph below, price ‘inflation’ has been largely and shockingly accumulating like compound interest since the early 1970s.

No government agency is in a better position to be tasked with assessing inequality than the PC, although it will need to ensure it always includes a free market friendly ‘red’ team. The PC has largely been a bastion of sound economics and common sense for decades, particularly in the 1990s and 2000s.

The PC will, or at least should, be aware of the primary role that too many government interventions have in reducing real net wealth and the distribution of that wealth. Key amongst these interventions are regulation, taxation and inflation of the money supply. Such interventions not only always reduce real net wealth but always have distributional consequences as well, whether intended or unintended. Regarding the latter, as the famous saying goes: “The road to hell is paved with good intentions.”

Regardless of intentions, most if not all government interventions eventually hurt ‘the many’ to the benefit of ‘the few’. The many are the grassroot businesses, consumers and taxpayers of this country. The few are the elite activists, bureaucrats and politicians.

The ‘poster boy’ (or is it politically correct nowadays to instead say ‘poster sex-fluid entity’) for such interventions are the plethora of climate related ones since 2007 and the all-too-predictable impacts on electricity prices since then. Electricity CPI, in the second graph below, clearly shows what the story has been the past decade. The small dip from 2013 to 2015 is the removal of the Carbon Tax. The shocking rise in electricity CPI since 2008 has almost exclusively been driven by government regulations and taxpayer subsidies in solar and wind.

In conclusion, free market wealth and thus any inequality is not at the expense of others. Government facilitated wealth is, has been and always will be. This is where significant and sustainable inequality almost always comes from – ie from Fake Capitalism, not Real Capitalism. However, the following challenge still remains for every freedom fighter as pointed out by the 20th century’s greatest economist Ludwig von Mises:

Nobody seems to doubt that to prevent some people from acquiring riches is a policy extremely beneficial for the rest of society. Everybody is sincerely convinced that technological progress is an act of God not conditioned by the methods of social organization. Enjoying all the new products which free enterprise provides, they are tormented by one thought only: that some people have become rich in creating these new things.

Darren Brady Nelson

1 Comment on "Inequality, an indicator in search of a problem"

  1. Our popular indicators are not always well founded. Take my favourite, equality of income as measured as an average of female earnings vs an average of male earnings. Its totally false as an indicator of anything. The sexes are judged by different criteria in the sexual marketplace, the male more on what they earn, so the males will work towards a higher income whereas females will less so. It doesn’t indicate inequality at all but we hear it used to indicate it interminably.

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