Does Inequality Get a Bad Rap?

“A Goldman Sachs International adviser defended compensation in the finance industry as his company plans a near-record year for pay, saying the spending will help boost the economy. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday.”

from: Binham, Caroline. 2009. “Goldman Sachs’s Griffiths Says Inequality Helps All.” Bloomberg (21 October).
http://www.bloomberg.com/apps/news?pid=20601087&sid=a8upOpH5Q3Tw

Some economiss actually believe this stuff.  I wrote about this theory in The Confiscation of American Prosperity:

According to this theory, markets appropriately reward the rich and powerful because of their superior productivity.  Consequently, they deserve every bit of what they earn.  Supposedly, the best cure for poverty is to allow natural economic forces to follow their course.  These economists are unapologetic about their stance.  For example, when Finis Welch, who gave his prestigious Richard T. Ely lecture at the 1999 meeting of the American Economic Association, he provocatively titled his talk, “In Defense of Inequality.”  There, Welch proclaimed:

I believe inequality is an economic “good” that has received too much bad press ….  Wages play many roles in our economy; along with time worked, they determine labor income, but they also signal relative scarcity and abundance, and with malleable skills, wages provide incentives to render the services that are most highly valued ….  Increasing dispersion can offer increased opportunities for specialization and increased opportunities to mesh skills and activities.  [Welch 1999, pp. 1 and 15]

Ludwig von Mises, an Austrian economist and one of the leading icons of libertarian economics, went even further than Welch, proclaiming: “Inequality of wealth and incomes is the cause of the masses’ well‑being, not the cause of anybody’s distress.  Where there is a ‘lower degree of inequality’, there is necessarily a lower standard of living of the masses” (von Mises 1955).

Does inequality really get too much bad press, as Finis Welch suggests?

5 comments so far

  1. Javier Hernandez-Miyares on

    in defense of the gilded age? Don’t they inevitably lead to a let them eat cake moment, followed by “heads falling into baskets”?

  2. Thomas Molitor on

    Michael,
    How would Welch defend Raj Rajaratnam and the Galleon Fund operations (or Madoff, for that matter)? Isn’t the Galleon Fund operations a final nail in the coffin of the Efficient-Market Hypothesis? Most of wealth is an insider game, irrespective of the industry. Incidentally, did Hayek buy into the EMH?

    • mperelman on

      Easy. Economics specializes in rationalizations. More learning makes markets more efficient [in ripping people off]

  3. Thomas Molitor on

    Do you agree with Robert Lucas, who admitted earlier this year, that “Everyone is a Keynesian in the foxhole”?

  4. mperelman on

    Yes. People call upon the government to patch things up & after they do, they pull out their Friedman/Hayek texts to show that markets work perfectly.


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