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People, Not Ratios

Issue Analysis

Title

People, Not Ratios

Why the Debate over Income Inequality Asks the Wrong Questions

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The debate over income inequality became especially heated following the English-language publication of French economist Thomas Piketty’s bestselling book, Capital in the Twenty-First Century. The controversy has generated more heat than light. This paper seeks to clarify common points of confusion in the inequality debate and expose the fundamentals behind the ideological tussle. For all sides of the inequality debate, the overarching goal should be to reduce global poverty.

The paper begins with an analysis of Piketty’s book and some of his policy proposals, including a global tax on capital, and his argument that capitalism has built-in increasing inequality because rates of return on capital tend to outstrip overall economic growth. But for all Piketty’s concern about mathematical

disparities between rich and poor, he never asks some obvious questions:

  • How are the poor actually doing?
  • Is their economic situation improving over time?
  • What policies can make the world’s poor better off over time?

Contra Piketty, the mathematical ratio between a society’s highest and lowest income and wealth strata is less important than the actual living standard for people living at the economic bottom. In other words, relative poverty reduction should take a backseat to absolute poverty reduction. People, not ratios, are most important. Since the current debate is almost exclusively about relative and not absolute living standards, we conclude that most poverty activists are asking—and answering—the wrong questions. Their misguided focus harms the poor.

Many inequality activists believe that in order for some people to have more, others must have less. But a brief tour of economic history over the last century shows that the modern economy is emphatically not a zero-sum game.

According to a host of data, poor people around the world today are living better than ever before, though much work remains until everyone has enough to live with comfort and dignity. According to data from the economic historian Angus Maddison, from 1910 to 2003, the world saw more than a  quadrupling of per capita income, even as global population increased by three and a half times, from 1.8 billion to 6.3 billion.

There is more wealth today, and more wealth per person. In China, the government’s gradual loosening of economic control has allowed 680 million people to escape the absolute poverty standard of $1.25 a day—the largest reduction of poverty in history.

Increasing wealth has led to the democratization of good health. In the United States during the 20th century, average life expectancy increased by 30 years, while infant mortality dropped by 90 percent.

In addition to better health, poor people today have more, better, and cheaper consumer goods than their parents or grandparents did. And while the price of formal schooling has gone up significantly, schooling and education are not the same thing, and today the latter is affordable to all. In the developed and parts of the developing world, nearly everyone has inexpensive or even free access to books, documentaries, college-level lectures, and other intellectual riches to a degree never before seen in history.

In almost every area of life, the poor in the United States and many places around the world have seen their standard of living improve more during the last century than in the last several millennia combined. There is much left to do, but much has also already been accomplished.

The paper concludes with a limited defense of inequality, which Piketty and many like-minded inequality scholars might mostly agree with. Piketty’s aversion to ancient régime status societies, in which hereditary kings and nobles have more rights and privileges than others is justified, as is his defense of “a just inequality based on merit, education, and the social utility of elites.”

However, Piketty’s prescription to address what he sees as “a more worrisome inequality, based more clearly on vast wealth” focuses on tempering large fortunes and inherited wealth rather an on tackling absolute poverty.

A companion paper applies this paper’s “people, not ratios” approach to a concrete policy agenda to help the poor. Planks of the agenda include a stable price system, affordable energy, easy access to capital, occupational licensing reform, and regulatory reform.