Relative vs. Absolute Wealth, and The Gaps

Fantastic column Mr. Max Borders at The Freeman.

There is a great deal of hand-wringing over the gap in wealth and/or income between rich and poor. Many of the calls for higher taxes on the rich believe mistakenly that the poor are poor because the rich are rich (with respect to crony-capitalism, that’s often true). I am convinced that we should be more focused on absolute wealth/poverty rather than relative wealth/poverty. And I think most people are, even without realizing it.

 [ Musings On Spreading The Wealth, and Walnut Grove … ]

I think that in spite of what many say and write, most of us would prefer to be better-off in absolute terms, even if it meant being worse-off in relative terms.

For example, think of all of the immigrants, legal or not, who risk a great deal to come across the border from Mexico to the U.S. They undertake this journey knowing that while they will perhaps be wealthier in absolute terms, they will quite likely become poorer in relative terms, compared to the majority of Americans. Yet that is what they want.

Do try to read the entire column, it’s quite good.

Never Mind the Gap – The Freeman – Ideas On Liberty: Common sense diffuses Noah’s misuse of the Gini index, the standard measure of income inequality. If you define a banana republic in terms of the gap, the United States, Hong Kong, and Singapore are all banana republics. By the same logic, then, North Korea, Venezuela, and Myanmar are veritable utopias. Measuring the wealth gap in a country doesn’t tell us anything about levels of poverty or opportunity. It only tells us the statistical spread between richest and poorest.

Despite the protestations of a couple of Nobel laureates who should know better, the market is not a zero-sum arrangement. All this discussion of the gap obscures the fact that whenever people engage in voluntary exchange, all parties benefit. Recall Stiglitz above: “So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie.” This straw man doesn’t look like anyone I know. The whole point of a free economy is that exchange is mutually beneficial. Only outside the market (or in a government-rigged market) does one party gain because another loses. In such cases, only one of four things could have happened: force, theft, fraud, or some variation of these sanctioned by government. Wealth transfers—whether from poor to rich or rich to poor—are inherently zero-sum. That means someone has to lose in order for someone else to gain.

Related links:
Musings On Spreading The Wealth, and Walnut Grove …
Who Pays Taxes? Are They Doubly-Progressive?