This is the first part of a three-part series.
Over the past two and a half centuries, the world has witnessed significant progressPeople are living longer, are wealthier and better educated, and enjoy greater political freedom. (I have already explored the role of Cities as engines (Are the advances made under the Liberty Fund’s AdamSmithWorks project the work of only a few? Have the improvements in living conditions benefited mainly a small elite, leaving much of the world behind?)
What many don’t realize is that these improvements have actually been widely shared. It seems that globalization and market liberalization, the power of which Adam Smith recognized more than two centuries ago, have raised the absolute standard of living to unprecedented heights And Global inequality has been reduced. The world is not only richer, but also more equal.
In this series, I will discuss what inequality is, how it is measured, and how to understand its decline.
Part 1: Understanding Inequality
A popular adage goes that “the rich get richer and the poor get poorer,” which sums up the idea that progress is only available to some. In an oft-quoted passage that is subject to various interpretations, Smith wrote“Wherever there is great property, there is great inequality. For every very rich man there must be at least five hundred poor men, and the ease of a few presupposes the indigence of many.” How readers understand Smith’s remarks on inequality often depends on the extent to which they see inequality as a problem.
Smith was not the first to draw attention to the issue of inequality. Some research even suggests that this concern may be deeply rooted in evolution. Human psychology has evolved At a time when people lived in small bands of hunter-gatherers who tended to share meat equally. Society has changed considerably, but moral intuitions remain largely unchanged: the very unequal distributions of resources often seem unfair.
Of course, our genetic predispositions to think in a certain way should not be taken seriously: human impulses can be both good and bad. Smith calls “the odious and detestable passion of envy” is sometimes implied in the desire to reduce inequalities and has long been characterized as negative by sources such as Bible Book of Proverbs (who says that “envy rots the bones”) and the playwright William Shakespeare (who wrote that “envy breeds cruel divisions”). The tendency to focus on relative rather than absolute measures of well-being can also be harmful, because absolute rather than relative measures of progress are the best yardstick for assessing the success of different institutions and policies.
Moreover, most people have no objection to inequality based on merit, and there is no evidence of widespread unhappiness induced by inequality. In developing countries, increasing economic inequality which occurs when a portion of the population escapes poverty is often seen as encouraging – evidence that upward mobility is possible – and may coincide with greatest average happiness. The research also revealed “a complete lack of effect of inequality in happiness poor Americans.
Of course, when the wealthy are protected by privileged status under the law, inequality seems much more worrisome. Smith acknowledged that incumbents sometimes get unfair privileges from the government, in the form of regulations that stifle competition, for example:
The interest of merchants in any particular branch of trade or manufacture, however, is always, in some respects, different from, and even opposed to, that of the public. To enlarge the market and restrict competition is always the interest of merchants. . . . Any proposal for a new law or regulation of trade emanating from this order ought always to be listened to with great caution, and should never be adopted without having been long and carefully examined, not only with the most scrupulous attention, but with the greatest suspicion. (The Wealth of Nations, Book 1, Chapter 11)
The growth of government since Smith’s time makes these concerns even more relevant. Examples of such laws range from an unnecessarily expansive law professional licensing system Barriers to entry for individual competitors in an industry, excessive regulatory barriers that prevent new firms from entering an industry, bailouts, mandates and subsidies that artificially boost sales and coddle entire industries. The inequalities that arise from such crony government policies is worrying, and reforms to prevent governments from increasing inequality in this way are a prudent and widely welcomed idea.
There are, of course, other possible causes of inequality, particularly in rich countries. Consider income inequality. As countries develop economically, income inequality becomes less useful as a measure of well-being. In subsistence economies, everyone is engaged in the same struggle for survival. In rich societies, by contrast, people engage in different activities because these societies offer diverse opportunities for self-fulfilment.
While some individuals seek to maximize their income, others choose lower-paying occupations that they find enjoyable or meaningful or that provide prestige or greater flexibility. Some may prefer work that allows them more time for leisure or to care for children. Smith observed that each person continues personal interest— “concern for his own happiness, that of his family, his friends, his country” — but as Lauren Hall once noted for AdamSmithWorks, “Smith never claims that economic “Interest is or should be the sum total of all human activities” (emphasis added).
When income inequality is the result of personal decisions made by some people to pursue goals other than material prosperity, it is hardly a good measure of well-being. In these societies, income inequality reflects personal choices, not general well-being. In other words, advanced economies offer many paths to happiness, making income inequality less important. Fortunately, there is a more meaningful way to measure inequality, which I will discuss in part two of this series by focusing on the Human Progress Inequality Index (HPI) created by myself and Vincent Geloso.
Want more?
Vincent Geloso on the Great Antidote podcast talks about global inequalities at AdamSmithWorks
Chelsea Follett Cities as centres of innovation: lessons from Edinburgh and Paris at AdamSmithWorks
Pedro Schwartz, Poverty and inequalityat Econlib.
Chelsea Follett is editor of HumanProgress.org, a project of the Cato Institute that aims to educate the public about global improvements in well-being by providing free empirical data on long-term developments.
