Should we be worried about income inequality? Should we apologize if it rises? Should we brag about a decrease in this statistic? No, no, and no are the proper answers to these questions, at least for those interested in defending what little remains of our free enterprise system.
It is all well and good to insist that the supposed rise in this statistic is based on “an illusion created by the Census Bureau’s failure to account for taxes and welfare.” Yes, yes, the post-tax and subsidy income distribution is more equal than before these transfers are undertaken. This is because our fiscal system is broadly speaking “progressive” in both the mathematical and political sense: on net balance it tends to take money from the rich and distribute it to the poor. This of course ignores regulations, tariffs, licenses, and other not strictly pecuniary transfer issues, which again, in general, tend to benefit the wealthy more than the impoverished, but that is entirely another matter.
The main criticism of this sort of defense of capitalism is that it apologizes for income inequality. The implicit premise is that when divergence in wealth once again arises (it will, this is a cyclical phenomenon) this is to be regretted; it will be a black mark against the system of economic freedom. It is sort of like apologizing for profits: they are only a tiny sliver of the GDP.
To see why this defense is flawed, let us borrow a leaf from such weak-kneed guardians of the marketplace and argue by analogy. Let us posit a Gini coefficient for chess rankings, and suppose them to be falling (indicating more equality). Is this anything to exult about? Does this constitute a defense of chess? Should we now be less worried about this institution? No, no, and no is the proper answer, at least for those interested in defending this sport of kings.
All this would mean is that the players at the top of the pyramid are getting a little rusty, and that those with the lowest ratings are improving. On the other hand, if the Gini coefficient rises, the very opposite would prevail. The grandmasters are pulling away from the hoi polloi to an even greater extent, and the patzers are getting even more inept, relatively speaking. Those in the middle might well be standing still in their ability to maneuver the chess pieces.
Chess ratings are a pretty good, albeit not perfect, indication of ability to play this game. Yes, yes, younger players are typically underrated, since their score is based to an extent on previous winnings, losings and draws, and they are now presumably getting better. Similarly, older players are a bit overrated, given that they are now past their primes, but their present ratings do not yet fully reflect this. At least, no one has yet come up with a better measure of chess-playing ability than rankings. So should we weep and gnash our teeth for greater inequality in this measure, and boast about more equality? It is silly to even ask this question.
A similar reaction to Gini coefficients in marathon running is appropriate. No one should give a rat’s rear end about whether the gap between the best and worst participants in this sport is rising or falling. The justification for long distance events does not in the slightest depend upon this statistic. Again, time in this race is a very good, albeit imperfect, indication of ability. Assuming no drug taking, sometimes a runner is a bit “off;” other times, he is “feeling his oats.”
Ditto for free enterprise. Earnings, profits, wages, interest payments, etc., are a very, very accurate indication of contribution to the economy. Perfect? No: there is way too much government intervention into commercial affairs for that to be true. There is also the matter of luck. (Yes, heirs may have made no contribution commensurate with their income or wealth; but this is still a good indication of that of their donors). These measures are by far the best measurement we have of this important characteristic.
The defense of laissez faire capitalism should no more be based on equality or inequality than in the cases of chess or marathon running. There are two problems with defending this system on the basis of equality of outcome. One, every once in a while, inequality increases, even when taking into account government transfer payments. Two, worse, it acquiesces in the fallacious notion that equality is good, inequality is bad. No, both states of affairs are merely accurate measures of contribution to the economy.