Economic Inequality: Facts, Theory and Significance

Policy Reports | Economy | Government | Social

No. 312
Tuesday, June 10, 2008
by David R. Henderson

The Difficulty of Redistribution

Stiglitz reflects another mainstream economic viewpoint on income distribution when he writes:

If we don’t like the income distribution generated by the competitive market, we need not abandon the use of the competitive market mechanism.  All we need do is redistribute the initial wealth, and then leave the rest to the competitive market.26

Oh, is that all?  Stiglitz makes redistribution sound as easy as changing a graph on a blackboard.  But, in fact, to “redistribute the initial wealth” in any substantial way would probably lead to a bloody civil war.  Those whose main wealth is in their house, for example, would likely fight to keep their wealth.  Stiglitz, who is almost certainly a multimillionaire, would probably be one of them.

“Government-enforced equality would require constant intervention to redistribute income.”

Moreover, once people learn that every time the government doesn’t like the income distribution it will intervene to change it, they will be less likely to do things to earn that wealth.  And you can be sure that the government will want to intervene frequently because, even if total equality is achieved, the market would upset that pattern. A simple example illustrates how the market does this.27 In New Jersey, a mother gives birth to a large baby who grows up to be bigger than all his classmates.  He also is good at basketball and hones his skills in high school and college.  When the Orlando Magic basketball team hires him, many people are willing to pay to see him play.  Therefore, teams that would like to sell more tickets are willing to pay him to play for them (ask the L.A. Lakers, Miami Heat or Phoenix Suns).  Thus does Shaquille O’Neal get rich — and contribute to economic inequality.  So do many other less visible people who have an aptitude for business, or any rare skill that is in great demand.

The free market upsets patterns.  A government devoted to enforced equality must intervene again and again to prevent inequality.  Either it must prevent wealthy people from spending their money the way they want or it must confiscate all income above a modest level.  A truly equality-oriented government might even try what the regulators tried in the humorous yet haunting short story, “Harrison Bergeron,” by Kurt Vonnegut.28 In that story, the government offset all inherent advantages of people.  Physically powerful men had to wear weights so that they wouldn’t be able to perform better than anyone else.  Beautiful women had to wear masks to hide their beauty.  Smart people had to wear electric headgear that zapped them whenever they started to think clearly.  The point is that if the government truly dislikes the distribution of wealth or income that results from a free market, and if it insists on having to “correct” it, we will end up with a vicious totalitarian government.

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