Economic Inequality: Facts, Theory and Significance

Studies | Economy | Government | Social

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


The Philosophical Justification for Income Inequality

Justice and Fairness.  Philosophers have two primary ways of judging whether something is fair.  One is the end-state view of fairness:  the outcome is fair based only on the outcome and not on how it was achieved.  The other is a process view of fairness:  the outcome’s fairness cannot be judged independently of the process used to get there.  To contrast the two types of rules, consider two people, each with $1 million.  One made his by coming up with a new product that he sold to customers, and never cheated or lied to any customer or employee.  The other designed a clever piece of computer software that stole $1 from the bank accounts of each of one million people.  Which of the two made his money justly?  Virtually all of us would answer that it was the former.  In other words, how the person made the money matters a lot.  Yet a straight end-state view would say that how the money was made doesn’t matter at all.  What this shows is that the vast majority holds a process view of justice.

“Inequality due to income earned through work and investment is just.”

Are the Means Important?  Most economists judge how just or “equitable” an income distribution is by how equal it is; they don’t ask how people obtained what they have.  In short, the majority of economists have a purely end-state view of justice.  Typical, for example, is economist Joseph Stiglitz, former chairman of President Clinton’s Council of Economic Advisers.  In his textbook, Economics of the Public Sector, he writes:

Consider again a simple economy with two individuals, Robinson Crusoe and Friday.  Assume initially that Robinson Crusoe has ten oranges, while Friday has only two.  This seems inequitable.  Assume, therefore, that we play the role of government and attempt to transfer four oranges from Robinson Crusoe to Friday, but in the process one orange gets lost.  Hence Robinson Crusoe ends up with six oranges, and Friday with five.  We have eliminated most of the inequity, but in the process the total number of oranges available has been diminished.  There is a trade-off between efficiency — the total number of oranges available — and equity.25

Notice that Stiglitz does not even bother to tell the reader how Crusoe and Friday obtained what they have.  He doesn’t tell because the process is irrelevant to him; all that matters is the end state.  He initially hedges by saying it “seems” inequitable rather than it is inequitable, but by the end of the paragraph, the hedge is gone and Stiglitz comes right out and says that inequality is inequitable.  Stiglitz is not alone.  Many economists move almost seamlessly between the words “equity” and “equality” as if they were interchangeable.

A Possible Dilemma?  The propensity for economists to use only an end state view of justice brings up an interesting dilemma.  While many economists write about just distributions of income based solely on the degree of inequality, it is unlikely they raise their children that way.  They are not indifferent about whether their children earned or stole what they have; it matters greatly to them how the end state is reached because ends in themselves are not enough to justify the means.  Thus, on decisions that really matter to them — such as child rearing — it is likely that even economists turn out to believe in the process view.  The problem is not that these economists don’t practice what they preach.  What they preach — the end-state view of justice — is horrible.  What they practice in their child-rearing is quite reasonable.  They should preach what they practice.


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