Income Inequality Is a Statistical Artifact
The past year or so has witnessed a tremendous outpouring of commentary about income inequality. Pundits and politicians have huffed and puffed about it, mainly about its alleged evils and what governments should do to diminish it. Mainstream economists have devoted a great deal of attention to dissecting French economist Thomas Piketty’s book Capital in the Twenty-First Century, a book focused on income inequality—and also a book whose shoddy craftsmanship would have repelled such attention had the book dealt with a different topic. All of this is unfortunate because it only helps to mislead the public and hence to increase support for pernicious economic policies to deal with a problem that, truth be known, is not even a real human condition, much less one that cries out for political remedy.
Income inequality is a statistical artifact, not a real human condition. As Thomas Szasz might have said, “Show me the lesion.” If you were to conduct autopsies on a random collection of human beings, you would find nothing to show that some of them had lived in societies with a high degree of income inequality and others in societies with a low degree of income inequality. The personal (or family or household) distribution of income is not a human condition. It is only, to repeat, a statistical artifact. It is a measure such as the Gini coefficient for describing the degree of inequality of the values of individual observations in any aggregate of such observations. The aggregate of the measurement is arbitrary: why, for example, should inequality be measured for the entire U.S. population, rather than for population of the city or state in which one lives, the entire North American population (including Mexico), the entire Western Hemisphere population, or indeed the entire world population? The answer is that the measurement is done for certain political units with an eye to “doing something about” the measured inequality, which is always to say, doing something to reduce it, whatever it now happens to be. Thus, this topic is and always has been a hobbyhorse for socialists and others whose ideologies rest on a psychological foundation of envy, of seeking to justify taking from high-income recipients and giving to low-income recipients.
Income inequality has no necessary connection with poverty, the lack of material resources for a decent life, such as adequate food, shelter, and clothing. A society with great income inequality may have no poor people, and a society with no income inequality may have nothing but poor people. Coercively reducing income inequality by fiscal measures may do nothing to reduce the extent of real poverty and may indeed—to tell the truth, almost certainly will—create incentives that increase the extent of real poverty (and many other social ills).
Probably no subject in the social sciences has created so much unnecessary heat. Yet, at the same time, economists actually know a great deal about it and can dispel the public’s confusion about it if they try. Sad to say, many (such as Piketty) do not try in a competent fashion, but only add to the confusion and feed the already raging fires of envy. These economists are therefore acting as ideologues, rather than economists, in such work.
Twenty years ago I wrote an essay on this subject. Although some of the examples I gave are no longer up to date, the analysis has lost none of its pertinence.