Smithian Insights into Shrinking Global Inequality

By Chelsea Follett.

"This is part one of three-part series.

Over the past two and a half centuries, the world has seen significant progress. People live longer, are richer and better educated, and enjoy greater political freedom. (I previously explored the role of cities as engines of such progress for the Liberty Fund’s AdamSmithWorks project). But has that progress been enjoyed by only a few? Has the improvement in living conditions accrued mainly to a small elite, leaving much of the world behind?

What many don’t realize is that these improvements have indeed been widely shared. It seems that globalization and market liberalization—whose power Adam Smith recognized more than two centuries ago—have raised absolute living standards to unprecedented heights and reduced overall inequality. The world is not only wealthier but also more equal.

In this series, I will discuss what inequality is, how it’s measured, and how to understand it’s decline.

 

Part 1: Understanding Inequality

A popular adage states that “the rich get richer and the poor get poorer”—encapsulating the view that progress is enjoyed only by some. In a much-quoted passage subject to various interpretations, Smith wrote, “Wherever there is great property, there is great inequality. For one very rich man, there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many.” How readers understand Smith’s words on inequality often depends on whether and to what extent they consider inequality to be a problem.

Smith was hardly the first to bring attention to the subject of inequality. Some research even suggests that concern about inequality may be evolutionarily hardwired. Human psychology evolved at a time when people lived in small hunter-gatherer bands that tended to divide meat in an egalitarian manner. Society has altered considerably, but moral intuitions remain largely unchanged—highly unequal distributions of resources often strike people as unjust.

Of course, our genetic predispositions for thinking in certain ways should not be given undue weight: human impulses can be bad as well as good. What Smith calls “the odious and detestable passion of envy” is sometimes implicated in the desire to reduce inequality and has long been characterized as negative by sources such as the biblical Book of Proverbs (which says that “envy rots the bones”) and the playwright William Shakespeare (who wrote that “envy breeds unkind division”). 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 standard to assess the success of different institutions and policies.

Furthermore, the majority of people have no objection to inequality arrived at by merit, and there is no evidence of widespread inequality-induced unhappiness. In developing countries, increased economic inequality that arises as part of the population escapes poverty is often seen as heartening—proof that upward mobility is possible—and can coincide with greater average happiness. Research has similarly found “a complete lack of any effect of inequality on the happiness of the American poor.” [abstract of this paper is below-CM]

Of course, when the rich are protected through privileged status in law, inequality seems far more troubling. Smith recognized that incumbent businesses sometimes gain unfair privileges from the government—in the form of regulations that strangle competition, for example:

The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public. To widen the market and to narrow the competition, is always the interest of the dealers. . . . The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. (Wealth of Nations, Bk 1, Ch 11)

The growth of government since Smith’s time makes those concerns even more relevant. Examples of such laws range from a needlessly expansive regime of occupational licensing stopping individual competitors from entering a field and overbearing regulatory barriers blocking new businesses from entering an industry to bailouts, mandates, and subsidies that artificially boost sales and coddle entire industries. Inequality that arises from such cronyistic government policies is concerning, and reforms to prevent governments from increasing inequality in this manner are a prudent idea with broad appeal.

There are of course other possible causes of inequality, particularly in rich countries. Consider income inequality. As countries develop economically, income inequality becomes less and less useful as a measure of well-being. In subsistence economies, everyone is engaged in the same struggle for survival. In contrast, people are engaged in different pursuits in affluent societies because such societies offer diverse avenues for fulfillment.

While some individuals seek to maximize their income, others may choose lower-paid professions that they find enjoyable or meaningful or that confer prestige or greater flexibility. Individuals may prefer work that allows more time for leisure or caring for their children. Smith famously observed that each person pursues self-interest—“the care of his own happiness, of that of his family, his friends, his country”—but as Lauren Hall previously noted for AdamSmithWorks, “Smith never argues that economic interest is or should be the sum total of all human activities” (emphasis added).

When income inequality results from personal decisions that some people make to pursue things other than material prosperity, it is hardly a good measure of well-being. Income inequality in such societies reflects personal choices, not overall well-being. In other words, advanced economies provide numerous paths to happiness, diminishing the significance of income inequality. Fortunately, there is a more meaningful way of measuring inequality which I will discuss in part two of this series by focusing on the Inequality of Human Progress Index (IHPI) created by myself and Vincent Geloso.

Want more?

Vincent Geloso on the Great Antidote podcast talking about Global Inequality at AdamSmithWorks
Chelsea Follett’s Cities as Centers of Innovation: Lessons from Edinburgh and Paris at AdamSmithWorks

Pedro Schwartz, Poverty and Inequality, at Econlib."

"Inequality and Happiness: Are Europeans and Americans Different?"

By Alberto Alesina, Rafael Di Tella & Robert MacCulloch

"We study the effect of the level of inequality in society on individual well being using a total of 123,668 answers to a survey question about “happiness”. We find that individuals have a lower tendency to report themselves happy when inequality is high, even after controlling for individual income, a large set of personal characteristics, and year and country (or, in the case of the US, state) dummies. The effect, however, appears to be stronger in Europe than in the US. In addition we find a striking difference across groups. In Europe, the poor and those on the left of the political spectrum are unhappy about inequality; whereas in the US the happiness of the poor and of those on the left is uncorrelated with inequality. Interestingly, in the US it is the rich who are especially bothered by inequality. We argue that these findings are consistent with the perception (not necessarily the reality) that Americans have of living in a mobile society, where individual effort can move people up and down the income ladder, while Europeans believe that they live in less mobile societies."