Freeman

IT JUST AIN'T SO

America Is Headed Toward Plutocracy?

Wealth Inequality Is Not a Problem

OCTOBER 01, 2002 by AEON SKOBLE

In a New York Times op-ed (June 14, 2002), columnist Paul Krugman lamented the increasing inequality between rich and poor, and expressed concern that this will lead to an erosion of democracy. He needn’t worry himself (more important, he needn’t worry his readers), since his argument depends on misleading arguments about wealth disparities and philosophical confusion about American democracy.

The very title of his column, “Plutocracy and Politics,” is misleading. Plutocracy means government by the wealthy. Even if we grant the assumption that income inequalities are increasing, that wouldn’t make our society a plutocracy. If it wasn’t a plutocracy during the hated (by Progressives) Gilded Age, it isn’t now. Even if it were true that income inequalities are more pronounced now than in John D. Rockefeller’s day, there is simply no evidence that we are governed by a cabal of the wealthiest few. For one thing, many of our richest citizens are left-leaning. More to the point, politicians are still democratically elected, and fears about campaign finance notwithstanding, it remains the case that a rich person has as many votes as a poor person. Even if we wanted to reduce the citizenry to convenient, polarized categories like “rich” and “poor,” the politicians would be a distinct third class. They work to get re-elected. Sometimes that means catering to what they see as the interests of the rich. Other times it means catering to what they see as the interests of the poor.

But politicians are notorious for attaining results contrary to their stated goals. For example, it might seem to be “catering to the interests of the working class” to enact import quotas on foreign goods, because they protect the jobs of those who produce the corresponding domestic goods. But it is not, since it is predominantly the working class that will bear the burden of paying the higher prices for those goods. What is in everyone’s real interests, of course, is to have the maximal amount of liberty that is consistent with everyone else having equal liberty. But there’s scant evidence that any politicians consistently work toward that end.

There’s a deeper point about income inequality, which can be summarized as “so what?” Since when is disparity between incomes the only gauge of how good a state of affairs is? If all philosophy professors could double their incomes, but only as part of some scheme whereby history professors would triple theirs, is it not in my interest to agree to this? There’s a sense in which this may be “unfair,” but preferring the status quo is clearly detrimental, to me as well as to everyone else. If all the historians start driving Jaguars, I have still doubled my income. It’s more a matter of attitude whether I am filled with joy at the increase in my wealth or resentful that the historians have even more. I prefer the former. The latter is psychologically, as well as socially, destructive. If one approach to political economy makes both Smith and Jones richer, but to different degrees, that is preferable to one in which both are equally impoverished. So to lament inequality without taking into consideration real gains by all is morally obtuse at best. At worst, it’s deceitful.

Part of Krugman’s complaint is that the pay for top CEOs has skyrocketed (4,300 percent!) even in cases where one has had a disastrous tenure at the company. This is largely a non sequitur. It may be true that some CEOs are overpaid. The free market respects people’s freedom to make decisions, but it doesn’t guarantee that all decisions are wise. Do some corporate boards pay their CEOs too much? Sure. And the company suffers when they do.

But excessive salaries for ineffective CEOs aren’t directly charged to my account (unlike, say, tax increases). One suspects that Krugman has invoked the overpaid but inefficient CEO as a rhetorical device to foment indignation about income disparities. Another example might be a professional athlete who signs a multimillion-dollar contract and then has a terrible year, or a big-budget action picture that flops. These examples make people more acutely aware of income disparities because they seem to be examples of someone making lots of money for doing nothing. But the appeal is largely rhetorical, operating in defiance of economic logic. People make mistakes. This is neither here nor there with respect to Krugman’s larger argument that we are heading toward “government of the rich.” And contrary to what he thinks, these examples do not refute the idea that riches generally are a reward for achievement.

Cause for Concern?

Even if it’s true that America isn’t heading toward plutocracy, some might argue, should we not be concerned about the erosion of democratic sentiment that wealth inequality engenders? No, for two reasons. First, there’s ample evidence that these disparities are not increasing the way Krugman implies. According to economist Steven Horwitz, the real cost of living has dropped significantly and consistently over the course of the last hundred years, and the last few decades, for the poor as well as the rich. Between 1975 and 1991, the average income of those in the bottom fifth rose, in real terms, at a greater rate than the average income of the top fifth. So the slogan “the rich get richer while the poor get poorer” turns out not to be the case. While examples of ostentatious consumption of luxury goods may make it seem that disparities are growing, the statistics belie this. And of course the trend toward ostentatious consumption is as common to lower-income and middle-income families as it is among the rich.

Second, democracy, in the sense of popular voting for congressional representatives, is not threatened by some people making more money than others. Other senses of democracy, for example, that all wealth belongs to the state and hence inequalities must be “arranged” in order to achieve certain outcomes, are not consistent with liberty and are not part of our political heritage.

It’s a shame that the most prominent economics columnist, in the country’s most prestigious newspaper, relies on misleading statistics and appeals to resentment and envy to make an alarming point when he could be passing along some good news: that everyone is better off now than 100 years ago, and government manipulation of wages and prices isn’t why.

Aeon J. Skoble

Department of Philosophy

Bridgewater State College

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October 2002

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