Prosperity Through Inequality
Income Inequality Promotes Human Well-Being
AUGUST 01, 2001 by SHELDON RICHMAN
Economics may be seen as the rendering of the counterintuitive obvious. At least that’s what good economists do. I came across a good example recently while reading F. A. Hayek’s lecture “The Origins and Effects of Our Morals: A Problem for Science,” which is reprinted in his book New Studies in Philosophy, Politics, Economics, and the History of Ideas (1978).
In one brief section Hayek points out that the socialists wish to substitute a new morality for the one that underpins the market order because they are dissatisfied with a moral code that does not give each person “what he deserves in light of his perceived merits or needs.” In the few paragraphs that follow, Hayek brilliantly shows what the socialists have never understood: that private property and inequality in rewards make all people richer than they would be otherwise.
The root of the misunderstanding is the belief that it’s unimportant how wealth got here and that all we have to do is figure out how to distribute it. Hayek quotes John Stuart Mill (author of “The silliest sentence ever penned by a famous economist . . . an incredible stupidity”): “once the product is there, mankind, individually or collectively, can do with it whatever it pleases.” In a trivial sense Mill was right. The critical question is: will the product be replenished regardless of the manner of distribution?
Hayek disposes of the matter by arguing that “a process which tells us how to reward the several contributions to this product is also the indispensable source of information for the individuals, telling them where they can make the aggregate product as large as possible. It is the relative [remuneration] of all the different factors of production by the market which alone can show us how we must arrange them to make the product as large as we can.”
In other words, if we want the greatest array of wealth possible, producers will need signals indicating how they can best satisfy consumers. Those signals are prices. But the same system that generates prices also generates unequal incomes.
Thus inequality of incomes promotes human well-being. Private property, Hayek wrote, “in the means of production is . . . an indispensable condition for the existence of this product in anything like its present condition. Socialists offer us as a superior moral [sic] what is, in fact, a very inferior morality, yet alluring because they promise great pleasure or enjoyment to people they would be unable to feed.”
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