On Income Inequality and Income Gaps

Every country you go to, you hear about the rising income inequality. That the rich are getting richer, screwing over the poor, etc. The income gap is widening, and it is implied that that is a bad thing. Here I will try to prove to you that it is not a bad thing-and in all likelihood, is a good thing for the country in general-the country as a whole gets richer because of this income inequality.

As an economist or a government official you are interested in the overall well being of the citizens of the country, which can be measured by the mean or median income. A society with a large gap between the rich and poor can still have a very large mean/median income-can be a very rich society overall [I will not worry about the difference between mean and median, which is a better measure, etc]. Conversely, a society with a small gap between the rich and poor can  be a very poor society overall. Canada and USA have unemployment insurance or dole of $600 per month. An average Engineer in China and India doesn't earn even half that working 8 hours a day everyday! The income inequality in Canada and USA is very large-but that doesn't prevent the average (or median) earnings from being  a lot higher than in China or India. So much so that it is better to be unemployed in Canada than to be employed as an engineer in China or India.  Note that by income I mean not a dollar or yen figure of earnings-but what that income is really worth-the amount of necessities, conveniences or luxuries of life you can buy with that income at a particular place.

It should be obvious, therefore, that a more equal society is not necessarily a richer society overall. Now I will go a step further-and argue that an unequal society is a richer society than a society where all are equal.


Humans have different talents-and the talent to run a big business like Walmart or Sony or Apple is one such talent. Other talents are playing football, playing chess, etc. The distribution talents in individuals is not linear-Messi is 10 times better than the next best player. On an average, the Argentine football team is 10 times better than a regional team like Boca Juniors. A top chess player like Anand or Kasparov is 10 times better than the other grandmasters (that's why these two guys win all the time!). It is this inequality in abilities or talents which gives rise to income gaps (and is also the motivation for emulation, a real necessity for progress).

The Walmart family or Steve Jobs are absolute geniuses to run a business. You can open your own small shop selling stuff-or get a job with these great companies and increase the overall output of society much better. The ability to direct and subdivide labor (managerial skills in today's lingo) is an exceedingly rare talent, and it is well that that talent, which puts so much human industry in motion in productive ways, be well rewarded. This in turns benefits the society.

The equality lovers do not consider this basic difference in human talents- all men are equal in their talents is a savage tribe where 99% of the time is spent in finding food. Everybody is equal, because everyone is hopelessly poor-they don't have their basic necessities of food and lodging taken care of. As society progresses and capital accumulates, these basic necessities are taken care of by a small portion of people-and the rest can think about producing the luxuries of life (railways, telephones, ipads).

From a goverment's point of view, respecting human freedom means letting people exercise their talents freely in a country, and helping them become better at their talents. Let Messi play football the best he can, let's give him the right conditions to play even better. Let Kasparov play chess the best he can, let's give them the best conditions to play great chess. And let the top business guys at Walmart and Apple  play their game (their business is their game) well-let's help them play the game well, and everyone wins. The overall production of Walmart and Apple goes up, and we have a lot more conveniences and luxuries of life in the country for it's citizens.

Not realizing the organizational abilities of the top guys in big businesses is not respecting a really useful talent of humanity. It is very hurtful to everyone. You are likely to be more rich if you work for Walmart than if you open your own little kiosk. True that a Walton family member will be your boss and they will be much richer than you, but if your ego is in check, and the Walton family member treats you well as en employee, your right to the conveniences and luxuries of life is very large working at Walmart than opening your own little kiosk.

Would you put a chain around Messi's leg so he doesn't play better than the rest of his team or other people in Argentina who play football? Putting restrictions on big businesses is the same thing-you are hurting their ability to produce, and in turn, you hurt everyone. Imagine going to a football game where Messi has a chain on his legs because the Argentine government decided to promote equality in football. The problem with talents of running businesses is that such talents are not very obvious (like playing football or chess), and human jealousy therefore makes them an easy target for allegations of unfair advantage.

In summary-income inequality and income gaps in society are a necessary thing-everyone has different talents and some people are exceedingly talented, and need to be paid well for exercising and bettering their talents.  Overall society benefits from this-because the overall production of society goes up. Savages and tribes in remote parts of the world are equal and poor, the more well developed and richer a society, the more the income inequality. If you compare your earnings to the earnings of the owners of your company it is true that they will be earning much more in an unequal society, but if are worried about what you can do with those earnings, your power to acquire the luxuries of life with those earnings, you are better off this way, letting the owner of your business become richer. She will take you with her to even higher levels of income because of her excellent talents in running that business.

Let people exercise their professions (and running a business is a profession) the best they can, and you will as a society become richer. That's the lesson here for non-capitalists. Most people have a strong (usually negative) opinion on Capitalism, without really understanding what it really means. This includes some very intelligent people-because they never really understood what Smith said in "The Wealth of Nations".

People have strong opinions on a lot of things they don't really understand-in addition to Capitalism, another present day example is Global Warming.

Sanjay