Don Boudreaux, chairman of economics at GMU, has a lengthy post explaining why he believes that income inequality is irrelevant.
First, income inequality says nothing about absolute levels of income. If the real incomes of society’s poorest people are rising by X%, what does it matter if the real incomes of society’s wealthiest people are rising by X+1%?
This matters a lot to people, because it is part of our core human nature to be concerned with our position in society. As an economist, Don surely understands that money is a medium of exchange. People don’t really want money, they want the things that money can buy. After the basic necessities one needs to survive, what the remaining income is really spent on is status. A big house, an expensive car, expensive clothes, there are all signaling devices that tell the world “I have made it, my status is high, look at what I can afford to buy!”
Second, discussions of income inequality promote – psychologically if not logically – the mistaken notion that the amount of total income is fixed.
The total amount of status is actually fixed relative to the total population. If Uncle Sam gave everyone a check for $1,000, are we really richer? No, because it just creates inflation, the amount of goods and services available to buy don’t change. In the same manner, if we were magically able to give everyone a new Mercedes, would everyone’s status go up? No, because the amount of status in society is fixed. In this case, the Mercedes would instantly become a symbol of having low status because it would represent the default car that everyone, even fast food laborers, drive.
concern with income inequality denigrates non-monetary sources of human happiness and flourishing.
Most non-monetary sources of happiness come from status. Don claims to be happy, but he is the chairman of his department and appears on TV shows from time to time. He has status within the economics community. I doubt that Don would be so happy if he was just a nobody teaching economics at Devry.
The lesson, of course, is that money is not life’s be-all and end-all.
A funny comment considering that earlier in his blog post he made a big deal about explaining how great it is that total income is rising. But it’s this last comment that’s correct. It’s not money that’s life’s be-all and end-all, it’s status. The ancient Roman poet Ovid got it right when he wrote two thousand years ago that “this is truly the Golden Age of Rome, because gold can buy everything: love, happiness, and the esteem of man.” Ovid understood that money is used to buy status, not physical possessions.
Economists who say that only total income counts and distribution is irrelevant, they are making the crucial mistake of ignoring human nature. The communists made a similar mistake thinking they could create a society where everyone had the exact same status. This is impossible because it’s only the possibility of increasing one’s status (or preventing one’s status from decreasing) that motivates anyone to do anything. If people can’t get ahead by working hard, then they won’t work hard. Libertarian economists like Don understand very well that people won’t accomplish much without incentives, but they don’t grasp the true incentive people seek: not money, but status.