Monday, 25 April 2016

The Irrelevance of Inequality

As any grand scholar, McCloskey touches on a number of exciting topics in her initial chapters. Such as chapter 6, titled Inequality Is Not The Problem. As is expected, she addresses the "relative vs absolute" poverty discussion. But, more importantly and (to me) way more novel, she provides a couple of interesting takes on those arguments - one of which is a point I have touched upon in an essay from last year.

1) Inequality in itself is irrelevant

This is quite a common point among economically literate people, since any sort of ethical standard presumably depends on the absolute level of suffering of the poor. There is very little reason to believe that it's ethically wrong for me to have more than you, if you have enough to live on - or at any rate are getting richer by the minute or faster than under any other system. And if capitalism provides an ever-increasing tide that lifts all boats, it doesn't really matter if Bill Gates or Carlos Slim has faster or more beautifully-decorated boats:
"In ethical truth we wish to raise up the poor to 'enough' for them to function in a democratic society and to have full human lives. It doesn't matter ethically whether the poor have the same number of diamond bracelets and Porsche automobiles as do owners of hedge funds." (McCloskey, p. 46) 
 Absolute levels of poverty matters. Not relative, which by mathematical definition will almost always exist.

2) Inequality measured is not inequality experienced

As I pointed out in my Wentworth Essay from August last year, the Gini-statistics for Australia (0.32) does not take into account the effects of imputed rent (i.e. services rendered from home-ownership) and transfers-in-kind (such as education or health care provided). When such effects are correctly accounted for as incomes, the Gini-coefficients real Australians actually face falls by about a third, to 0.226.

Why does this matter? Because, all the harms that allegedly come from inequality, most famously portrayed a few years ago by Pickett & Wilkinson's The Spirit Level, require that individuals in such "unequal societies" actually face those inequalities. That is, for the causal relation to run "Inequality -> Social Harms", people have to face unequal conditions and be able to clearly perceive the differences between one's poor self and one's rich neighbour.

McCloskey discusses an article by economist Boudreaux from 2004 ("Can You Spot The Billionaire?") that I was not aware of, that makes this critique against Spirit Level-arguments even stronger. In one of his seminars, Boudreaux had a billionaire attending, but there was no way to distinguish him from the rest of the crowd's graduate students, professors, visitors or relatives, even thought the gini-coefficient of that room would likely be massive:
It’s not that Mr. Bucks was shabby or unkempt. On the contrary, he wore a nice suit and a nice watch, and had a nice haircut. The reason he was not distinguishable as a billionaire had nothing to do with his own appearance; it had everything to do with the appearance of the other 25 or so people in the room. Everyone was as well-dressed and groomed as he was.
The argument here is that the visible, perceivable differences between the rich or even ultra-rich and normal people has fallen dramatically over the last century or so - which, if true, means that Spirit-Level arguments about inequality causing a whole bunch of social ills are even weaker. If differences between people are merely numbers on statisticians' spreadsheets, there cannot be a causal connection that accounts for it.  Boudreaux continues:
"Hefty differences in money income and wealth do exist in capitalist societies. But the consequences of this inequality on actual material standards of living are so small that they are largely invisible. For most of the features of our routine existence—our dress, personal cleanliness, and access to basic health care, such as vaccines, vision correction, pain relief, and first aid—almost everyone in capitalist society is equal."
Caveat: of course I am not arguing that a fuel-burning Porsche-driving billionaire going past a homeless guy on a rug means nothing in explaining differences in social outcomes between the two of them. Those sort of inequalities are patently obvious. But those extreme outliers are not the sort of arguments Pickett & Wilkinson's followers rely on. Rather, they rely on large groups of people, aggregates, containing mostly quite normal middle-class people living quite normal lives. And the differences between those lives compared to your average billionaire's life, are pretty invisible.

Inequality is irrelevant. On ethical as well as practical grounds.

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