A disparity of income and wealth is good for us, as long as people can move up the ladder.
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In
In this annual survey of the world's richest people, it's worth pausing to consider one ugly effect of capitalism. It creates a few very wealthy grandees--what the 1992 billionaires survey in FORBES called "the trickle-up phenomenon." And this phenomenon has generated a lot of envy among those less fortunate.
Envy, though, is easier to bear than poverty. Socialism succeeded in lowering everybody's living standard. And the Third World today has greater economic disparities than the First. To be sure, billionaires tend to congregate in rich countries. All except one of the top ten countries in billionaire density have income per head above $22,000 a year (the exception is Saudi Arabia). But on the whole, income and wealth are more evenly distributed in affluent countries than in poor ones.
A single number, called the Gini index--after economist
All societies fall between these extremes. The Gini number is defined in such a way that it would equal 0 for the imaginary egalitarian society and 1 for the Bill-Gates-has-it-all society. Most developing countries have a Gini of 0.45 or higher. Nominally socialist China comes in at 0.40, alongside the U.S. (see table, below). Most of western Europe clusters around 0.30. We don't have a Gini handy for feudal England, but it would probably be at the high end of the scale.
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| Rich and Poor | |||
| The income gap is greater in the US than in Japan, but its easier in America to amass a fortune. | |||
| Country | Gini
|
Per capita
|
2003
|
| Canada | 31.5 | $22,379 | 15 |
| China | 40.3 | 845 | 0 |
| France | 32.7 | 21,751 | 13 |
| Germany | 30.0 | 23,098 | 43 |
| Hong Kong | 52.2 | 24,010 | 11 |
| Italy | 27.3 | 18,730 | 11 |
| Japan | 24.9 | 37,567 | 19 |
| Mexico | 53.1 | 5,817 | 11 |
| Russia | 48.7 | 1,697 | 17 |
| South Korea | 31.6 | 9,668 | 2 |
| Spain | 32.5 | 14,077 | 7 |
| Sweden | 25.0 | 25,705 | 5 |
| United Kingdom | 36.8 | 23,688 | 14 |
| United States | 40.8 | 36,144 | 222 |
| Venezuela | 49.5 | 4,981 | 2 |
In the West everybody is better off than people were in the days when the only way to subsist was by farming. Capitalism has produced a rising tide that has lifted all boats. But it has, no question, lifted some boats a lot more than others.
These Gini numbers, mind you, measure wealth, not consumption. The Gates household is something like 150,000 times as rich as the average American household, but it does not spend 150,000 times as much on food and medicine. Taxes and philanthropy push the distribution of living standards a long way in the direction of equality.
Do these two forces go far enough toward equality? That is the great debate for social philosophers. When President Bush announces his plan to cut taxes, his opponents greet the proposal with cries he is helping the rich. In Venezuela the divide between haves and have-nots has made the country virtually ungovernable. China's leaders have chosen to ride the capitalist tiger even if rapid economic growth leads to social tension.
Economic inequality has two effects, one good, one bad and both named by economists Joseph Zeira, John Hassler and José Rodriguez Mora. The good one is the incentive effect. The greater the disparity between wealth and income, the harder people strive to be successful, and by their striving they enlarge the pie. The bad effect, called the distance effect, is that inequality begets more inequality--the children of the poor have to work harder to succeed, compared with the children of the rich. Just compare the schools in a deprived neighborhood with those in a better-class one.
A society can choose to reduce the distance effect by taxing the rich and spending the proceeds on the poor. But in so doing it reduces the incentive to get ahead. European countries tend to have a lower Gini than the U.S.--and higher unemployment as well. In 1980 U.S. economic output per capita was just about the same as in France and Germany. Since then the per capita output in those countries has gone sideways, while in the U.S. it has climbed 50%.
More than tax structures are at work, to be sure. Egalitarian South Korea has seen a fivefold gain in living standards in the past 22 years. Korea is not merely capitalist but also socially homogeneous, and a place where hard work, saving and education are prized.
One lesson of all this is that societies where the spoils are more unevenly divided, such as the U.S., had better be mobile--or else. If a large enough number of people believe they have a fair shot at success, then they will put up with the megarich. But if large numbers feel stuck at the bottom, sooner or later they will explode. For now, mobility is making China safe for capitalism. The masses believe that plenty of people have become rich corruptly. But the Chinese economy still offers lots of legitimate business opportunities.
Hong Kong has one of the widest disparities in income of any developed economy. Yet social unrest is unlikely. People there are too busy trying to enrich themselves.
Mobility also is important at the top end. Consider these prophetic words about what was then Germany's forthcoming economic malaise, quoted in the FORBES billionaires survey of 1990.
Too much German family wealth was kept in private hands, passed from one generation to another. According to
In 1990 FORBES counted 38 billionaires in West Germany. Thirteen years later the number had edged up to 43, a 13% rise. The billionaire count jumped 111% in the rest of Europe and 124% in the U.S.
As FORBES wrote in 1992: "We needn't love our billionaires, but we should be grateful we live in a society that keeps creating new ones."