Principles of Market Fundamentalism, No. 6: Inequality

Inequality is a feature of healthy economies says the wise capuchin monkey.

Published in Underthrow Series .

Principle Six:
Inequality is a feature of healthy economies.

The Inequality Principle is simple: Inequality, under normal conditions, is a feature of the economy, not a bug. If inequality results from political entrepreneurs locked in an unholy alliance with the political class, that is destructive to society. But if inequality is a natural consequence of differential contributions of insight, work, risk-taking, and capital contribution, we should expect nothing else.

In that case, the Law of Flow predicts the economy will look like any other living system: we will see scaling laws. And scaling laws are not equal.

Imagine you’re walking in a rainforest. It’s rich with life — verdant, beautiful, and diverse. When you look up, you notice something striking. A few giant mahogany trees dominate the forest. Their canopy covers almost everything. After reflecting some on these trees, you give them reverence. They are towering and majestic and sustain life for a bewildering array of other plants and animals. Yet, those smaller plants and animals help sustain the trees, too.

But nothing is equal in the forest.

The mahogany trees soak up so much of the forest’s resources, including sunlight, soil, water, and air. You decide the mahogany trees are hoarding resources. Their biomass takes up nearly 80 percent of the forest ecosystem. It’s just not fair that they should have so much, while the smaller flora and fauna have so little. Thinking about this inequality, you wonder if it would be better to cut, cull, or pair back some larger trees.

Soon, you come upon a group of tribesmen. They share some magic with you, which they say allows you to “talk to the forest.” Being an open-minded sort, you heat up some root with water and make tea from the root. Then, you plunge deeper into the jungle with your heart burdened with a message of rectitude.

“Hey, monkey,” you say, wondering if the root works.

“Why must the mahogany trees take up so much sun, water, and light?”

To your surprise, the capuchin turns his head and replies: “Without them, we’d have no boughs on which to stand, nor fruit, nor shelter from the storm.”

“It seems unfair, though,” you return. “Without you, little ones, the mahogany seeds would have no fertilizer. Their seeds would not so easily find a place for their saplings to take root.”

The capuchin says, “This is true.”

A tree frog overhears. “Yes, if we depend on each other this way, why aren’t we bigger and the trees smaller? Why shouldn’t we have more of the resources?”

The capuchin thinks for a moment. “One thing is certain. If we cut them down to our size, we’ll be living in an empty field.”

Frog says, “I couldn’t live in an empty field.”

“Nor could I,” says the capuchin, turning back to you. “I wonder, traveler. Is it in the forest’s nature that the trees are large and we are smaller and more numerous? That they control the water and the light? And would the rainforest be this plentiful without these giants here?”

The atavistic desire for equal economic outcomes is a fetish manifested by paleolithic brains. When humans lived in small clans with little refrigeration and severe scarcity, equal sharing meant clan survival. But outside of family and charity, a clan ethos has no place in advanced economies.

If one is concerned about the least advantaged, she can always practice compassion. In compassion, she will come to appreciate the distinction between humane concerns about poverty and envy-based feelings about inequality. The former emphasizes prosocial means of uplifting the poor. The latter emphasizes confiscating wealth. Never mind that people have significant moral objections to confiscation. From an economic point of view, confiscating wealth creates no value. It merely transfers it.

To reiterate, the Principle of Inequality implies that economies operate according to proportionality. Any reward that accrues to one ought to be tied as closely as possible to their contribution to some profitable endeavor and be a consequence of sovereign choices, not choices by sovereigns.

Institutional reform that minimizes compulsory transfers—whether from poor to rich (cronyism) or rich to poor (welfare)—will not create an equal society. Instead, it can shape the rich to become more compassionate, the middle classes to save more of their seed corn, and the poor to seek mutual aid and upward mobility.

Max Borders is a senior advisor to The Advocates, you can read more from him at Underthrow.

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