Inequality is an issue that’s particularly difficult to talk about within libertarian circles. The subject has been politicized, and most people have an opinion on whether inequality ought to be reduced or not. Libertarians dislike the topic because they believe, rightly, that to a great extent inequality is justified by the advantaged conferred by exploiting these inequalities. But, then they use this as an excuse to avoid the rest of the debate, arguing that whoever is still arguing about inequality is missing the most important point. The problem with this worldview is that it’s akin to plugging one’s ears and then yelling really loudly to avoid having to listen to uncomfortable ideas. It also condemns your knowledge to a certain lack of sophistication, because the truth is that comparative advantage explains only so much.
The case for inequality goes something as follows. Humans are born unequal: we have different preferences and abilities. By taking advantage of these differences, we construct a division of labor where the opportunity cost is the lowest. This is the basic concept of Ricardian comparative advantage. Differences in prices, in turn, are beneficial for two major reasons. The most often cited reason is to provide an incentive for more productive individuals to work as hard as what’s optimal. I actually think this way of thinking about it has its flaws. The more important reason to allow for heterogeneous and market-led prices is to allow them to better reflect differences in the value of the factors of production, including labor, so that the market can best allocate these resources. All of this leads to inequality, but at the same time it benefits society by allowing for much greater productivity.
Unless you reject comparative advantage, the logic of the case for inequality is sound. It’s also widely accepted, even by most economists who would like to reduce inequality. If you don’t believe me, you should read Joseph Stiglitz’ The Price of Inequality — Stiglitz’ views are relatively extreme, yet he still accepts the logic of comparative advantage and its implications. The problem is that differences in ability doesn’t explain all inequality. So, the “libertarian” (better said, the economic) case for inequality is trivial, which is why it seems nobody considers it. Everyone considers it, but it has been internalized to the extent that they don’t need to repeat it, especially if everyone already knows its truth.
The problem, for libertarians, is that going beyond this seems to require passing judgment on the desirability of inequality. But, avoiding the topic of inequality because of this seems like a complete non-sequitur. Whether something is “good” or “bad” is a normative statement. It’s a matter of opinion. Economists are in the business of making positive statements (except for those who make policy recommendations) — economics is a theoretical science.
How does an economist look at inequality, then? The economist is interested in explaining the world around her. This world includes inequality, and the subject has become more and more important (to people) over time. We know that a sizable chunk of it is caused by differences in abilities, and consequently differences in values and monetary payment. However, we also know that another sizable chunk of inequality is not explained for by comparative advantage. Therefore, it behooves economists to study what does explain the rest of inequality. For the free market economist, in particular, this subject is important, because either: (a) we need to develop alternative theories to combat bad ones; or (b) maybe some of the theories out there, that we disagree with, are correct and we need to change our worldview. If we don’t do this then we, in fact, have nothing to say about inequality, and worst of all we sound like broken records repeating the same ol’ fact (that everyone already knows) as if it were something new.
Neither is it outside of the economist’s — as a scientist — scope to make cost-benefit analyses. It requires a good amount of abstraction, which consequently leads to significant margins of error, but we can look at inequality as a cost. But, it’s a cost attached to “something” (e.g. comparative advantage) that also has benefits. In the case of differences in productivity, sure one outcome is inequality, but another is increased productivity. Most people accept exploiting comparative advantage as acceptable, because otherwise the division of labor would have never come into existence. But, other times inequality doesn’t pass the cost-benefit analysis. We get the cost of inequality with too little benefits, such as when it occurs as a result of rent-seeking or unconstrained (which is not necessarily the same thing as unregulated) financialization. Of course, looking at inequality as a cost is subjective, but the truth is that most people probably do consider inequality to be bad to one extent or another — few people oppose progressive tax schemes, for example.
It’s clear, to me at least, that tackling inequality as something that should be explained, to the extent that people can weigh the costs and benefits for themselves, is something economists ought to do, whether they’re anti- or pro-market. The alternative, sticking one’s head in the sand and repeating “comparative advantage!,” is unsophisticated, and is the product of digging one’s heels in the dirt just to avoid subjects which are uncomfortable because they carry a “progressive” stigma. This seems completely wrong to me because: (a) we condemn ourselves to ignorance (by not even caring about what explains inequality, apart from comparative advantage); and (b) we declare ourselves irrelevant in the positive debate, because we really have nothing new to offer. Besides, if you first consider the normative, rather than the positive, you’re probably conflating the two, and you’re forgetting the true purpose of economic analysis.