Markets Don’t Exist in a Vacuum

Matt Bruenig draws attention to a recent paper on income inequality and mobility. The paper interprets that the evidence suggests mobility between income quintiles is more rigid than some might expect. It’s an important finding, and something that anybody trying to explain the causes and (de)merits of inequality should address. What follows is not necessarily relevant to Bruenig’s point, but I’m going to use his post as opportunity to segue to a related point.

The data shows certain realities about our current world: growing income inequality, stagnating incomes for the bottom quintiles, income rigidity, et cetera. Looking at the data, we have an impulse towards a certain conclusion: whatever wealth our society is producing, it is not benefiting the worst off to the extent that we’d expect or want. And the easiest correction seems to be to use the power of legislation to change market outcomes.

But, market outcomes are not independent of existing political institutions. It could be that current inequality, rigidity, stagnation, et cetera, are unintended consequences of non-market factors, that impinge on the market process. The first example that comes to mind: the minimum wage (if classic economics is right). The minimum wage leaves some workers worse off, widening the gap between them and the rest of society. Another example is monetary policy that rewards certain people, such as stock owners or asset holders, over others. I’m not saying these are important, relevant, or even right. I just want to illustrate the point: those that take it for granted that the market is at fault should address the possibility that part of the inequality data might be an unintended consequence of some set of legislation.

Of course, it behooves a clever person to try to prove that some of the inequality data can be explained by bad legislation. But, it just seems to me that many people take it for granted that the market is at fault, in the worst sense. I don’t think this assumption is entirely fair, especially since those who blame markets haven’t necessarily presented a convincing argument in that direction.

P.S. I should clarify that I mean inequality net of that which everyone should expect from markets. That is, inequality caused by innate differences between humans and differences in how the output of each worker is valued. There is clearly a good chunk of inequality that is caused by markets, but this is not inequality that we necessarily want to tinker with, because it could make society worse off.

One thought on “Markets Don’t Exist in a Vacuum

  1. Suvy Boyina

    Good post. I’ll also add that equality is a pipedream. Different people have different skill sets and different capabilities and NO ONE is equal. Equality does not exist in this world. That being said, extreme income/wealth inequality is a major issue.


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