All Commentary
Wednesday, August 1, 2001

Prosperity Through Inequality

Income Inequality Promotes Human Well-Being

Economics may be seen as the rendering of the counterintuitive obvious. At least that’s what good economists do. I came across a good example recently while reading F. A. Hayek’s lecture “The Origins and Effects of Our Morals: A Problem for Science,” which is reprinted in his book New Studies in Philosophy, Politics, Economics, and the History of Ideas (1978).

In one brief section Hayek points out that the socialists wish to substitute a new morality for the one that underpins the market order because they are dissatisfied with a moral code that does not give each person “what he deserves in light of his perceived merits or needs.” In the few paragraphs that follow, Hayek brilliantly shows what the socialists have never understood: that private property and inequality in rewards make all people richer than they would be otherwise.

The root of the misunderstanding is the belief that it’s unimportant how wealth got here and that all we have to do is figure out how to distribute it. Hayek quotes John Stuart Mill (author of “The silliest sentence ever penned by a famous economist . . . an incredible stupidity”): “once the product is there, mankind, individually or collectively, can do with it whatever it pleases.” In a trivial sense Mill was right. The critical question is: will the product be replenished regardless of the manner of distribution?

Hayek disposes of the matter by arguing that “a process which tells us how to reward the several contributions to this product is also the indispensable source of information for the individuals, telling them where they can make the aggregate product as large as possible. It is the relative [remuneration] of all the different factors of production by the market which alone can show us how we must arrange them to make the product as large as we can.”

In other words, if we want the greatest array of wealth possible, producers will need signals indicating how they can best satisfy consumers. Those signals are prices. But the same system that generates prices also generates unequal incomes.

Thus inequality of incomes promotes human well-being. Private property, Hayek wrote, “in the means of production is . . . an indispensable condition for the existence of this product in anything like its present condition. Socialists offer us as a superior moral [sic] what is, in fact, a very inferior morality, yet alluring because they promise great pleasure or enjoyment to people they would be unable to feed.”

* * *

Adam Smith said, “There is much ruin in a nation.” But the news media lead one to believe that’s all there is. Stephen Davies enlists the grand old liberal Herbert Spencer to explain why disaster is nearly all we hear about.

What happens when a bureaucrat is actually called on publicly to defend a set of proposed regulations? You’d be surprised. James Payne relates a firsthand experience.

Countries emerging from the long night of socialism could do no better than to look to one of America’s Founding Fathers for political and economic guidance. James Dorn describes one of the most influential men in history.

You can tell much about a country from whether rewards are allocated according to status or achievement. Thomas Wilson discusses the importance of this distinction.

Theoretically, governments were instituted to avert conflict. Yet they seem to spend most of their time instigating it. Nicholas Kyriazi takes a look at this side of the state.

The reasons for separating church and state are well known. What is not so well known is that they are identical to those for separating school and state. Barry Loberfeld demonstrates.

China apparently subscribes to the view that economic liberalization can only be purchased at the cost of political authoritarianism. Even some Westerners buy it. Christopher Lingle, however, does not.

Risk is a part of life, yet much of what government promises to do is diminish risk. Christopher Mayer points out that the Law of Unintended Consequences always has the last laugh.

When a student asked his teacher why immigrants tend to own stores in the inner cities, he got an important economics lesson. Richard Marcus was there.

If foreign aid improved economic conditions, Africa would today be a haven for investment and high incomes. What went wrong? Jim Peron counts the ways.

In Canada the government is allowed to open mail without a warrant. But don’t worry; it’s just to combat crime. Adam Young is worried anyway.

Here’s what our columnists found to write about this month: Donald Boudreaux reminds us of the importance of reading history. Lawrence Reed has no faith in President Bush’s plan to subsidize religious social-welfare organizations. Doug Bandow stamps the monopoly post office. Dwight Lee says command-and-control is no way to reduce pollution. Mark Skousen pens a paean to Hayek. Charles Baird reports on attempts to unionize temporary workers. And Joseph Salerno, reading two Nobel laureates’ argument for not cutting taxes, protests, “It Just Ain’t So!”

The book reviewers ponder volumes on work and home, health care, privacy, race, higher education, and the telephone for the hearing impaired.


  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.