Monday, May 12, 2008

Does Inequality Matter?

I think the answer depends on one's view of free markets. In free markets, income, broadly speaking, is the result of value creation through innovation and arbitrage. If not all people create value equally (and take the same risks in their careers and investments), why should it be expected that they share equally? The focus then of policy makers ought to instead be on ensuring equality of opportunity and reducing barriers to new ideas instead of creating new ones and reducing incentives. That's what makes a recent study on inequality interesting (Economist's View Blog) - studying why some of the numbers have been changing compared to other countries globally.

In autocracies and plutocracies wealth often becomes a zero sum game, where in order to achieve wealth, it must be taken from another. The problem is that they're often described as free markets. That's why, at least when it comes to places like Russia, you get generalized views like this (h/t Greg Mankiw):

According to a recent survey, a majority of Russians believes that acquiring wealth requires criminal activity and political connections. Only 20% believe that talent matters.
Sadly, it often seems reporters can't tell the difference either. Little wonder then that some politicians perpetually view taxing the rich as an inexhaustible source of money or simply a matter of "fairness".

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