This blog is a supplement to my colleague Jeff Haymond’s very informative blog of July 26 entitled “Turning to the Left….” I wanted to add a further ethical dimension to the discussion of income inequality which Jeff was addressing with regard to recent comments by Thomas Ricks at Politico. Jeff’s comments are worth reproducing in full below:

There is one aspect of income inequality in which Ricks is right (but leads to the exact opposite conclusion), yet the other is dead wrong; let’s address the latter first. In market systems, wealth is created, not transferred. This goes straight to the heart of the progressive thinker’s biggest economic fallacy, that of a fixed pie. In this view, if the rich get richer, the poor must get poorer. For me to have a larger slice of pie, you must have a smaller. But this is fundamentally wrong, and taught in all introductory economics classes. Value is created two ways; the simplest being voluntary exchange. When both people agree to trade, by the assumption of rationality and that we prefer more to less, we know that both sides believe any trade makes them better off; they subjectively assess themselves to be better off. The other way value is created is by transformation of productive inputs into more highly valued productive outputs. This is the heart of entrepreneurship, where entrepreneurs appraise current valuations of inputs and are alert to opportunities to bid away resource inputs and combine them into more highly valued outputs (as compared to their current use). So whether it is General Motors taking raw steel and transforming it into a more highly valued automobile, or Google hiring a software programmer who is able to design a more efficient method of advertising on the web, value is created, not redistributed. This value comes at no expense to the poor, it was not redistributed from them. Without the rich, this value never would have been. Rather than stoke the flames of envy, as the left perpetually does with its focus on income inequality, we should instead praise the entrepreneurial processes which lead to more total output–output which benefits all of us to some degree, even when the lion’s share goes to the Zuckerbergs of the world. In other words, economically we should not drift left, but drift toward liberty and markets (notice I didn’t say right).

Jeff writes that wealth is created, not transferred, and he is dead right on that. He also brings out the fallacy of those on the Left: that wealth is a fixed quantity and therefore when one person (or corporation) gains, someone else loses (the classic zero-sum game scenario). Let’s talk more about the ethical dimension of market transactions, to which Jeff briefly spoke. Production and exchange in a market are voluntary to begin with. Without coercion, it is difficult to argue that they are somehow ethically deficient, unless one argues that there is coercion, such as duress, or some other sort of power over one of the parties. Jeff also added that people generally are rational in the economic sense that they can evaluate relative value of potential exchanges to them, and they generally want more rather than less. So the voluntary transaction will by definition be valued to each participant and the value for each will exceed that of what they gave in exchange or they would not have exchanged anything. Of course the exceptions are theft or fraud.

If exchange and production create value and no duress/force, theft or fraud are involved why does Ricks say the results are unethical? As Jeff alluded to, he believes that wealth is a fixed quantity–the “pie size” is unchangeable. If that were true then anyone who added value to himself would have done so by somehow taking from others. That would be unethical–unless of course one party voluntarily gave up value to another (gift?) without gaining anything in return. But if nothing mentioned above occurred in a transaction or in production then that means that no one gained at someone else’s expense and therefore that no ethical principle could have been violated. I am still amazed that so many people talk about income differences as if someone wealthier got that way by taking from others. In most cases that is false–there simply is no ethical issue.

Now Jeff is also very correct to mention that some do attain wealth through “cronyism” or technically, rent-seeking, by using government to take from others and redistribute to themselves. In that way, they are taking from others–taxpayers, or “us.” But as he says, that is precisely because of government.

The ethics here are definitely on the side of the markets. It just doesn’t work–except rhetorically–to blame those who create value for the problems of those who have less. It is not morally their fault. A Christian might ask at this point, “Don’t we have an obligation to help the poor?” But that is a different issue. The church and Christians may have an obligation to help, but nowhere is government given that authority to take from some and redistribute to others. No, the texts on gleaning and Jubilee are not sanctions for government action. I suggest reading Walter Kaiser, noted Old Testament scholar on those. And Acts 2 and 4 do not establish socialism as a governmental system. But on the positive side, there are good ways to help the poor in a more comprehensive and beneficial way. Those ways include advocating for establishment of better property rights institutions, encouraging (and enabling) entrepreneurship, and many other market-based solutions.

Here in the US, citizen-voters must stop enabling cronyism. They can become informed and refuse to vote for politicians who engage in that kind of behavior. It would be nice to see institutional arrangements that prevent such behavior (ideally, some kind of constitutional amendment dealing with spending or some other aspect of governance), but until we have a “critical mass” of both voters and politicians, it looks like it will remain. But it can still be reduced in the meantime.

In conclusion, Mr. Ricks needs a lesson in not only economics but in basic ethics. And thanks, Jeff Haymond, for the good blog.