In most American political discourse, freedom and equality are treated as inversely related: that is, economic freedom can only be increased at the expense of raising inequality, and economic equality can only be increased at the expense of reducing economic freedom. But at Stumbling and Mumbling blog, Chris Dillow (“Inequality against freedom,” Feb. 23) shows that it’s just the opposite. Economic freedom (as measured by the Heritage Foundation’s index of business freedom) tends to correlate with economic equality: the less regulated the economy, the smaller the share of total income that’s likely to go to the top 10%.
According to the standard American framing, this is counter-intuitive. Not only do high levels of inequality and concentration of wealth spontaneously emerge from a free economy, unless the state interferes with the process; but extreme inequality actually contributes to economic growth. A good example is a recent column by Jacob Hornberger (“What’s Wrong With Inequality?” Future of Freedom, Feb. 11). On the one hand he treats the Gilded Age — “[w]hen America had no income tax or welfare-warfare state,” and before “the federal government was charged with the task of equalizing wealth by taking from the rich to give to the poor” — as a basically laissez-faire period in which high levels of inequality appeared as a matter of course. On the other, this extreme level of inequality benefited everybody by letting the wealthy accumulate unlimited amounts of capital that increased economic productivity. And — a point Hornberger seems to be fond of bringing up — the super-rich used their wealth to benefit the poor in ways “such as building churches that didn’t charge an admission fee to anyone.”
But in reality it’s Hornberger’s right-libertarian framing that violates common sense — and it makes perfect sense that economic freedom correlates with economic equality. Large concentrations of wealth that result from robbery or government intervention (the increasingly popular “crony capitalism” or “corporatism” theme) are not some kind of outlier, as Hornberger suggests, irrelevant to the majority of giant fortunes that resulted from serving the free market in his mythically “laissez-faire” Gilded Age. Gilded Age capitalism itself, far from being the product of “laissez-faire,” was an edifice built on centuries of land enclosure and other massive robberies, colonial conquest and enslavement.
Government intervention in the market is the main source of large fortunes. Inequality is driven by large concentrations of wealth that derive almost entirely from rents created by the government: monopolies, entry barriers, regulatory cartels, and socialization of operating costs. The differences in wealth that resulted from genuine entrepreneurship, or variation in individual ability, would probably be several orders of magnitude smaller than at present if all those state-enforced monopolies and their resulting rents were abolished. And far from it being a matter of the 20th century state “equalizing wealth,” as Hornberger puts it, the main function of the capitalist state — including the U.S. government in the Gilded Age — has always been to promote inequality.
Rather than economic growth and technological progress being driven by giant accumulations of capital, it’s more often the case that those accumulations of capital — in league with the state — sidetrack technological development onto a path skewed towards artificially high levels of capital intensiveness and enterprise scale. In the late 19th century, when the invention of the electric motor arguably made decentralized local production on the industrial district model the optimal organization of manufacturing, the American state in alliance with industrial interests instead diverted economic development towards mass production and oligopoly industry.
Since the primary purpose of government intervention in the economy is to guarantee profits to big business and increase the rents accruing to the already wealthy — after all, government is basically the enforcement arm of the plutocracy — it stands to reason that the main effect of government intervention is to shift income upwards from workers and consumers to the propertied classes, and increase the inequality of wealth. Therefore we should expect, as a matter of course, a reduction in government intervention to reduce the upward redistribution of income — robbery — responsible for high levels of inequality.
As for those churches “that (gasp!) didn’t charge an admission fee to anyone,” I can’t help thinking of an anecdote from E.P. Thompson’s Making of the English Working Class. A group of workers passing a Methodist chapel built for them by Mr. Sutcliffe, the mill owner, “looked towards the chapel and wished it might sink into hell, and Mr. Sutcliffe go with it.” Hornberger’s churches are a prime example of what Bastiat called “the unseen.” We can see the big churches, which the robber barons built as monuments to themselves. What we can’t see is what the working classes might have built for themselves with their own money, had it not been extracted from them in the form of rents.
Rather than an economy in which the super-rich use the state to extract wealth from the rest of us, I would gladly give up those big churches for a more equal society in which workers kept the wealth they created by their own effort and used it for ends of their own choosing.
