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Is The Gap Between The Rich And The Poor The Real Problem?

This article is more than 4 years old.

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One of the pet topics of anti-capitalists like Bernie Sanders is the gap between rich and poor. In their opinion, this is the greatest of the problems that afflict modern society. And yet the evidence they repeatedly cite in support of their claim that the gap between society’s most and least affluent is constantly widening is questionable at best. The global anti-poverty charity Oxfam publishes an annual report that is frequently referenced in this regard, despite the fact that objective analysis has clearly demonstrated that the report’s methodology is highly questionable and does not stand up to scientific scrutiny. Nevertheless, the report is still widely cited by anti-capitalists—simply because Oxfam’s broad brushstrokes align with the socialists’ stated agenda.

Another source frequently proffered by critics of the “gap between rich and poor” is the research of left-wing French economist Thomas Piketty, who wrote the bestseller Capital in the Twenty-First Century. Piketty’s ideas have become increasingly influential in the United States, especially because two of his closest allies, the economists Emmanuel Saez and Gabriel Zucman, were instrumental in drawing up the Democratic Party’s presidential candidate Elizabeth Warren’s economic program. Unsurprisingly, Warren’s policy proposals include tax increases for the rich, founded on the premise that the gap between rich and poor is widening.

Even Piketty admits that the gap between the poor and the rich has not grown for most of the twentieth century. At the same time, he does criticize the fact that “inequalities” in terms of income and wealth widened between 1990 and 2010. In fact, this forms the core of his criticism.

Dramatic Decline In Poverty

This period, however, has seen global poverty decrease at a faster rate than at any other time in history! In the 2018 book Enlightenment Now, the Harvard University professor Steven Pinker demonstrates that over the past 200 years the rate of extreme poverty in the world has fallen from 90% to 10%. Most interestingly, almost half of this decline has been achieved in the last 35 years.

These are exactly the same years in which, according to Piketty and his socialist devotees, the gap between rich and poor grew so rapidly. In reality, these decades saw the greatest reductions in global poverty the world has ever seen. In China alone, capitalist reforms between 1981 and 2015 reduced the number of people living in extreme poverty from 878 million to less than ten million. The crucial question is: What is more important to these hundreds of millions of people—that they are no longer starving or that the wealth of multi-millionaires and billionaires may have increased to an even greater degree than their own standard of living?

Paradoxically, it is the same “progressive” politicians who otherwise always argue that the world should not be viewed from an American-centric perspective who are suddenly no longer taking a globalist standpoint on this question, but are exclusively adopting an American point of view.

A Thought Experiment

Rather than focusing on whether the gap between the rich and the poor is widening or not, it is far more important to consider the fate of the poor. This becomes clear from the following thought experiment: On a Pacific island, three rich people have fortunes of $5,000 each, while 1,000 of the island’s poorer residents only have $100 each. The combined wealth of the island’s residents is thus $115,000. Now comes the experiment part: Due to economic growth, the total wealth of the island’s residents doubles to $230,000. The wealth of the three rich people triples to $15,000 each; they now own a total of $45,000 between them. Meanwhile, the wealth of the island’s remaining 1,000 residents grows by 85% to $185 per capita. The inequality gap between the richest and the poorest residents has widened considerably.

In an alternative scenario, let’s take the total wealth of $115,000 and split it evenly between all 1,003 residents. That’s $114.66 per capita. As one of the poor with a baseline wealth of $100, which of the two societies are preferable—economic growth or equal distribution? And what would happen if, as a consequence of economic reforms aimed at creating greater equality, the island’s total wealth shrank to a paltry $80,000, or less than $79.80 per capita?

Of course, it is possible to object that the best outcome would be economic growth and a higher general standard of living in tandem with greater equality. And that’s exactly what capitalism achieved in the twentieth century, as even Piketty admits. The above thought experiment is still useful as a way of demonstrating a fundamental difference between two competing value systems. Those who prioritize the fight against inequality over raising the standard of living for the majority will make different choices from those who believe the opposite.

The Power of Capitalism

Capitalism is the root cause of a global increase in living standards on a scale unprecedented in human history before the emergence of the market economy. This has been verified by calculations from the economist J. Bradford DeLong from the University of California: It took humanity 99.4% of its 2.5-million-year history to achieve a per-capita GDP of 90 international dollars about 15,000 years ago (the international dollar is a unit of calculation based on buying-power levels in 1990). It took another 0.59% of human history to double global GDP to 180 international dollars in 1750. Between 1750 and 2000—in a period that represents less than 0.01% of the total span of human history—global per capita GDP grew 37-fold to 6,600 international dollars. To put it differently, 97% of the total wealth created throughout human history was generated within those 250 years. Global life expectancy almost tripled in the same short period of time (in 1820, it was only 26 years).

None of this happened because of a sudden increase in human intelligence or industry—it happened because the new economic system that emerged in Western countries about 200 years ago proved superior to any other before or since: capitalism. It was this system, based on private property ownership, entrepreneurship, fair pricing and competition, that made the unprecedented economic and technological advances of the past 200 years possible.

The most obvious suspicion is that socialists, who are so myopically fixated on whether the rich are getting richer and whether the gap between rich and poor is widening, are more driven by envy than by any honest sympathy for the fate of the poor. If this wasn’t the case, they would not spend all of their time complaining about inequality and would instead focus on discussing the most effective measures to combat poverty around the world.

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