Global Income Distribution Has Become More Equal

Professor Hannes H. Gissurarson, RNH Academic Director, read a paper to a seminar on “Piketty’s Challenge” at the Centre for Free Economic Thought at the Tallinn Business School in Estonia 30 April 2015. In his widely discussed book, Capital in the 21st Century, French economist Thomas Piketty demanded extensive global redistribution of income, because it had become much more unequal than in the past. Professor Gissurarson pointed out the great difference between the approaches of Piketty and American philosopher John Rawls: Piketty was upset by the fact that some people were richer than most, whereas Rawls was concerned with the problem when many people were poor. Indeed, capitalism was able to create much wealth. It has historically been the mechanism by which people in many countries had gone from poverty to affluence, as the evidence showed. It was interesting, Professor Gissurarson submitted, to compare Australia and Argentina—two large countries in the Southern hemisphere, with vast natural resources, and inhabited mainly by European immigrants—and Singapore and Jamaica—two tropical islands and formerly British colonies—and West and East Germany and South and North Korea. It was also interesting to compare some of the Canadian provinces and the Northernmost states of the United States to the Nordic countries. The conclusion was always the same: wealth was created by economic freedom. Undeniably, measurements showed an unequal income distribution in capitalist countries, but in the United States this was at least partly caused by a steady stream of immigrants entering the country, penniless in the beginning, but slowly and surely advancing economically. Measurements of income distribution by the Gini coefficient (or alternatively by comparison of the 1% highest-income earners and the rest) were often misleading, Professor Gissurarson added, because it showed greater inequality in the case of a relative increase of the numbers of pensionists or graduate students, brought about by longer life expectancy or more time spent on education, whereas both of those social changes were generally thought to be desirable.

Professor Gissurarson pointed out that global income distribution had actually become more equal in the last few years, because hundreds of millions of Indians and Chinese had migrated into capitalism. Possibly, however, income distribution had become less equal in the West, and then for two reasons: competition from China and India had stabilised the income of unskilled labour; and individuals with non-reproducible talents or abilities, for example film stars, entertainers and entrepreneurs, now had found themselves operating on the global rather than the local market. When living standards of Western workers were investigated, the fact should not also be disregarded that the quality and diversity of goods had vastly improved. A worker needed much less time nowadays to work for the goods available than he did in the past. Professor Gissurarson then asked whether anything was wrong with an unequal distribution anyway, if it came about as a result of free choice. He took an example. Milton Friedman advertises a lecture, charging $50 per person. The lecture is attended by 500 people. Friedman is now richer by $25,000, whereas each of the people attending is poorer by $50. But everybody is happy. Where is the problem? Professor Gissurarson said that we should be able to sleep even if other people do well.

The seminar at the Tallinn Business School was well attended, with US economist Dr Richard Rahn acting as commentator. Meelis Kitsing, the Director of the Centre for Free Economic Thought, chaired the meeting. A discussion followed after the lecture and the comments. The question was raised whether entrepreneurs needed the astronomical income they were deriving at present. Would they not be just as creative with less income? Professor Gissurarson replied that income should not be regarded as mainly an incentive to contribute, but rather as information provided to the participants in the market process. Income distribution in a free market served as a means of discovering and distributing necessary information about how people could fulfil their own needs as well as those of others. When the flow of information was halted or reduced by government redistribution of income, people were deprived of this information. Professor Gissurarson’s lecture formed a part of the joint project by RNH and AECR on “Europe, Iceland and the Future of Capitalism”.

Tallinn Business School Slides by Gissurarson

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