Milton Friedman on Income Inequality

There is a certain tension in Milton Friedman’s views on the issue of freedom versus equality, which was much more nuanced than is commonly assumed. On the one hand, he argued that economic policy should focus on freedom as a primary value; stressing equality per se could lead to economic inefficiency as well as jeopardizing freedom itself. On the other hand, he famously advocated government-sponsored  poverty alleviation by way of the negative income tax, a form of income redistribution that is inconsistent with his general theory of the free-market economy. His justification for this policy, however, was not on egalitarian grounds. Rather, his main motivation seems to have been compassion.
Introduction
A society that puts equality—in the sense of equality of outcome—ahead of freedom will end up with neither equality nor freedom.… On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality.
It seems pretty obvious where libertarians stand on the question of freedom versus equality, and this quotation from Milton Friedman sums it up quite clearly: Libertarians believe that we should be concerned about freedom, and nothing else.
If we aim for freedom, we will also get, indirectly, a good measure of equality as  part of the bargain, but that is a bonus; if we aim for equality directly, however, we will lose liberty, and we will not get equality anyway
Whether Friedman was right or not—that is, whether capitalism does in fact result in less inequality, as he claimed—is a question that presumably can be settled by research. The intriguing question, however, is why a libertarian such as Milton Friedman should be concerned with inequality at all. Note the phrasing of our initial quotation. Rhetoric apart, why would both greater freedom and greater equality be a happy byproduct for Friedman, unless he valued equality for its own sake as well as valuing liberty? Of course, we know that he probably valued the latter much more that he did the former, but, still, the phrasing is subtle and suggestive, and his views on this subject might bear a closer reading.
Friedman’s Case Against Equality of Outcomes
Friedman’s views on income inequality are most clearly stated in ‘Capitalism and  Freedom’ (1962) and in ‘ Free to Choose’ (1980), his two major popular books. In both works, he starts out by arguing that we should indeed be unconcerned about income inequality in a free-market economy, and he provides three major reasons:
(1) Some degree of inequality is actually desirable in any well-functioning economic system;
(2) in any case, a certain degree of inequality is unavoidable under an economic system based on free-market principles; and
(3) the actual degree of income inequality in observed market economies, such as the United States, is much less than is commonly assumed (especially when compared to income distributions in non-market economies).
Regarding the first two points, Friedman expresses the ethical principle behind the distribution of incomes in a market economy: “To each according to what he and the instruments he owns produces.”
That is, and to use a bit of economic jargon, in such an economy, individuals are rewarded in proportion to how much the factors of production under their control (including their own labor) contribute to total economic output. Incomes, in short, derive from property ownership and/or from work performed, and because individuals will differ in tastes and preferences, including relative preferences for leisure and for risk-taking, the principle of “payment in accordance with product” will necessarily result in inequalities of money incomes. Such differentials, however, are necessary in order to provide incentives for certain types of irksome or tedious labor and for certain types of risky activities that would not be performed otherwise.

Friedman goes on to note, however, that a large part of observed income inequality is not due to these “equalizing differences,” as he calls them, but rather to “initial differences in endowment, both of human capacities and of property.” Most people do not regard inequalities due to differences in inherited personal talents and capacities as negatively as those arising from inherited wealth, though

Friedman argues that the distinction is in fact untenable:
Much of the moral fervor behind the drive for equality of outcome comes from the widespread belief that it is not fair that some children should have a great advantage over others simply because they happen to have wealthy parents. Of course it is not fair. However, unfairness can take many forms. It can take the form of the inheritance of property—bonds and stocks, houses, factories; it can also take the form of the inheritance of talent—musical ability, strength, mathematical genius. The inheritance of property can be interfered with more readily than the inheritance of talent. But from an ethical point of view, is there any difference between the two? Yet many people resent the inheritance of  property but not the inheritance of talent.
Is there any greater ethical justification for the high returns to the individual who inherits from his parents a peculiar voice for which there is a great demand than for the high returns to the individual who inherits property?… A parent who has wealth that he wishes to pass on to his child can do so in different ways. He can use a given sum of money to finance his child’s training … or to set him up in business, or to set up a trust fund yielding him a property income. In any of these cases, the child will have a higher income than he otherwise would. But in the first case, [it] will be regarded as coming from human capacities; in the second, from profits; in the third, from inherited wealth. Is there any basis for distinguishing among these categories of receipts on ethical grounds?
As a parting shot, he notes that “it seems illogical to say that a man is entitled to what he has produced by personal capacities or to the produce of the wealth he has accumulated, but that he is not entitled to pass any wealth on to his children; to say that a man may use his income for riotous living but may not give it to his heirs.”
These are good points (especially the last one). As an ethical argument, how-ever, most people would probably regard it as rather weak and unconvincing.One reviewer of ‘Free to Choose’, for instance, had this to say about Friedman’s  position regarding the distinction between inheritance of property and inheritance of talents:

The answer to this question is that there is indeed a difference, and moreover a difference that must surely be known to the authors. It is that we do not attach any moral significance to unfairnesses determined by nature, whereas we do attach such significance to those determined by society. No one considers it morally wrong that one person is handsome and another ugly, but everyone holds it to be morally wrong when two people have incomes which, when compared, offend sensibilities or violate conventions. This is true whether those incomes are equal or not. We are morally outraged when a gangster makes as much as a law-abiding citizen and when a useless citizen has more than a useful one. Thus the moral issue is not that of equality of outcomes at all. It is the character of the arguments that we adduce in favor of, or against, any kind of social determination, be it access to justice, work, income, or whatever.

Friedman himself seems to have been aware of these difficulties. Thus, having made his case, he immediately concedes that it does not amount to a positive ethical argument in favor of income inequalities under a capitalist-type system because this requires appeal to some higher value, something beyond economics as such:
The fact that these arguments against the so-called capitalist ethic are invalid does not of course demonstrate that the capitalist ethic is an acceptable one. I find it difficult to justify either accepting or rejecting it, or to justify any alternative principle. I am led to the view that it cannot in and of itself be regarded as an ethical principle; that it must be regarded as instrumental or a corollary of some other principle such as freedom.
“Payment in accordance with product,” as he puts it, is necessary for allocative efficiency in a market economy, but this is not in itself an ethical criterion. It can explain income differentials, but it cannot justify them. Freedom, on the other hand, is an ethical value in its own right. Acceptance of this value, however, implies acceptance of whatever income inequalities that may arise from volun-tary market transactions, as well as inequalities due to intergenerational wealth transfers (because these arise, ultimately, from people’s freedom to dispose of their own incomes as they see fit).
Income Inequality Under Capitalism(as Compared to Alternative Systems)

How large are these resulting inequalities, and how do they compare with observed income distributions in non-capitalistic societies? This brings us to Friedman’s third main line of argument, and here he treads on firmer ground because this is a factual matter, and the facts appear to bear him out. Given the observed diversity among human beings—in tastes and preferences, in talents and capacities, as well as in initial endowments—it should come as no surprise that the logic of income distribution under capitalism results in significant inequality of money incomes.

However, Friedman points out, “this fact is frequently misinterpreted to mean that capitalism and free enterprise produce wider inequality than alternative systems and, as a corollary, that the extension and development of capitalism has meant increased inequality.”
In fact, income distributions in market economies do not compare unfavorably with those of non-market economies, even with those of socialist-type systems that are ostensibly predicated on explicitly egalitarian premises. (Not to mention the fact that absolute
standards of living are much higher in market economies,so the incidence and extent of absolute poverty is correspondingly much lower.)Thus, Friedman argued that income inequality in the Soviet Union was actually greater than in many capitalist countries:
Russia is a country of two nations: a small privileged upper class of bureaucrats, party officials, technicians; and a great mass of people living little better than their great-grandparents did. The upper class has access to special shops, schools and luxuries of all kind; the masses are condemned to enjoy little more than the basic necessities. We remember asking a tourist guide in Moscow the cost of a large automobile that we saw and being told, “Oh, those aren’t for sale; they’re only for the Politburo.” Several recent books by American journalists document in great detail the contrast between the privileged life of the upper classes and the poverty of the masses.
In Communist China, income inequality was greater than in most capitalist countries:
China, too, is a nation with wide differences in income—between the politically powerful and the rest; between city and countryside; between some workers in the cities and other workers. A perceptive student of China writes that “the inequality between rich and poor regions in China was more acute in 1957 than in any of the larger nations of the world except perhaps Brazil.”
Government Measures to Alter the Distribution of Income
Having stated his general case, Friedman then proceeds to analyze several specific government interventions that are often justified on egalitarian grounds. Though these encompass a broad range of disparate government policies, the nature of his critiques usually can be reduced to two main points: (1) These policies tend to distort incentives, resulting in a less efficient allocation of resources (i.e., surprise that the logic of income distribution under capitalism results in significant inequality of money incomes. 
economic waste); and (2) they do not in fact result in major reductions of income inequality—indeed, they often have, perversely, the opposite effect.
The  progressive income tax, for instance, has introduced many distortions in the economy, but it has not had a very large impact on the actual distribution of after-tax incomes. Friedman conjectures that this is partly due to increased inequality in the distribution of pretax incomes (thus partially cancelling the equalizing effect of the tax schedule) but mostly to the effect of loopholes that allow for tax avoidance. In practice, these opportunities are usually available only for large incomes (e.g., tax-free municipal bonds), and their net effect is to reduce the effective tax rates far below the nominal rates. This reduction in effective taxation is achieved, however, “at the cost of a great waste of resources, and of the introduction of widespread inequity” because the existence of loopholes“make[s] the incidence of the taxes capricious and unequal. People at the same economic level pay very different taxes depending on the accident of the source of their income and the opportunities they have to evade the tax.”
Public housing and urban renewal projects are proposed and defended as a poverty-reduction device, though Friedman argues that the net effect has been to actually increase inequality. Although some poor people do indeed obtain better housing, others are merely displaced to even worse conditions because more housing is destroyed than is built:
Far from improving the housing of the poor … public housing has done justthe reverse. The number of dwelling units destroyed in the course of erecting public housing projects has been far larger than the number of new dwellingunits constructed. But public housing as such has done nothing to reduce the number of persons to be housed.
However, Friedman points out, “this fact is frequently misinterpreted to mean that capitalism and free enterprise produce wider inequality than alternative systems and, as a corollary, that the extension and development of capitalism has meant increased inequality.”
In fact,  income distributions in market economies do not compare unfavorably with those of non-market economies, even with those of socialist-type systems that are ostensibly predicated on explicitly egalitarian premises. (Not to mention the fact that absolute
standards of living are much higher in market economies,so the incidence and extent of absolute poverty is correspondingly much lower.)Thus, Friedman argued that income inequality in the Soviet Union was actuallygreater than in many capitalist countries:
Russia is a country of two nations:  a small privileged upper class of bureaucrats, party officials, technicians; and a great mass of people living little better than their great-grandparents did. The upper class has access to special shops, schools and luxuries of all kind; the masses are condemned to enjoy little more than the basic necessities. We remember asking a tourist guide in Moscow the cost of a large automobile that we saw and being told, “Oh, those aren’t for sale; they’re only for the Politburo.” Several recent books by American journalists document in great detail the contrast between the privileged life of the upper classes and the poverty of the masses.
In Communist China, income inequality was greater than in most capitalist countries:
China, too, is a nation with wide differences in income—between the politically powerful and the rest; between city and countryside; between some workers in the cities and other workers. A perceptive student of China writes that “the inequality between rich and poor regions in China was more acute in 1957 than in any of the larger nations of the world except perhaps Brazil.”
Diskusija par ‘vienlīdzības’ vai ‘brīvības’ principa primaritāti ir novecojusi. Pamatā jāliek nevis ‘vienlīdzība’ vai ‘brīvība’, bet sabiedrības augšupeja un izdzīvošana liela laika mērogā. Jo kāda nozīme ‘brīvībai’ un ‘vienlīdzībai’, ja mēs brīvi un vienlīdzīgi iesim bojā?
Ievērosim, ka arī padomju sociālisms deklarēja ‘katram pēc viņa darba sabiedrības labā’. Sabiedrības spēles noteikumiem jābalstās uz reālām cilvēku īpašībām. Gadu tūkstošu pieredze rāda, ka tās nosaka ģenētiski mantotie primātu instinkti, pieklusināti ar mūsu vēlmi nedaudz pacelties tiem pāri. Šī vēlme izteikta cilvēktiesību deklarācijās.
Jāveido smalks balanss starp katra indivīda vēlmi paņemt sev vai atstāt kaut ko arī citiem, sabiedrībai, tās augšupejai. Mēs varam deklarēt ”katram pēc viņa darba sabiedrības labā’, bet galvenais ir – kā faktiski notiek saražoto materiālo labumu sadale. Ir ērti un patīkami izveidot kādu deklarāciju un ar to dzīvot. Bet, ja gribam pakļauties sabiedrības attīstības un izdzīvošanas primaritātei, tad tik  vienkārši nevar: ir jāizstrādā sabiedrības labā izveidotā ieguldījuma mērīšanas metodes, šo ieguldījumu nevar mērīt vienkārši ar dažu indivīdu iegūto naudu. Finanšu mahinācijas sabiedrībai derīgu produktu nedod, bet izpildītājiem dod naudu. Ir jāizveido mērīšanas kritēriji, kas atbild uz jautājumu: kāds labums ir radīts sabiedrībai? Un katram darba vai līdzekļu (labākā gadījumā tas ir uzkrāts darbs) ieguldītājam atbilstoši jāatlīdzina.

About basicrulesoflife

Year 1935. Interests: Contemporary society problems, quality of life, happiness, understanding and changing ourselves - everything based on scientific evidence. Artificial Intelligence Foundation Latvia, http://www.artificialintelligence.lv Editor.
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One Response to Milton Friedman on Income Inequality

  1. Pingback: More on “The Increasingly Libertarian Milton Friedman” | pundit from another planet

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