From Different Planets

Daniel Little:

the idea that a properly functioning market economy will tend to reduce poverty and narrow the extremes of income inequality has been historically refuted — at least in the case of American capitalism.

Echoed by Mark Thoma.

On the other hand, Don Boudreaux.

Each and every thing that we consume today in market societies is something that requires the coordinated efforts of millions of people, yet each of us is able to command possession and use of these things in exchange for only a small fraction of our work time.

8 thoughts on “From Different Planets

  1. “Low-quality and ineffective schools are concentrated in low-income and racially segregated neighborhoods, so poor people have reduced educational opportunities. Access to jobs is also constrained by geography and educational opportunity. ”

    Bad public schools are failures of a market economy? Talk about stacking the deck, Mr. Little. Geography is a constraint on access to jobs? That’s like complaining on a physics blog that gravity is a constraint on our ability to fly.

  2. Daniel Little’s statement has two problems compared to Boudreaux’s position:

    1) Clearly, there is less poverty today than there used to be, in absolute terms, per capita. For one thing, his own charts show rising incomes for the lowest 20th percentile. For another, if you take an even longer view, is there a question that a smaller percentage of people today die from starvation (perhaps the most important measurement of poverty) than 100, 200, or 500 years ago?

    2) Boudreaux makes no claims about inequality in his post, and I doubt whether he would think it’s a relevant issue. In fact, no one that Little mentions makes claims concerning inequality reduction. He is literally arguing against no one on that point. In fact, I think this is why he makes the mistakes in his analysis of poverty: he conflates increasing inequality with increasing poverty, instead of taking a view of absolute material gains in well being over time (notice that his first paragraph focuses on poverty, then later he pivots to inequality as if they are the same theme). The other thing to note in his graphs is that the top percentile of incomes is so sensitive to asset prices (equities and housing), which Bernanke has explicitly targeted with low rates since the crisis. You want to reduce income inequality in the next two months? Crank up the Fed funds rate to 15% tomorrow. I guarantee a stock market and housing crash, hence lower incomes for the wealthiest 1%. Would Little view this as progress? Would this alleviate poverty?

  3. Poverty is not a necessary or sufficient condition for income inequality. There can be income inequality without poverty, and poverty without inequality. Some “philosopher” Little is. His argument fails Logic 101.

  4. Like others, the problem with Little’s statement is that he conflates poverty and income inequality as the same thing. For income inequality, Little’s right….markets do very little to affix that.

    What that actually means of course is an entirely different story.

    When it comes to poverty itself, I think markets have a very good track record of lifting people out of poverty. America, India, China, Southeast Asia etc are all excellent examples of this.

    And to dissect the point a little more, I actually think the one happens because of the other. Markets allow individual actors to differentiate customers based on willingness to pay, which allows further differentiation of products and services, which allows for points of entrance into the market, which allows for different returns to various sorts of capital, which ultimately makes a lot of goods and services more available to more people, but but makes different groups of people rich to very different degrees.

  5. “properly functioning market economy” is a straw man, or a nonstarter.

    If by “properly functioning” we mean poverty-reducing then it is tautological. If we mean, “functioning the way I want it to”, we have a nonsense definition.

    Take away the nonsense “properly functioning”, and your answer is: *yes*, it is poverty-reducing, but *no* it is not necessarily inequality-reducing.

    I am surprised Mark Thoma would endorse such a nonsense position. (As opposed to an Alan Blinder type argument that free markets increase inequality too much to reducing poverty, which is a defensible and coherent argument.)

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