Yesterday we saw how GDP per capita has improved over the centuries and accelerated dramatically after The Enlightenment. Since higher GDP per capital correlates with a number of quality of life metrics, it’s an important measure of human progress.
Those who try to refute the significance of this progress often point to growing income disparity as evidence that something is terribly wrong with the system. But is a growing relative income disparity truly an indicator of economic or societal illness? Or might it instead be a natural consequence of economic progress?
As Pinker states in “Enlightenment Now”:
The starting point for understanding inequality in the context of human progress is to recognize that income inequality is not a fundamental component of well-being. It is not like health, prosperity, knowledge, safety, peace, and the other areas of progress I examine in these chapters.
Said another way, there are moral implications when people are deprived of basic healthcare, sustenance, education, safety, etc. They are undeniably “worse off” when deprived of these things. But does the fact that someone else has more than me, perhaps much more than me and increasingly so, make me any “worse off” provided that I have “enough” and more than yesterday?
Modern intellectuals (most often Leftist statists) harp on inequality in hopes of disproving the benefits progress, largely because it’s one of the very few things that they can harp upon. For instance, noting that the poorer half of the people control only 5% of the world’s wealth today, the same as in 1910, Thomas Piketty argues in his book “Capital in the Twenty-First Century” that the poorer half is “as poor” now as then. His implication is that all progress over the last century has inured to the benefit of “the rich.”
However, as shown yesterday, the world is far, far, far wealthier today on a per capita basis than it was in 1910. The bottom half today enjoy a standard of living that is simply incomparable to the bottom half of 1910, and this is triply so once welfare and social services are factored into the equation. As discussed yesterday, UN statistics show that the percentage of the population living in extreme poverty has declined from more than 90 percent from circa 1900 to less than 10 percent now. Is the bottom half really “as poor” today as in 1910? Clearly not. Not even remotely close.
The simple and unavoidable fact, one always overlooked by Leftists, is that progress is “lumpy”. It happens in fits and starts, and there are ten failures for every success. This is true because progress, innovation and discovery ultimately come from risk-taking. Capitalist society’s progress much more rapidly than Communist ones for the simple reason that risk-taking is incentivized in the former and discouraged in the latter.
In capitalist systems, more people take more risks and therefore develop more innovations in a given amount of time. Capitalism incentivizes this risk-taking by permitting people to tinker in whatever fields interest them (free from the constraints of central planning) and by affording discoverers and innovators a large share of any resulting profits. Potentially large upside gains are offered to the entrepreneur in exchange for the entrepreneur (rather than society as a whole) bearing the loss when, as is most often the case, the venture fails. (Obviously I’m distinguishing true capitalism from corrupt Crony Capitalism where losses are socialized via “bailouts”).
By contrast, Communism depends upon central planning. The empowered planners dictate the work of the people to a much greater degree. There are therefore few incentives for either the planners or the people to assume any risk of innovation. And when then central planners do take risks that don’t pan out (which is most often the case with any risk), everyone suffers because they are in the same centrally-planned boat. So, not only are individuals in communist systems denied the upside benefit that comes from any successful discovery, but when something goes wrong with the government’s “Five Year Plan”, everyone in society (and not just the risk-taking entrepreneur) absorbs the massive losses.
Risk-taking is unquestionably the engine of progress. Capitalism encourages innovative risk taking systemically while Communism represses it. In the authentic capitalist system, outsized rewards are enjoyed by the few successful entrepreneurs (French for “risk takers”) who develop radically new technologies that transform society and ultimately alleviate poverty. Therefore, the more quickly and extensively the capitalist economy is innovating (1) the greater and more frequent are the outsized rewards to the entrepreneurs from their wealth creation (resulting in rapidly increasing wealth disparity in relative terms), and (2) the faster is the reduction in poverty (as all of society ultimately benefits from the new innovations and higher levels of productivity and wealth creation). Increasing wealth disparity is therefore a sign of a healthy capitalist system, or at least it can be. (Admittedly it can also be evidence of corruption and Crony Capitalism).
To conclude, there’s nothing mortally wrong with increasing wealth disparity when the rising tide is lifting all boats, including the smallest ones. Likewise, increasing wealth disparity is not necessary a sign of a sick system. In fact, it could be important evidence of an exceptionally healthy and innovative one. Progress must be measured by improvements in the lives of the masses and not by the extend of the disparity between the richest and poorest.