Economics 101

Is There Such Thing as “Good” Income Inequality?

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When someone gets ahead of others financially because of hard work, calculated risk-taking, and innovation, it is not only good—it should be celebrated.

Really? Shouldn’t Christians be more focused on equality? What about helping the little guy? 

Let’s think about these questions from an economic perspective.

Isn’t Inequality a Sign of Injustice?

Income is a return for labor that is well-invested, because well-invested labor creates value for others. This doesn’t occur in a vacuum; we can only earn income when we give others what they want at high quality and reasonable prices. Income is an important incentive for innovation and making goods and services cheaper.

Only when the poor in the third world can earn higher wages, retain their income, and enter the global marketplace will they be on the road out of poverty.

In the United States, we argue against income inequality primarily based on the false idea that if someone earns a high income, they take away opportunities for the poor and middle classes to earn more, too. The truth is, when economies are based on market trade they are not zero-sum games. If one earns a high income because they provide a valuable service, then everyone is better-off because we benefit from a good or service in which we would not have otherwise been provided. Furthermore, value can increasingly be created as people use resources and trade in ways that satisfy their preferences and needs.

When someone earns more, it is because they have created new value for others. Neurosurgery is a highly specialized and highly valuable skill, and the market rewards it accordingly. Because a neurosurgeon has a set of highly sought-after skills that most don’t have, he or she earns an income that reflects that. Income is the price of one’s labor and, like all other prices, it reflects the supply of the skills required to do the work against the consumers’ demand for those skills.

Capitalism will ultimately pull the third world into the first world and give the approximately 620 million people worldwide who are living in extreme poverty the washing machines, antibiotics, and food they so desperately need.

Why Forced Equality Doesn’t Work

Though often well-intentioned, any attempt to correct or fix income inequality will fall flat, because egalitarianism (making everyone have the same) is antithetical to our God-given design.

Imagine that in an effort to attain income equality, we were all given an equal amount of money by the government. Let’s make this hypothetical income $50,000. For a family of four in the United States living at or below the poverty standard, this would at least double their income. If this happens on day one, what does day two look like? How about a week or a month or a year later? There is no way to ensure that people’s amount of cash (based on the amount they were initially given) would remain equal, because we would all do something different with our money based on our unique preferences, needs, choices, and situations.

  • Some would put money in a high-risk investment and triple their money.
  • Some would invest in a high-risk venture and lose it all.
  • Some would put funds in a safe and low-interest money market account and earn a return at a lower rate.
  • Some would waste it all at the blackjack table.

There is no way to ensure that income equality is retained unless we constantly redistribute excess earnings (anything greater than $50,000).

The good news is that in a healthy, market-based economy, we have the best chance we have ever had in human history for both high incomes and wealth.

For example, Bill Gates’s dramatically high income does not hurt the ability of the janitor to earn an income. The difference in their two incomes has to do with supply and demand for the skills each provides.

The difference in their incomes also has nothing to do with their worth or dignity. God does not define us by our incomes, but he does understand our hearts. If we covet money and make it an idol, it doesn’t matter whether we are poor or rich—our hearts need transformation. As such, it is neither inherently righteous to be poor any more than it is villainous to be rich.

Understanding how market economies operate in light of biblical teachings about work and income helps us to better understand these principles. As Christians, we can view this type of “good” income inequality as desirable so long as it is within the context of market trade, private property rights, a sound rule of law, and value creation.

Editor’s note: Read more about a Christian view of income inequality in Counting the Cost: Christian Perspectives on Capitalism. Get 15% OFF! Use code: CTC15

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  • Dr. Anne Bradley

    Dear Bob,
    Thank you for your comment, there is much in here and I will try to address as much of it as I can within this space, but I am always open to more conversations.
    My content is not written as if there were no evil effects of the Fall on human action; in fact, that is at the very core of market exchange and governance concerns. As humans who are fallen, we make mistakes, we don’t know all we need to know, and we are sinful. This is true of every human regardless of whether they are a market participant, a church congregant, or a policymaker. All human beings are fallen. As such we need binding constraints on the nature of humans who want to exploit others (this is what good governments do via constitutions, etc.; it’s also what markets do via profit and loss). Throughout human history, this exploitation has occurred the most through state power, not by market exchange. In fact, the wonder of the industrial revolution was that it changed the ideas people had toward biblical principles of work, integrity, property rights, and human dignity, and this in turn changed government and opened up markets in a global way for the first time ever. This process of commercial market exchange is governed by profit and loss, prices, and property rights. Those three things are essential to alleviating poverty and stopping exploitation of the poor, which we as Christians care so deeply about. It works because it gives ordinary market participants the power to say, “no thank you”—a power that coercive states do not give.
    You are correct to point out, as do I, that this is not perfect. Nothing here on earth can be. But it’s profound because it works well, and it does so because it embraces the values of work and integrity and embraces the dignity of the human person—markets work because they allow us to come together. This matters because it’s not simply a consequentialist case for markets but a deontological case based on biblical principles.
    That said, people will still try to use institutions for greedy gain. But markets are decentralized and, as such, are the least likely to be systematically corrupt. In a market-based society such as the U.S., Denmark, or Switzerland, consumers have the power to walk away and demand better. And the better things they demand in terms of goods and services, price and quality, are extended across all income quintiles. Decentralized market exchange fosters cooperation and service. It will never be perfect. The most worrisome markets in the U.S., where cronyists thrive, are the markets that have been co-opted in part by the state: education, health care, and financial markets. It is the cronyism that we should worry about, not the competition for profit.
    CEO’S must earn profit in a market-based economy and they are paid for doing that well. Where we should be most worried about CEO pay is where CEO’s are able to use their money for political gain (this is not a market problem but rather a political problem—it’s worse when markets are not allowed to work, not when they are working well).
    Profits are simply leftovers. Leftover time, talent, money. Leftovers are precisely what we desire for the poor. No society has achieved income mobility and economic flourishing through redistribution, but through unleashing entrepreneurship. When we advocate to increase income redistribution, as you suggest, we not only steal from those who have earned money by serving others, but we do not help the poor in the long term. It is a short-term view with unintended consequences—well evidenced by the many large welfare states that do nothing to move the poor out of poverty (the U.S. falls into this category).
    I do not suggest that we should never move money from rich to poor, but that must be voluntary and not coercive. State coercion is not an act of Christian love; private charity is that mechanism because it is voluntary. I deeply care for the poor. I think aid is a necessary but insufficient remedy for long-term poverty alleviation, and the empirical evidence of history proves this. We do live in a supply-and-demand world—those realities are just like the reality of gravity and we must respect that they govern exchange. Again, the poorest countries today are those who have not experienced either the needed revolution in ideas or the economic revolution that you and I so blissfully enjoy and tend to criticize. I will leave you with a quote from Robert Lucas, Nobel Laureate in Economics:

    “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.” (https://minneapolisfed.org/publications/the-region/the-industrial-revolution-past-and-future)

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