14. The Futile Quest for Economic Equality

SOME CLAIM THAT, WHILE free markets produce an abundance of wealth, it is still inhuman and unjust that some receive more than others. They claim that free markets create great injustices by exacerbating the inequities of wealth. Furthermore, these people believe that such injustices require the intervention of those with humanitarian sentiments to reallocate wealth more equitably. While egalitarians use numerous schemes to equalize wealth, their goal is, in the end, unattainable, irrespective of their efforts. Attempts to equalize wealth will only result in reducing its quantity without affecting its allocation.

According to the Fraser Institute’s Economic Freedom of the World: 2005 Annual Report,²⁵ regardless of the degree of economic freedom²⁶ among 128 countries (comprising 93 percent of the world’s population), the percentage share of income by quintiles from 1998 to 2002 remained about the same in each country. According to the report, countries with greater freedom had a higher per capita income than those with less freedom. However, irrespective of the average level of per capita income of a country, the percentage distribution of such income for ascending quintiles settled at about 6 percent, 11 percent, 15 percent, 21 percent, and 47 percent.

So what do these figures tell us? It appears that income quintile tiers are a natural distribution phenomenon and remain largely unchanged (in terms of percentage), regardless of the varied attempts by governments or well-meaning politicos to equalize them. While the percentage share of each quintile is similar, irrespective of the country, the actual dollar income of each quintile increases dramatically as a country’s level of freedom increases.

When the countries were grouped into quintiles based on their level of freedom (least free to most free), the average annual per capita income was about $2,000, $5,000, $6,000, $14,000, and $25,000. These figures reveal that those in the poorest quintile of the freest countries earn substantially more than those in the richest quintile of the least free countries. Those wishing to close the gap between the rich and the poor (by restricting individual liberty and transferring wealth) will not change the relative gap, but only reduce real earnings for everyone, and, in the process, harm the poorest the most. In other words, any attempt to enforce equality reduces the size of the economic pie, but not the differences in the relative slices of the pie. Regardless of the size of the pie at any given time, a fifth of the population will share in about 6 percent of that pie, while the other quintiles will each share approximately 11 percent, 15 percent, 21 percent, and 47 percent of the pie, respectively.

The gap between the earnings of the lowest and the highest quintiles at any given time is about 40 percent, but the dollar gap between them will depend on the prosperity of the country. When we hear that the gap between the lowest and highest quintiles is widening, the gap refers to dollars. Of course, if the percentage gap remains the same and the overall dollar prosperity doubles, the previous dollar gap will also double. Thus, the dollar gaps between quintiles will widen with greater prosperity, with each quintile gaining about the same percentage of the total gain. It is important to emphasize that these studies are based on snapshots of the current earnings of members of a country and do not account for income mobility. Income mobility, as discussed earlier, diminishes the significance of earning gaps, whether they are expressed in percentage or in dollar figures.

While the University of Michigan and the U.S. Treasury Department’s studies demonstrate considerable mobility to higher income quintiles for people in the U.S., I’m not aware of a study that has compared the degree of mobility relative to a country’s level of economic freedom. Intuitively, however, it would seem that the greater the economic freedom, the greater the degree of mobility, because greater freedom allows one to reap more of the fruit of one’s own labor. This self-rewarding feature of freedom is the quintessential incentive that can lead a person to higher productivity and earnings.

²⁵Erik Gartzke, James D. Gwartney, and Robert A. Lawson, Economic Freedom of the World: 2005 Annual Report (Vancouver, B.C.: Fraser Institute, 2005); www.FraserInstitute.ca.

²⁶The index of economic freedom is based on the degree of personal choice, freedom of voluntary exchange, protection of person and property, the right to keep earnings, and the freedom to enter and compete in markets.