SHARE
Income Inequality

One of the many things that seems to trouble most people around the world today is income inequality. Organisations like Oxfam have been very vocal against income inequality. Pope Francis, Barack Obama, and many others on the left have spoken loudly against this phenomenon.

People like Thomas Piketty, the famous French economist, have become global rock stars on the crusade against income inequality. Piketty, who delivered the 13th Annual Nelson Mandela Lecture at the University of Johannesburg in October last  year, is the author of the  best-selling, anti-income-inequality book, titled Capital In The 21st Century.

But here’s what saddens me: too often, when it comes to income inequality, people like Pope Francis, Thomas Piketty, and President Obama tend to be driven by emotions, instead of logic and objective interpretation of factual data.

They claim income inequality is one of the causes of social upheavals we hear about and see every day – a wrong and misleading assertion.

The crusade against income inequality resonates with many, especially here in South Africa – a country with one of the highest income inequalities in the world.

Currently, South Africa’s Gini coefficient, which measures income distribution (with 0 representing perfect equality and 1 representing perfect inequality), stands at 0.65; in contrast to America’s 0.45, China’s 0.47 and Brazil’s 0.53.

People all over the world are bothered by these statistics, and as a result, call for the reformation of the free-enterprise system. They are disgruntled by the so-called greedy CEOs and the top one percent who, in their view, take all the income gains at the expense of the middle class and the poor.

In the United States, the notion that the middle class is declining has gained traction. Those parroting this false rhetoric, including President Obama, refer to declining household incomes and wages as indicators that the capitalist system has benefited only a few: the top one percent.

But these people should do themselves a favor – they must stop for a few minutes and think.

In his well-written and intelligent piece titled The myth of wage stagnation, published by CNBC in 2014, Daniel J. Smith, an assistant professor of economics at the Johnson Center at Troy University, argues the claim that incomes are stagnant is “wrought with holes and erroneous interpretation of the data available”.

Looking at just average hourly wages in the United States, adjusted for inflation using the Consumer Price Index (CPI), it is shown that earnings increased only 5.58% since 1964. But this statistic and others like it are misleading because they do not factor in the new forms of growing employee compensation, and they overstate the erosion of purchasing power. “Once these contributions are taken into account, a much more clear — and positive — picture of the average incomes surfaces,” he writes.

When you look at total compensation – which is your salary, plus benefits such as healthcare, paid vacation time, hour flexibility, improved work environments and even daycare, you come to a conclusion that actually, earnings have increased by more than 45% since 1964 in the United States, not by 5.58%.

But to people like Piketty, Pope Francis, Obama, and their followers, this sensible interpretation of statistics doesn’t mean anything. Logic and common sense doesn’t mean much to them.

It’s not only Daniel J. Smith who has written about this ignorance of people like Thomas Piketty. Dr. Thomas Sowell, the legendary American economist, and Senior Fellow at the Hoover Institution, has written extensively about income inequality.

In his column, That top one percent, Sowell contends that the top 1% is an income bracket – it’s not people. Americans in the top 1% in a given year are not there permanently. In other words, I may be in the top 1% this year, but it’s quite likely I won’t be in the top 1% next year. People’s incomes fluctuate over time, and given the globalized, volatile world we live in today, too often.

Yet these top 1% people are written and spoken about as if they are an enduring class. How irrational.

Also, people like Obama and Piketty ignore the fact that age is a factor on income inequality. It takes years to acquire the skills and knowledge needed to have a high-paying job. People older than sixty years will have higher incomes than those in their twenties – because they have worked longer, have experience, and have accumulated a lot of money during their working years. Is the relationship between age and income that difficult to understand?

Here in South Africa, like in the United States, the obsession over income inequality persists. People don’t even give themselves time to think; they hear rhetoric and they run with it.

It will take a long time for South Africans to reduce income inequality, because, twenty-one years after the end of apartheid, millions of people remain unskilled with minimal education. And all these points I have discussed above on income are relevant to South Africa.

The great news is this: in a new democratic South Africa, significant economic strides have been made. As Leon Louw of the Free Market Foundation South Africa explains in one of his writings, the once ostracized and repressed Black communities have made remarkable economic progress.

To speed up this progress, South Africa, and the world, should fix their education, open up and deregulate markets to create employment opportunities, and privatise government-owned enterprises. People will need skills, jobs, and experience to climb the income ladder, regardless of their race. Those who argue we should take a portion of A’s income and give it to B are totally wrong. That is not the solution – that approach will violate human rights and people’s liberties.

Even though poverty has declined significantly over the past twenty years, millions around the world remain jobless and live in poverty. We need to focus more on fighting poverty, and stop the obsession over income inequality.

Previous articleFree Speech: A Vanishing Right
Next articleUCT: Academic Freedom Under Attack
Phumlani is a Contributor at the Rational Standard. Hei is a writer and radio commentator on economic and political issues, with a major focus on South Africa. He is a non-executive director at the Free Market Foundation South Africa, a policy fellow and member of the council at the Institute of Race Relations, a policy analyst and director at Independent Entrepreneurship Group.
  • Harald Sitta

    Dear Phumlani, Well written. But our arguments will not be accepted as the “social equality” warriors follow an ideology which says that income differences are bad by themselves. That differences in income and wealth are the natural results of a free economy and will only disappear within the framework of a totalitarian commando system they will not accept.

    The GINI coefficient is the biggest swindle: 1st Nobody gives the formula according to which the calculation is made.2nd To calculate one must have all economic data of one country, all incomes and all wealth. Who possesses such a mass of data? nobody so i presume the discussed percentages are just “social constructs”.

    I do not give a damn if someone earns more than me or less than me. As long as we all have a fair chance. The best distributor for a fair chance, especially for materially poorer people is a good school system.

    And why do we always stick to material factors, what about moral and ethical richness or poorness. What about intelligence, diligence, stamina and impetus which are most unequally distributed among humans?

    I am just reading a biography on Comrade Stalin. the mass murder of the “kulaks’ was also a fight against income inequality and driven by the hate of the Marxists against industrious people.

    in ZIM the income inequality between (mostly) White professional farmers and the Black rural population had been surely eradicated. Anybody living better ?

    You know, dear learned friend, I know. But we should fight the “social justice’ warriors also with a positive emotion: income inequality is a good and necessary thing.And then ask them – as most of them work in protected workshops – how much they earn !

    • Altus Pienaar

      “As long as we all have a fair chance.”

      I need to point out to you that although intelligence, diligence, stamina and impetus are perhaps not material factors they are influenced by material factors. Your background and how you grow up are factors we do not receive in equal measures and they often provide the biggest catalyst for success. You have to understand that although a bill of rights might give as all a fair chance, when we add all other factors, we do not all have an equal chance.

      When the CEO of a company must clean his own office and wash and repair his own car as well as perform many other simple tasks how much time will he/she have left to perform the more important tasks to run the company.

      The question remains, who’s job is more important, the one running the company or those that free up his/her time so that they can focus only on the running of the company.

      The regular argument is that not everyone can run a company but there are many who can clean etc. so they are in fact easily replaceable. I believe this is no argument for paying these “slaves” to the capitalist system so little when those in charge are living in such royal extravagance and opulence and it should not be for any person with a conscience.

      Zimbabwe can never be used as an example and neither should Stalinism. In both instances those with the deeper understanding of running a large business or farm have been removed and those with more simpler skills have been placed in charge. The end result will always be futile.
      What is needed is a system of greater economic freedom achievable only through the formation of worker co-operatives. This system allows for both workers and management deciding together on important aspects of building a successful business or farm.
      Those in charge must stay in charge but only when they are supported by the workers. The workers still do the work but being an active member of the co-operative allowing a greater say in income and profit distribution will likely be more productive and less like to fall in the trap of self entitlement.

      Self entitlement often lead to theft and stealing work time to do private errands or by simply loafing when an opportunity presents itself.
      The worker co-operative provides a more secure environment for workers and make them feel they also have a part ownership which will extend that ownership into what they do.

  • Brian

    I think part of the problem here is that much of what is being described as the free market running out of control is not in fact the free market at all. America is a case in point: their government and big businesses are in bed to an extent that one cannot speak of a free market at all.

    And I have this suspicion that for the poor and middle class, such a situation is in fact far worse than a system where government just doesn’t interfere with businesses at all.

    • Altus Pienaar

      That is exactly why a free market can never be achieved! Those at the top will always be in a position to “buy” government and any regulation put in place to restrict or prevent the formation of oligarchs cannot be called a free market anymore.
      In Germany laws are in place to protect bigger breweries to buy up smaller breweries and to prevent centralism of the brewing industry as it happened here in SA.
      I am sure if given the choice you would prefer to drink a natural beer from the wide selection of brauhauses in Munich before having a castle made by the SAB.
      This is one example of how the limitation of a free market can be a great advantage and at the same time prevent monopolization which contribute to capital glut by those in charge.
      I do however agree that a centralized government does not know how to regulate the market and is probably the main contributor to monopolization of industry.
      I believe government needs to step down and let the market regulate itself but this can only be achieved when a greater economic democracy exists.
      The formation of worker co-operations is the perfect model to achieve economic democracy.
      The market can never go unregulated and if you mean to suggest a free market is one without any form of regulation I am afraid to say it will never be free as there will always be some that will use that to corrupt the market in order to get unfair benefits.
      If however you refer to a free market as a market free from the regulations of a central government but seeking ways to allow ALL players, including workers, to be able to have a say in how the market must be regulated then I myself can believe in the idea of a free market.

  • Shadeburst

    The Great Society should guarantee its members a minimum standard of material welfare. It should also guarantee the opportunity to exceed that minimum standard.

  • Harald Sitta

    @ Altus Pienaar : “Your background and how you grow up are factors we do not receive in equal measure”. Correct.. Favorable or unfavorable circumstances are unequally distributed. We all have it better than a child growing up in a slum of Calcutta. So what ? I have seen guys from “privileged’ backgrounds making a mess of their life and people from very modest backgrounds succeeding. Alternative ? Total equality or identical upbringing ? that needs a totalitarian, collectivist quasi military camp organization. Even in Soviet Russia which exterminated the ‘privileged ‘ classes and demanded a high degree of equality a “new class’ pretty soon came into existence . The manners of the “new class’ are much more rude, brutal, arrogant than the manners of the ‘ancien regime’. Furthermore we have to recognize that upward and downward movement in the social hierarchy often goes through 2-3 generations. An open society does not create strict equality but the fair chance to change your position through the times…….

    Realizing “Socialism”: Of course the soviet union was not the real thing, nor China, nor Cuba, nor Venezuela nor whatever. After so many tries and so many failures please throw the doctrine away!

  • We need to focus more on fighting poverty, and stop the obsession over income inequality.

    Well said. Income inequality is a red herring. There are other measures like the Human Development Index and GDP per Capita which give a far better reflection of the state of the country.