Income Differences: Inequality or Not?

Judging from the fervor of the left flank in the Democrat party, it is safe to say that they will make next year’s election an ideologically charged one, perhaps more so than any election in recent memory. One of their central tenets is that government must do more to reduce so-called income inequalities, primarily by spending more money on entitlements for lower-income families and secondarily by raising taxes on the so-called rich.

In short, the ideological quest for economic egalitarianism is a driving force behind our federal government’s mounting fiscal problems. Therefore, any effort to bring America’s fiscal affairs in balance must include a conversation about the concept of income inequality, addressing specifically the question: is it the role of government to alter income differences as they emerge from voluntary, gainful economic exchange between free individuals?

Philosophically, the answer to this question is negative. It is not the role of government to alter the outcomes of any actions that individuals take, provided that the actions were – again – voluntary and that the consequences to not violate the personal integrity of any other individual. This principle is well established in the political theory behind the American founding, it is fully compatible with Christianity and it is in harmony with human nature.

The idea that government is responsible for altering the outcomes of voluntary human action originates in Marxist economic theory. It is based on the notion that voluntary trade is not voluntary, that there are invisible forces in the economy that reduce individuals to components of a machinery. If we disregard the ontological and epistemological problems associated with proving Marxism – in other words we don’t ask socialists to actually point to the alleged oppressive force of capitalism – we can and should still discuss the economic sense, or nonsense, of said theory. This is a feat too daunting for both Hegel and Marx, and until any modern socialist rises to the occasion, we can rest assured that Marxist theory is inherently false.

That, however, does not solve the practical problem with socialists pursuing certain economic policies, all derived from Marxist theory. The fact that a theory is false does not prevent the socialist from trying to change reality in its image. In doing so he centers his arguments for policy reforms around the concept of “economic inequality”. It is derived from the Marxist use of the labor theory of value, again addressed in my book Democracy or Socialism, and proposes that all differences in income are immoral (or “unjust” which has the same practical meaning). Therefore, the socialist defines income differences as “inequalities” and calls on government to eliminate them.

From a technical viewpoint, not even Marxism proposes the elimination of all income differences. Its reliance on the labor theory of value gives rise to differences where the strict quantity of work put into a product determines the compensation that workers will get; the more labor, the more workers are paid. Modern socialists have abandoned the idea of demanding wages be based on labor-value theory, most likely because the concept is complex and demands a fair amount of scholarship. It is also easier for a socialist who is active in a modern capitalist economy, to demand a reduction in income differences if the labor theory is left out of the picture. All he has to do is make a linear argument against “income inequality”.

From an economic viewpoint, there are two major problems with the inequality concept. The first is the open-ended nature of the concept. The idea behind anti-inequality policies is to reduce income differences, but there is never a stipulation in those policies of just how far government should shrink those differences. There is a good reason for this, traceable back to Marxist economic theory: according to Marx, the worker has the right to all of the value he produces during a workday, leaving nothing for the capitalist.

Herein lies the reason why there is a strain of socialism known as communism which proposes the complete socialization of all businesses. Not all socialists advocate the socialization of property: the “democratic” strain of socialism uses other means to achieve the same goal, namely the gradual reduction – and eventual elimination – of income differences. We know those tools as entitlement spending and progressive income taxes, or “the welfare state”.

Socialists who follow the “democratic” route to their ultimate goal – the elimination of economic differences between individual citizens – accept that their progress toward that goal will be long and incremental. Many supporters of this reformist version of socialism are not even explicitly aware of the fact that their ideology stipulates complete egalitarianism as the end goal. However, they give away their de facto endorsement of this end goal with their answer to the question: “When is income redistribution big enough?”

There is no firm answer to this question, again for the very reason that the end goal is the same for democratic socialists as it is for those who do not have a prefix. Because of its open-ended nature, the socialist policy project – the welfare state – is in a state of constant expansion: government must grow spending, raise taxes and reach farther and farther into the economy simply to continue to practice the democratic version of socialism.

A growing government takes a growing toll on the performance of the economy. It is well established that when government reaches the size of 40 percent of GDP, the economy goes through a no-return decline in economic growth. While the U.S. economy has only recently – over the past decade – approached and balanced on this breaking point, Europe has experience aplenty of what this means. However, as the American welfare state continues to grow along the lines laid out by democratic socialism, it will follow in the footsteps of Europe’s economic stagnation.

In short: the open-ended pursuit of democratic socialism eventually brings the economy to a permanent standstill.

The second economic problem with the inequality concept is that it takes no account of what standard of living a country actually has. There is perfect economic equality – to stick with the socialist terminology – in North Korea. South Korea, by contrast, exhibits all the character traits of a free-market capitalist economy. One of them is that there are major economic differences between citizens. However, the average citizen, even those who make relatively little money, are vastly better off in South Korea than people are north of the Korean border. Yet there is no account of this in socialist political theory: since the end goal is to eliminate economic differences – eradicate income inequality – this goal takes precedent over any pursuit of economic growth.

Bluntly: a democratic socialist who is true to his ideology would pull down everyone in a country to abject poverty, in order to implement economic equality, rather than elevating the standard of living among low-income families regardless of how wealthy others become.

It is hardly in the interest of anyone – not even the socialist himself – to lower the standard of living of an entire population. Yet there is an aggressive push for more socialism in America today, a push that is coming on top of decades of welfare-state expansion. Our country is at a tipping point, where even a small expansion of the welfare state will push us over the limit and into the shadowland of economic stagnation and industrial poverty. If this happens, it will be entirely in the name of the fight against “income inequality”.