Friedman’s
writing was clear, persuasive, and very much in line with the concepts taught
in Econ50 from market efficiency to neighborhood effects (externalities) and
potential market failures. While I found many of his ideas foundational and
convincing, I was unimpressed by his analysis of income distribution. I believe
this was, in large part, shaped by recent research and movement within the
United States in terms of income inequality. First what I agree with. I agree
with Friedman’s general thoughts on the subject—namely that some degree of
income dispersion is to be expected. Individuals have different tastes for
work, there is a degree of randomness, and the importance of distributing
significantly due to an individual’s production. I also agree that future
income is significantly predicted by initial endowments, both of fundamental
human capital and wealth. Finally, I agree with the conclusion that paying each
person an equal wage is both undesirable in terms of overall growth and in the
philosophical sense unfair.
Mr.
Friedman and I part ways in two significant areas. I am not entirely convinced
that that it maximizes societal wellbeing for there to be complete freedom to
transfer wealth from parent to child. However, this is more of a philosophical
debate between utilitarianism and libertarianism—one that I will leave to focus
on the economic debate. The fundamental disagreement I have is how he treats
the distinction between income inequality and distribution of opportunity. The
distinction itself is important and he is right in his initial definitions,
there are two types of inequality:
“short-run differences in income, and differences in long-run income status.
Consider two societies that have the same distribution of annual income. In one
there is great mobility and change so that the position of particular families
in the income hierarch varies widely from year to year.” (171) The other has
greater rigidity. In a real sense, there is less inequality in the first.
However, Friedman then claims that the two types of inequality are likely to be
negatively correlated: “competitive
free-enterprise capitalism tends to substitute the one [type of inequality:
opportunity/result] for the other.” (171) This is where I, and I think the
data, disagree.
Let’s
look at a graph from the current head of the CEA, Alan Krueger:
What do we see here but
a positive correlation between intergenerational earnings elasticity (a proxy
for intergenerational mobility, or more technically defined the frequency of
movement between quintiles of income distribution) and the Gini coefficient (a
single number representing the equality of a country’s income distribution
based off a mathematical calculation and the Lorenz curve). Likewise, a cursory
glance reveals those countries that are generally deemed more socialist
(Scandinavian countries) not only have less inequality of result (Gini) but
also have more equality of opportunity. Looking at Krueger’s comments on the
graph we see just a sampling of explanations for why this might be the case: “There is a cost to the
economy and society if children from low-income families do not have anything
close to the opportunities to develop and use their talents as the more
fortunate kin from better off families who can attend better schools, receive
college prep tutoring, and draw on a network of family connections in the job
market.”
Looking
at recent trends in the US we see the trend moving towards less equality of
opportunity and less equality of result. The OECD identified 6 potential causes
for this: Globalization (minimal
impact); Progress in technology; less redistributive tax/benefit systems; an increase in part time or atypical workers; changing family structures and regulatory
reforms; changes in labor market
institutions widening inequality. These changes may imply a changing market,
one that is less dependent on the ability of an individual but based on
investments in human capital often available only to those who already have
money. Some of these are automatically influenced
by governmental policy.
Friedman glosses over some of the negative impact
of concentrated wealth ranging from worse health, more political corruption,
lower economic growth, more frequent revolution and civil unrest, and a number
of other negative impacts (economists writing on these include, but are not
limited to: Torsten Persson and Guido Tabellini, Stiglitz). It is unclear that
if the free market is moving towards a newly unequal distribution, that this is an efficient or
desirable result.
While there may be some theoretical coherency to
Friedman’s argument that the free market will reward those with the ability and
willingness to produce, the data seems to support that there is a market
failure preventing this from occurring. I suspect Friedman would like to argue
that this failure is actually due to unintended consequences and rent seeking
through government policy. However, given recent increasing inequality
corresponding with deregulation and the fact that more socialist countries have
had more equality of opportunity seems to undermine a number of Friedman’s
claims on the subject.
Sources:
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