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December 15, 2011


More Freedom, More Wealth for All: No Connection Between Income Inequality & Standard of Living

by RogueOperator

One of the most consistent complaints of the American political left is that “the haves” are getting wealthy at the expense of the “have-nots.” But even a cursory glance at readily available data shows that this is not the case.

Since most people who are heavily invested in maintaining their worldview if they believe it is more compassionate to do so are not readily persuadable by normal rhetorical devices, let us look at a few charts to flesh out how there is absolutely no connection between income inequality and individual standard of living, as measured by PPP (Purchasing Power Parity). First, a glance at global wealth by country.

Second, let’s see a chart for economic freedom scores by country:

And now, let’s look at income inequality, as assessed by the CIA.

Alright, so let’s look at economic freedom in the world versus per capita income.

One from a little further back, in 2000, broken up by region.

In case there is any doubt, let’s show a logarithmic regression.

In fact, the higher the economic freedom, the greater the average individual wealth per person.

So what about wealth disparity? Don’t the rich exploit the poor, causing reduced living standards for most people? Let’s look at the correlation between the Gini coefficient and per capita income.

As one can see, there is a diverse array of Gini measurements for the poorer countries, and a wide scatter for the higher income countries. Another, with the U.S. singled out:

So is there any connection between wealth disparity and individual standard of living, as the left suggests? No, not at all.

In fact, the numbers show that the state exploits both the rich and the poor. If we use the method of measuring income inequality, the Gini coefficient, regressed against per capita income, we find numbers that suggest that the less the income inequality, the likelier chance of a per capita income decrease of around $600 per Gini point.

My explanation for this is that state-centric governments that spend more wind up stifling economic growth, as a facet of Rahn’s curve, which shows that the higher state expenditures the likelier a decrease in GDP growth. Countries with less economic freedom are more likely to be corrupt and are more intrusive in the economy because they seek to exact rents for the ruling class.

If the rich supposedly exploit the poor, as the left’s labor theory of value suggests, then who do the poorer exploit if their standards of living improve? Such exposes the fallacy of the haves and the have-nots.

The economy is not static, but dynamic. Labor input is a function of the individual expenditure of energy, which transforms man’s environment to increase value, and does not inherently exploit or take away from others. The crucial ethical point is that man’s relations should be voluntary, whether in economics, society, or politics.


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