Inequality Distorts Markets

image of the Biltmore Estate in Asheville, NC

I’m surprised by what is missing in popular debates about economic inequality. A few arguments get repeated over and over — namely, that nobody could possibly work hard or smart enough to deserve billions and, in reply, that envy and resentment of the rich is a poor basis for policy. But many other, equally obvious and pressing arguments are ignored. This is my attempt to articulate one of those arguments, one which strikes me as both important and interesting, in part because it does not fit neatly into either partisan agenda.

. I suppose the right doesn’t make this argument, because objecting to wealth inequality is too leftist. And the left doesn’t make this argument, because no true lefty would be caught dead defending the free market. But I’m nobody’s true Scotsman, so here we go.

First off, wealth inequality is a matter of degree. Just because an enforced, exact equality of wealth would render money meaningless and dysfunctional as a system, doesn’t mean that just any degree of inequality is acceptable. The more unequal the wealth distribution is, the more distorted and irrational the free market becomes. And our present situation is incredibly extreme. Take moment to get some perspective on the degree of wealth inequality with this visual representation from Matt Korostoff. Wealth inequality needs to be constrained, even if it couldn’t or shouldn’t be eliminated.

So what is the freemarket, and what does it mean to worry about its distortion? Basically, the freemarket is a decentralized process for distributing goods, remarkably efficiently, in a way that makes use of more information than any one person or agency has — with some big caveats. In the paradigm free exchange of goods, both sides of the exchange become better off. If I value the pizza more than my ten bucks, and you value the ten bucks more than the pizza, then we are both improved by the transaction. The world is slightly better off overall. When exchange is free, easy and well-informed, goods keep moving toward the people who need them most. Efficiency. Maybe even pareto optimality.

As an environmental philosopher, my usual next step is to criticize the model of goods in this picture. It is limited to rival and excludable goods, like pizza, and does very little for protecting ecosystem services, clean air or wolf habitat. But instead of harping about externalities, like pollution, I want to talk about those kinds of goods that markets theoretically handle best. Because even there, they fail under conditions of wealth inequality.

The basic value commitments of modern economics are derived from utilitarian moral theory. We people are conative beings — we desire things. A world where more desires are satisfied is overall better than one where more desires are unsatisfied. Stronger desires are more important than weaker desires, and so on. The usual justification of the free market depends on a link between the strength of people’s desires and their willingness to pay for things. If you want helium for life-saving medical technology, and I want it for birthday balloons, then you are most likely willing to pay more for it than I am. And the free market will get it to you.

But willingness to pay depends only partly on the strength of my preference. It also depends on my ability to pay. When wealthy people from Atlanta or Miami decide they want a vacation home in the Smokies, they often have a greater ability to pay than locals who want simple homes near their families. To suppose that means that the wealthy want or need their vacation homes more than the locals want or need primary homes is ridiculous. And yet, the free market mechanism responds to the demand for vacation homes, until nobody from here can afford to stay. Free markets don’t just distribute goods according to greatest need, they bias production and distribution towards the wants of the rich.

Image of flyer about housing, from @AOC’s twitter feed.
Image of flyer about housing, from @AOC’s twitter feed.

Housing is a particularly egregious example of this. And as rising housing prices wreak havoc on local communities, governments often respond by constraining the freedom of the markets through rent controls to avoid rising homelessness. In the face of wealth inequality, the market fails and is rejected. The real estate market could be left free only if the constraints were placed on wealth instead. Such distortions run throughout the whole economic landscape, influencing every sector.

But the alternative to substantial reliance on free markets is odious levels of top-down controls. Free markets, where they work, are essential. The market itself is one of those commons values, like ecosystem services or good roads, that needs to be guarded by and for the community as a whole. So in defense of the integrity of the free markets, we must place (or restore) constraints on the extremities of wealth and poverty.

David is an environmental philosopher who teaches at Western Carolina University in the southern Appalachian mountains.

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