Economist Finis Welch observed long ago that “without unequal priorities and capabilities, there would be no trade, no specialization, and no surplus produced by cooperation. Indeed, there would be no economy...”. If we were all equal in every way there would not be the differences that drive us to create different things, to want to be like others, to differentiate ourselves from others, and to produce goods and services to exchange for different ones that have been produced by people we don't even know. It follows that inequality is, fundamentally, a cause of progress in a context of free people.
As the 19th century French economist Jean Gustave Courcelle-Seneuil, who was invited by the government of Manuel Montt, stated, inequality is “the cause of imitation and progress”. In the same vein, Friedrich Hayek would argue in the following century that equality before the law and material equality were “not only different”, but also “in conflict with each other”. For Hayek, “we can achieve one or the other, but not both at the same time. The equality before the law that liberty demands leads to material inequality.” In other words, one thing is equality before the law and quite another and even opposite, with which Chile became obsessed, is equality through the law.
Unfortunately, the thesis that has been installed is that there is a contradiction between public interest and inequality, which is not necessarily correct. A recent and emblematic case illustrating this point is China, which has experienced a massive decline in poverty rates in recent decades, while income inequality has increased substantially. The reason for this is that economic progress never benefits all people at the same time and at the same rate. As Deirdre McCloskey has explained, while “the poor have been the main beneficiaries of capitalism,” the benefits that come from innovation in an open market in line with liberal institutions go first to the rich who generated them. They then benefit the underprivileged by driving prices down relative to wages, generating more job opportunities. Thus, even natural and social inequalities, when they occur under more liberal institutions, allow the more privileged to benefit the less privileged.
In the same vein, Nobel economics laureate Angus Deaton has argued that inequalities in health, for example, should be tolerated for some time to allow for the massification of new treatments and expensive technologies. According to Deaton, it would be absurd, from a public interest perspective, to prevent a few from benefiting first in order to achieve greater equality. The same applies to wage inequality.
As Welch concluded, the increase in inequality produced by higher educational wage returns created new opportunities for individuals and a more educated labor market with higher wages. This is explained because more individuals, seeing the success of their peers, sought to educate themselves to obtain higher wages, leading to an increase in the average income of their peer groups. The demonized inequality, then, plays an essential role in the progress of the less advantaged.
This article was originally published in Spanish by Diario Financiero.
