Capitalism (political and economic freedom) causes economic inequality. (1) Indeed, in most pre-capitalist countries in the world today, there is less inequality than there is in the United States, (2) despite the United States's ranking among the "most-free" countries in terms of economic freedom. (3) But all of these pre-capitalist countries are dirt-poor. (4) 350 years ago, the pre-capitalist West was also dirt-poor. (5) There was equality--equality of poverty. (6) One of capitalism's great virtues is the fact that it has created inequality. (7)
What does that mean? It means that capitalism has allowed the creators of wealth to keep it. Capitalism has rewarded individuals based on their level of productivity. (8) The more productive you are, the more you make; the less productive you are, the less you make. This is supply and demand and market forces at work. Capitalism in its pure form, in a free market--setting cronyism aside--is a system of earned inequality.
When we look across the world both historically and geographically, countries that adopt capitalism and free markets are more likely to flourish economically and socially. (9) The rich get fabulously rich, and the poor just get rich--rich relative to where they were before. (10) Just ask any middle-class Chinese person or Indian person or Taiwanese person. They are rich, relative to the previous generation or relative to where they themselves were just a few years earlier. And given the speed at which this economic transformation is happening on a global scale, projections for continued wealth creation and accumulation continue to be positive. (11)
So, yes, capitalism creates inequality. (12) But inequality is good. Members of society have different skills, roles, and outcomes, and that's okay. The fact that there are people who are much smarter than I am, who have the ability to create beautiful things like the iPhone and sell them to billions of people, is wonderful. All of us benefit from that. And if these people make billions of dollars, that's a good thing, because that's part of the incentive to make and market the product.
Every time you buy a product like the iPhone, are you better or worse off? Consider J.K. Rowling. She is one of those individuals responsible for inequality in the last 20 years. Every time you bought one of the Harry Potter books, you added to inequality. Scholastic took twenty-five dollars from you for the book, giving a fifth of your payment to J.K. Rowling. She became a billionaire. You became twenty-five dollars poorer.
But why is there any problem with this scenario? You are better off because you get the spiritual value of reading Harry Potter--at the very least you expect you will--and Rowling got monetary compensation. As a result, she became a billionaire, and that's a good thing, not a bad thing. After all, you are both better off. That is the beauty of markets. That is the beauty of capitalism. Yes, capitalism creates wealth inequality, but so what? If the transactions are win-win, as voluntary trade is, we are all better off.
Now, there are real problems in the world today which, in my view, the whole inequality debate is hiding and trying to disguise. These problems include poverty, cronyism, and low economic growth. (13) None of these problems has anything to do with the inequality gap between rich and...