Only tragic Libertarian morons spout such ignorant Bullshit.

Economic inequality has spiked in many countries in the last several decades, raising questions about whether policy should do more to combat it. Until scholars, such as Thomas Piketty, put economic inequality on the public agenda, a common view among policy analysts and government officials was that economic inequality was not a matter of moral concern, as long as the least well-off received adequate resources to satisfy their basic needs (which Debra Satz and Stuart White call the ‘sufficiency’ view in their article) (Frankfurt 1987). This view has come under pressure in recent years. But the questions of what is wrong with inequality, and what is the best way to address it, remain highly contested.

One view, reflected in Benthamite utilitarianism, as well as the more sophisticated social welfare functions used in the public finance literature, is that income inequality reduces aggregate welfare because of the diminishing marginal utility of money. A millionaire values a dollar less than a homeless person does, so moving dollars from the millionaire to the poor enhances aggregate utility. Another view is that economic equality is a distinctive value on its own (Nagel 1995). A third is that it generates pathologies by dividing society into mutually suspicious castes or creating relationships of dependence.

But these claims have been met with scepticism in some quarters. As Satz and White discuss, the commitment to economic equality implies that policy should seek to ‘level down’ the best-off even when such policies are wasteful and do not help the poor. A dollar transferred from a billionaire to a millionaire is a victory from the standpoint of equality; so is burning that dollar rather than transferring it to anyone. Moreover, commitment to economic equality may conflict with other values, such as liberty and equality of opportunity. Although neglected by philosophers, many people seem to value hierarchy for its own sake, as shown by their support for authoritarian rulers or their voluntary association with hierarchical religious, military and social organizations. And equality-promoting policies may distort incentives to work or require substantial administrative costs, leaving fewer resources available for public projects and private consumption. Finally, it is worth observing that the two most powerful engines toward economic equality in the last several decades—the expansion of international trade and of worker migration—have also been the most reviled because of their distributive impacts within nations and their harms to other moral values.1 People who hold the sufficiency view are unbothered by inequality as long as basic needs—which can be defined narrowly to mean nutrition, literacy and shelter, or broadly to encompass a range of capacities necessary for the good life—are satisfied (Nussbaum 2013).

Satz and White offer a pluralistic account of the wrongs of economic inequality (by which they mean inequality of wealth and income).2 They argue that policy should aim to reduce income inequality for three reasons. First, inequality is harmful to human well-being—because it hampers economic growth, undermines social stability, and reflects a misallocation of resources so that some people have too much and others have too little. Second, economic inequality often reflects unfairness, as it can be the result of historical injustices or imperfections in the institutional structure of the market economy. Third, inequality can generate further unfairness and harms to well-being by giving the wealthy excessive political influence, damaging social relationships, and creating caste-like divisions among races and other groups.

Pluralism is all very well, but pluralistic justifications for a policy approach—here, broad-based reduction of economic inequality—are vulnerable to the objection that different justifications imply different remedies. It is possible that the harms identified by Satz and White can be more effectively addressed by policy instruments tailored to those harms than a general policy of reducing economic inequality through taxes and transfers, as they appear to advocate. For example, a more direct way for remedying a historical injustice is to make awards to victims or their descendants, who normally seek public recognition of the harm imposed on them and not just money or restitution of property. A higher income or wealth tax will not accomplish that aim—especially when the victims or their descendants are wealthier than average, as is sometimes the case (e.g. some of the victims of communist-era expropriations). If imperfections in the market economy cause harms, then the natural remedy is correction of those imperfections through market regulation rather than redistribution of wealth. Antitrust law or price regulation, for example, is the normal response to market concentration—and these policy tools both increase efficiency and mitigate economic inequality. Redistribution of wealth is not a good remedy for market concentration because the concentration remains in place, causing a waste of resources. Social instability, segregation, and related ills have traditionally been addressed with reforms in education, zoning, political structure, and much else.

On this view, the appropriate policy approach is to improve institutions—economic, political, educational, etc.—and to do so by using tailored or piecemeal policy reforms that correct whatever imperfections are identified, rather than large-scale redistribution, which is typically conducted through taxes and transfers. Policies that advance economic equality are then justified only by reference to fundamental norms. This view is the traditional view among policy analysts in western countries, and we see it in the division of policy labour in many countries. Some policy analysts specialize in markets and advocate market reforms; others specialize in politics and advocate political reforms; and so on. Meanwhile, other policy analysts recommend tax and welfare reforms that advance distributive justice.

However, this work has assumed that if the basic institutions of society improve, economic inequality will decline as a result—either automatically or as a result of progressive taxes-and-transfers. Rising economic inequality over the last several decades suggests that this assumption is unwarranted. In some countries, rising economic inequality has been accompanied by a degradation of many institutions (the United States is the most prominent example). This raises the possibility that the causation is backwards, or at least partly so: perhaps some degree of economic equality is a necessary premise for effective social, economic, and political institutions, rather than a consequence of them. Satz and White suggest as much, but their discussion is vague, leaving it unclear how one would determine empirically whether economic equality is a necessary premise for the effective operation of the institutions, or not. Below, I fill in some of the detail with the hope of stimulating research in this area.
The market economy

The standard economic justification of the market economy is that it generates wealth (‘efficiency’). If competition is perfect, the distribution of resources will be Pareto-optimal. Most economists recognize that a pareto-optimal economy does not exhaust the responsibility of society. The view is rather that policy should attempt to improve market institutions where they are appropriate, and that other institutions—mainly the tax-and-transfer system—should be used to achieve distributive fairness. That is why questions of economic equality and distributive justice are mostly absent from economic analysis of market institutions, and the focus is instead pareto-optimality or another measure of efficiency.

In a standard model of a competitive market, the initial distribution of wealth (or ‘endowments’) makes no difference to efficiency. To see why, imagine two initial scenarios. In the first, the distribution of wealth is equal. In the second, it is highly unequal. Let a perfect market operate on both scenarios. People in both scenarios will trade until no more mutually beneficial trades can occur; the outcomes are in both cases by definition Pareto-optimal. The degree of inequality at the start might influence the distribution at the end but it does not interfere with market exchange or degrade efficiency. Sellers earn a competitive rate of return regardless of whether they are wealthy or poor. Entrepreneurs with good ideas can self-finance if rich and borrow if poor, so they will produce the same output regardless of their initial wealth. Only consumption will vary with wealth.

However, in the real world of imperfect markets, there are reasons to think that economic inequality can interfere with efficiency. Consider two talented entrepreneurs who are identical in all respects except that one is rich and the other is poor. As before, the rich entrepreneur can self-finance any entrepreneurial activities. The poor entrepreneur is likely to have trouble persuading an investor to contribute capital. In real-world conditions, the poor entrepreneur faces obstacles: she may have talent and a good idea but investors will be sceptical. She cannot credibly disclose her private information about her ability. This means that the poor entrepreneur will have to take costly actions to prove herself. For example, she may go to work for a firm in the relevant industry where she can demonstrate her talents and work her way up the corporate hierarchy. But this will take time from her entrepreneurial activity (by hypothesis, her highest-value use), and she may end up being further bound by covenants not to compete and related restrictions imposed by employers who seek to profit from her talents. Or she may simply forgo the entrepreneurial route for an economically inferior job.