Obama Flunks Income Inequality

President Obama and Mark Brewer might have missed it in their economics classes. But they would do well to read Ludwig von Mises’s short classic, now titled Liberalism in the Classical Tradition,written in 1927.

Mises wrote that only market capitalism can create wealth for the masses. All forms of central planning — including socialism, fascism, and progressivism — would fail to solve the problem of decentralized information. The central planner cannot possibly know how 300 million Americans or 1.3 billion Chinese value hot dogs relative to peanuts — nor how many rolls of toilet paper will be needed come next Thursday.

The market system solves problems through the voluntary exchange of individuals and the price system. If people want more hot dogs than are currently being produced, the price of hot dogs will rise. This will signal to hot dog makers to produce more hot dogs and to consumers to buy fewer hot dogs until the amount of hot dogs that people want is basically what producers are producing. Every morning, 9 million people wake up in New York City and find just the right amount of hot dogs, Starbucks Coffee, bagels, deli sandwiches, gasoline — and all the myriad of goods and services they need.

This happens – not in spite of the fact that no one is in charge — but because no one is in charge.

Market capitalism created what Friedrich Hayek called a spontaneous order (although the idea goes back as far as Lao-tzu, a contemporary of Confucius). There is certainly order in a market system, as New York City’s economy shows, but it is spontaneous in the sense that individuals following their own self-interest create the order.

Mises discussed the political philosophy necessary for the market economy to work and provide the goods and services that have created an America where its poor are wealthier than the wealthiest person in the medieval world — and vastly wealthier than the poor in sub-Saharan Africa. This political philosophy is what he called classical liberalism, and Mises’ book discusses the fundamentals of classical liberal. Among them: property rights, freedom, peace, equality under the law, limited government, and tolerance of the religious beliefs of others.

But the one most applicable to the recent political debate is inequality of income.

I once wrote about why Bill Gates is rich and I am not. One gets rich in a market economy by pleasing other people. The more people you please, the richer you will get. While billions of people use Microsoft products, a much smaller number pay to read articles by Gary Wolfram.

But just as important is that the market system relies on inequality of income to survive.

“The fact that product today is as great as it is, is not a natural or technological phenomenon independent of all social conditions, but entirely the result of our social institutions,” wrote Mises. “Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.”

He was right. Inequality of income is the result of different individuals with different talents making different choices and pursuing different paths.

The spontaneous order that results from people pursuing their own goals creates wealth for the masses. Without the ability to obtain wealth from one’s effort and risk taking, the entire wealth of society would be vastly smaller — and those that would be harmed the most would be the poor. Ask yourself if you would rather live as the poorest person in a country ranked at the bottom of the Heritage Foundation’s Index of Economic Freedom (think Zimbabwe) — or in a country ranked at the top (think United States).

President Obama’s campaign — as well as Clark Durant’s Michigan Senate opponents — have tried to portray income inequality as a bad thing. In fact, inequality of income is to be celebrated. What is important is how poor the poorest members of society are. The only way to have a society where the poorest among us have food, shelter, clothing, and decent health care is to have a society where inequality of income is not only accepted – but sought after.

(Dr. Gary L. Wolfram is the William E. Simon Professor in Economics and Public Policy at Hillsdale College. Originally posted on The Michigan View.)