Inequality—how income and wealth are earned matters

Printer-friendly version
Appeared in the Toronto Sun, July 23, 2016

Inequality has become an animating issue for much of the political class. The Canadian federal government, in its recent budget, devoted an entire section to inequality. Unfortunately, almost no analysis to-date has considered the manner in which income and wealth are earned as a crucial element of the inequality debate.

How income and wealth are earned, and thus the underlying explanation for inequality, matters a lot.

Individuals, entrepreneurs, and businesses can become successful (earn profits and accumulate wealth) by providing goods or services to people at a price and quality they demand. In these circumstances, not only do individual businesses benefit, but so do consumers. The prerequisite for such circumstances is an open, competitive market where new players are free to create entirely new products or enter existing markets with better products. In either case, the key is that business competitively provides citizens things they want and are willing to pay for.

A Canadian example of this would be Chip Wilson, the founder of Lululemon, who has an estimated net worth of $2.2 billion. As an entrepreneur, Wilson took enormous risks to innovate and develop a line of products that consumers wanted and were willing to pay for. In doing so, he benefitted millions of customers by providing them with something they valued that didn’t exist before.

There are, however, other methods to “earn” income and accumulate wealth that don’t provide such social benefits. One way is through “cronyism,” whereby individuals earn income and amass wealth by securing special privileges and protection from government. While often legal, inequality resulting from cronyism imposes large costs on society while enriching a favoured few.

Consider the case of Mexico’s Carlos Slim, who at one point was the richest person in the world. To a large degree, Slim accumulated his wealth by using special privileges granted by the Mexican government that reduced competition and allowed his businesses to have monopoly powers. Specifically, the Mexican government placed barriers to competition in the telecommunications market, allowing Slim’s companies to charge consumers higher prices than would otherwise have been the case. It’s these protections, rather than competitive success, that explain Slim’s extraordinary wealth.

Income and wealth can also be amassed through outright corruption, which again imposes enormous costs on society for the benefit of a select few. For example, Indonesia’s former President Suharto, who ruled from 1967-1998. During his tenure Suharto is estimated to have embezzled between US$15-$35 billion from the Indonesian people.

Simply put, not all inequality is the same. Inequality that results from cronyism or corruption can impose large costs on society while benefiting few. These types of inequality should seriously concern politicians, policymakers and the general public.

But inequality that results from entrepreneurship and innovation provides enormous benefits to citizens. Merit-based inequality serves not only the people behind the wealth, but more importantly the consumers and people they serve, who buy and use their goods and services. This is something both politicians and the Canadian public should consider when thinking about inequality.

Subscribe to the Fraser Institute

Get the latest news from the Fraser Institute on the latest research studies, news and events.