By Justin Ong, Published The Straits Times, 14 Jun 2019
In the discourse on how we can best uplift the less fortunate that was sparked off by Mr Yaron Brook's recent op-ed (Why inequality might not be unfair, June 1), many Singaporeans have mistakenly conflated poverty with inequality.
Fundamentally, what matters to a poor person is how much money he has, not how much less money he has compared to Bill Gates. The fact that Singapore has a high number of millionaires per capita is simply irrelevant if the poorest of Singaporeans have a roof over their heads and can make ends meet.
Inequality is about a gap in numbers and speaks nothing of the socio-economic mobility of the poor.
If inequality is all that matters, then the poor would be better off in Afghanistan and Thailand, which rank better than Singapore on Oxfam's Inequality Index, but that's hardly the case.
As one of the co-founders of The Philosophy of Life, the organisation that hosted Mr Brook's dialogue series in Singapore, I would like to address some of the arguments that have been raised in response to his article.
MORAL RESPONSIBILITY OF THE RICH
The central premise of the arguments asserting that inequality matters is that the rich must be morally accountable to uplift the poor.
First, it is unclear why it is reasonable to prescribe the rich moral duties to the poor, especially in Singapore. Unlike countries marred with political corruption and a history of colonialism, wealth accumulation in a free marketplace like Singapore is an outcome of voluntary mutually advantageous transactions between individuals. Thus, there isn't a zero-sum game with the rich coming out on top at the expense of the poor that compels any form of moral responsibility.
The proposition that the rich must redistribute their wealth as a means to return the favour to society for enabling their success doesn't make sense either.
With regard to consumers and workers of the poor and middle class, businesses have fairly reciprocated by distributing wages consented to by their employees or transacting goods and services at prices desired by their customers.
Moreover, the rich are already shouldering a higher burden of taxes through corporate taxes and being taxed in the highest income bracket, the money going to fund public goods such as roads and schools.
Just because privileges are unearned doesn't make them wrong. Inherited privileges are blessings that shouldn't be frowned upon as they are incentives that motivate both rich and poor parents to work selflessly in pursuit of a better future for their children. Thus, it is perplexing to me how anyone would deem it moral and just to expropriate these privileges on the mere basis that others need it more.
INADEQUATE SOCIO-ECONOMIC MOBILITY
Another point that is frequently raised is that while we should not aim for equal outcomes, at a minimum, the rich ought to compensate for the different starting points we begin with. The critique fits well with the perennial narrative that the rich have steamrolled so far ahead of the poor and middle class that social mobility is out of reach.
However, the narrative does not match up to the unrivalled record of free markets to produce wealth and socio-economic mobility for the masses.
Globally, the world has halved absolute poverty in 15 years, meeting its UN Millennium Development Goal set in 2000, five years ahead of schedule. Domestically, Singapore's poor has witnessed similar progress. Basic wage has increased 7.8 per cent for local low-wage employees, which is higher than the increase for all rank-and-file workers at 5.5 per cent in 2018. In addition, Oxford-based research centre, Our World in Data, observes that inequality has not risen from 1990 to 2015, but has fallen marginally.
Only in a free marketplace is wealth the most dynamic and where people have the capacity to move across the income spectrum.
The rich can only sustain their privilege through serving their consumer markets better or funnelling their capital into the right hands. Thus, as the rich get richer, the poor get richer too as there is an ever greater abundance of opportunities to invest, work and enjoy products and services that make all of our lives more meaningful and productive.
Confiscating wealth and then redistributing it till we attain an equity of opportunities is not only an impossible endeavour but an unproductive one that penalises success and obstructs the creation of wealth for rich and poor alike.
If socio-economic mobility is an ideal we aspire to particularly for individuals who are less fortunate, then it is incumbent upon us to welcome and maximise the abundance of opportunities for them through free markets.
SOCIAL FRAGMENTATION
The claim that too much inequality ferments damaging divisions between the rich and poor by eroding social trust needs to be questioned too.
In my view, it's not inequality per se but rather, whether the inequality has accrued fairly, that troubles Singaporeans.
A recent behavioural economics study by Nature Human Behaviour journal revealed that people weren't actually averse to inequality. In an experiment, participants were tasked to distribute rewards to two cleaners. Initially, they would split it equally between the cleaners but when they discovered that one of them cleaned more diligently than the other, they much preferred an unequal distribution of rewards.
The sole means to guarantee that inequality is a fair and just outcome is to embrace meritocracy. Only in such a setting does merit prevail and arbitrary political privileges, ethnicity and religion are overridden.
Ironically, it's our obsession with inequality that amplifies the differences among us and cultivates an unhealthy "us versus them" tribalistic mentality.
Certainly, it is more productive to redirect our focus on poverty instead, which is an effective rallying point for both the rich and middle class alike to come together and work out solutions.
All in all, we must strip away the default presumption that the free marketplace, where inequality is permissible, is ruthlessly disadvantageous to the poor.
According to research by the Fraser Institute, a Canadian public policy think-tank, the bottom 10 per cent of income earners worldwide consistently hold 2 per cent to 2.8 per cent of the share of their respective nation's income regardless of their redistribution or welfare policies.
Interestingly, it observed that the average income of the poorest 10 per cent in the most economically free nations is almost twice the average per capita income in the least free nations.
Inequality is a constant in life and a reality in all societies. What's not constant is absolute poverty, which we've made great strides in eradicating and must continue to do so by treating inequality as nothing more than a red herring.
Justin Ong is co-founder with Henry Chew of The Philosophy of Life, the organisation that hosted the dialogue series in Singapore by Mr Yaron Brook, the chairman of the California-based non-profit think-tank, the Ayn Rand Institute, where Mr Don Watkins is a senior fellow.
In the discourse on how we can best uplift the less fortunate that was sparked off by Mr Yaron Brook's recent op-ed (Why inequality might not be unfair, June 1), many Singaporeans have mistakenly conflated poverty with inequality.
Fundamentally, what matters to a poor person is how much money he has, not how much less money he has compared to Bill Gates. The fact that Singapore has a high number of millionaires per capita is simply irrelevant if the poorest of Singaporeans have a roof over their heads and can make ends meet.
Inequality is about a gap in numbers and speaks nothing of the socio-economic mobility of the poor.
If inequality is all that matters, then the poor would be better off in Afghanistan and Thailand, which rank better than Singapore on Oxfam's Inequality Index, but that's hardly the case.
As one of the co-founders of The Philosophy of Life, the organisation that hosted Mr Brook's dialogue series in Singapore, I would like to address some of the arguments that have been raised in response to his article.
MORAL RESPONSIBILITY OF THE RICH
The central premise of the arguments asserting that inequality matters is that the rich must be morally accountable to uplift the poor.
First, it is unclear why it is reasonable to prescribe the rich moral duties to the poor, especially in Singapore. Unlike countries marred with political corruption and a history of colonialism, wealth accumulation in a free marketplace like Singapore is an outcome of voluntary mutually advantageous transactions between individuals. Thus, there isn't a zero-sum game with the rich coming out on top at the expense of the poor that compels any form of moral responsibility.
The proposition that the rich must redistribute their wealth as a means to return the favour to society for enabling their success doesn't make sense either.
With regard to consumers and workers of the poor and middle class, businesses have fairly reciprocated by distributing wages consented to by their employees or transacting goods and services at prices desired by their customers.
Moreover, the rich are already shouldering a higher burden of taxes through corporate taxes and being taxed in the highest income bracket, the money going to fund public goods such as roads and schools.
Just because privileges are unearned doesn't make them wrong. Inherited privileges are blessings that shouldn't be frowned upon as they are incentives that motivate both rich and poor parents to work selflessly in pursuit of a better future for their children. Thus, it is perplexing to me how anyone would deem it moral and just to expropriate these privileges on the mere basis that others need it more.
INADEQUATE SOCIO-ECONOMIC MOBILITY
Another point that is frequently raised is that while we should not aim for equal outcomes, at a minimum, the rich ought to compensate for the different starting points we begin with. The critique fits well with the perennial narrative that the rich have steamrolled so far ahead of the poor and middle class that social mobility is out of reach.
However, the narrative does not match up to the unrivalled record of free markets to produce wealth and socio-economic mobility for the masses.
Globally, the world has halved absolute poverty in 15 years, meeting its UN Millennium Development Goal set in 2000, five years ahead of schedule. Domestically, Singapore's poor has witnessed similar progress. Basic wage has increased 7.8 per cent for local low-wage employees, which is higher than the increase for all rank-and-file workers at 5.5 per cent in 2018. In addition, Oxford-based research centre, Our World in Data, observes that inequality has not risen from 1990 to 2015, but has fallen marginally.
Only in a free marketplace is wealth the most dynamic and where people have the capacity to move across the income spectrum.
The rich can only sustain their privilege through serving their consumer markets better or funnelling their capital into the right hands. Thus, as the rich get richer, the poor get richer too as there is an ever greater abundance of opportunities to invest, work and enjoy products and services that make all of our lives more meaningful and productive.
Confiscating wealth and then redistributing it till we attain an equity of opportunities is not only an impossible endeavour but an unproductive one that penalises success and obstructs the creation of wealth for rich and poor alike.
If socio-economic mobility is an ideal we aspire to particularly for individuals who are less fortunate, then it is incumbent upon us to welcome and maximise the abundance of opportunities for them through free markets.
SOCIAL FRAGMENTATION
The claim that too much inequality ferments damaging divisions between the rich and poor by eroding social trust needs to be questioned too.
In my view, it's not inequality per se but rather, whether the inequality has accrued fairly, that troubles Singaporeans.
A recent behavioural economics study by Nature Human Behaviour journal revealed that people weren't actually averse to inequality. In an experiment, participants were tasked to distribute rewards to two cleaners. Initially, they would split it equally between the cleaners but when they discovered that one of them cleaned more diligently than the other, they much preferred an unequal distribution of rewards.
The sole means to guarantee that inequality is a fair and just outcome is to embrace meritocracy. Only in such a setting does merit prevail and arbitrary political privileges, ethnicity and religion are overridden.
Ironically, it's our obsession with inequality that amplifies the differences among us and cultivates an unhealthy "us versus them" tribalistic mentality.
Certainly, it is more productive to redirect our focus on poverty instead, which is an effective rallying point for both the rich and middle class alike to come together and work out solutions.
All in all, we must strip away the default presumption that the free marketplace, where inequality is permissible, is ruthlessly disadvantageous to the poor.
According to research by the Fraser Institute, a Canadian public policy think-tank, the bottom 10 per cent of income earners worldwide consistently hold 2 per cent to 2.8 per cent of the share of their respective nation's income regardless of their redistribution or welfare policies.
Interestingly, it observed that the average income of the poorest 10 per cent in the most economically free nations is almost twice the average per capita income in the least free nations.
Inequality is a constant in life and a reality in all societies. What's not constant is absolute poverty, which we've made great strides in eradicating and must continue to do so by treating inequality as nothing more than a red herring.
Justin Ong is co-founder with Henry Chew of The Philosophy of Life, the organisation that hosted the dialogue series in Singapore by Mr Yaron Brook, the chairman of the California-based non-profit think-tank, the Ayn Rand Institute, where Mr Don Watkins is a senior fellow.
Why inequality may not be unfair
In a country as rich as Singapore with no absolute poverty, economic inequality just means some people have become richer than others. If they succeeded due to hard work and their own merit without depriving others, then inequality by itself is not a bad thing.
By Yaron Brook and Don Watkins, Published The Straits Times, 1 Jun 2019
Why should we care about economic inequality?
That's a question that deserves to be debated, but one of the frustrating features of today's discussion is that the inequality critics have smuggled into the discussion a perspective on wealth which tacitly assumes that economic inequality is unjust.
THE 'FIXED PIE' ASSUMPTION
Critics of inequality often speak of economic success as if it were a fixed-sum game. There is only so much wealth to go around, and so inequality amounts to proof that someone has gained at someone else's expense. Arguing that "the riches accruing to the top have come at the expense of those down below", Nobel Prize-winning economist Joseph Stiglitz writes:
"One can think of what's been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 per cent would get 1 per cent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone gets a smaller slice."
What this argument ignores is the fact of production. If the pie is constantly expanding, because people are constantly creating more wealth, then one person's gain doesn't have to come at anyone else's expense.
That doesn't mean you can't get richer at other people's expense - say, by lobbying politicians to give you part of someone else's pie - but a rise in inequality per se doesn't give us any reason to suspect that someone has been robbed, exploited or is even worse off.
Inequality, we have to keep in mind, is not the same thing as poverty. When Oxfam International slams Singapore for being way behind countries such as Thailand, Indonesia and even Afghanistan in tackling inequality, it acts as if it's irrelevant that almost all Singaporeans are rich compared to the citizens of those countries.
Economic inequality is perfectly compatible with widespread affluence, and rising inequality is perfectly compatible with a society in which the vast majority of citizens are getting richer.
If the incomes of the poorest Singaporeans doubled while the incomes of the richest Singaporeans tripled, that would dramatically increase inequality even though every single person would be better off. Inequality refers not to deprivation but difference, and there is nothing suspicious or objectionable about differences per se.
THE 'GROUP PIE' ASSUMPTION
In his speech on inequality, former US president Barack Obama said: "The top 10 per cent no longer takes in one-third of our income - it now takes half."
This sort of phraseology, which is endemic in discussions of inequality, assumes that wealth is, in effect, a social pie that is created by "society as a whole," which then has to be divided up fairly.
What's fair? In their book The Winner-Take-All Society, economists Robert Frank and Philip Cook begin their discussion of inequality with a simple thought experiment.
"Imagine that you and two friends have been told that an anonymous benefactor has donated three hundred thousand dollars to divide among you. How would you split it? If you are like most people, you would immediately propose an equal division - one hundred thousand dollars per person."
In their view, if the pie belongs to "all of us", then absent other considerations, fairness demands we divide it up equally - not allow a small group to arbitrarily take an outsized share of "our" income.
But although we can speak loosely about how much wealth a society has, wealth is not actually a pie belonging to the nation as a whole. It consists of particular values created by particular individuals, often working together in groups, and belonging to those particular individuals.
Wealth is not distributed by society. It is produced and traded by the people who create it. To distribute it, society would first have to seize it from the people who created it.
This changes the equation dramatically. When individuals create something, there is no presumption that they should end up with equal shares.
If Robinson Crusoe and Friday are on an island, and Crusoe grows seven pumpkins and Friday grows three pumpkins, Crusoe hasn't grabbed a bigger piece of - pumpkin? - pie. He has simply created more wealth than Friday, leaving Friday no worse off. It is dishonest to say Crusoe has taken 70 per cent of the island's wealth.
EQUAL IS UNFAIR
It's obvious why the fixed pie and group pie assumptions about wealth would lead us to view economic inequality with a sceptical eye. If wealth is a fixed pie or a pie cooked up by society as a whole, then it follows that economic equality is the ideal, and departures from this ideal are prima facie unjust and need to be defended.
But if wealth is something that individuals create, then there's no reason to expect that we should be anything close to equal, economically. If we look at the actual individuals who make up society, it is self-evident that human beings are unequal in almost every respect: in size, strength, intelligence, beauty, frugality, ambition, work ethic and moral character.
These differences will necessarily entail huge differences in economic conditions - and there is no reason why these differences should be viewed with scepticism, let alone alarm. It's ridiculous to complain about the income inequality that emerges from free, voluntary transactions.
Think about author J K Rowling, who became a billionaire from her wildly popular Harry Potter series. Ms Rowling increased inequality when she became a billionaire, but she did so by making millions of people better off - and anyone who didn't like her books didn't have to pay her a penny.
That's the pattern we see all over the economy. Mr Jeff Bezos, Mr Warren Buffett and Mr Mark Zuckerberg may have billions in the bank, but their fortunes did not come at the expense of their customers, employees or society at large. They prospered by doing something enormously valuable - by running companies that enriched the lives of everyone who chose to deal with them. It was win-win all around.
Thus far, Singapore consistently clinches the top spots of economic freedom indexes as well as having corrupt-free institutions, based on the principles of meritocracy.
I urge Singaporeans not to wage a war on inequality but to celebrate and recommit to ideals such as grit, self-reliance and innovation.
Mr Yaron Brook is the chairman of the California-based non-profit think-tank, the Ayn Rand Institute, where Mr Don Watkins is a senior fellow. Mr Brook is also the author of Equal Is Unfair.
Why inequality, and not just poverty, matters to Singapore
It can be unfair and has a pernicious effect on society, worsening poverty and other problems
By Vikram Khanna, Associate Editor, The Straits Times, 19 Jun 2019
On June 1, Dr Yaron Brook, the chairman of the California-based Ayn Rand Institute, and Mr Don Watkins, a senior fellow at the same pro-free market think-tank, wrote an article in these pages titled Why Inequality Might Not Be Unfair, urging Singaporeans not to concern themselves with this issue.
Then, in response to pushback from readers in the Forum pages, Mr Justin Ong, the co-founder of an organisation called The Philosophy of Life, which hosted Dr Brook in Singapore, wrote a rejoinder, complaining that "many Singaporeans have mistakenly conflated poverty with inequality". The fight is with poverty, not inequality, he asserted.
These diatribes against the more egalitarian societies that Singapore and many other countries are trying to create are surprising, coming after a period when economic inequalities have risen to record levels around the world.
There are countless studies on inequality from organisations such as the International Monetary Fund, the World Bank, the Organisation for Economic Cooperation and Development and others. And the evidence suggests it is not the Singaporeans who have stood up for more equality who are mistaken, but Dr Brook and Mr Ong.
Take, for instance, Dr Brook's central point that "economic inequality is perfectly compatible with widespread affluence, and rising inequality is perfectly compatible with a society in which the vast majority of citizens are getting richer".
First of all, this is a half-truth: Economic inequality is also perfectly compatible with widespread poverty. But more importantly, the evidence shows that if inequality persists, poverty gets worse; the vast majority of citizens will get poorer, not richer.
THE INEQUALITY-POVERTY LINK
Why? Because inequality is damaging, both economically and socially. Consider, for instance, its impact on consumption. The poor and the middle class spend a much higher proportion of every additional dollar that they earn than the rich. So if a greater share of income and wealth accrues to, say, the richest 10 per cent, the consumption growth of the other 90 per cent falls. Thus, over time, persistent and rising inequality leads to a chronic shortage of demand and lower investment. The result is slower economic growth - a smaller pie - and more poverty. In other words, inequality is part of what drives poverty. That is why responsible policymakers focus on reducing both.
Indeed, even those who, like Dr Brook and Mr Ong, are presumably more concerned with reducing poverty, should also be concerned about reducing inequality, because the two problems are related.
This is not to say that any policy aimed at reducing inequality will also reduce poverty. For instance, confiscatory rates of taxation, indiscriminate nationalisation or price controls can lead to outcomes that increase poverty. But this is different from saying inequality doesn't matter. It only suggests that policies to reduce inequality must be carefully chosen.
Such policies are also necessary because, if unchecked, inequality feeds on itself. Studies by the IMF and others show that it leads to lower social mobility across generations, because it affects behaviours that lead to unequal opportunities, which in turn lead to more inequality.
A recent illustration: Super-rich Americans were found to have paid vast sums of money - essentially, bribes - to enable their children to enter Ivy League universities for a privileged education. For every rich, undeserving child that gained admission in this way, there was a poorer, more deserving child who was denied admission. Such behaviour, besides being unfair, inhibits social mobility and perpetuates inequality.
SOCIAL PROBLEMS
Inequality also leads to social problems. For example, crime rates are higher in countries and cities with greater inequality - higher, even, than in places where there is more poverty and less inequality.
Economists such as the Nobel laureate Gary Becker found that this is because criminals also do their own cost-benefit analysis: The wider the economic gap they observe, the greater they perceive their potential gains would be from criminal activities relative to the probability of being caught and punished. Psychologists note that in highly unequal societies, some people feel they have no chance to rise, so they turn to crime.
Other social issues, including school dropout rates and chronic health problems such as alcoholism and drug abuse, are also higher in countries and cities with high levels of inequality.
Sociologists find that poor people in countries with high inequality make riskier decisions - such as taking out loans and mortgages they cannot afford in a desperate bid to get ahead. Economists like Professor Raghuram Rajan of the University of Chicago suggest that the global financial crisis of 2008 which followed a housing bubble built on an explosion of sub-prime mortgages was partly caused by this type of behaviour, which was a response to widening inequality.
DIFFERENCES MATTER
With regard to differences arising from inequality, Dr Brooks makes this argument: "If the incomes of the poorest Singaporeans doubled while the incomes of the richest Singaporeans tripled, that would dramatically increase inequality even though every single person would be better off. Inequality refers not to deprivation but difference, and there is nothing suspicious or objectionable about differences per se."
This is problematic on several counts. First, because "differences" are viewed subjectively. While every person would be better off in a purely arithmetical sense if all incomes rise, it is not clear they would feel better off if those around them are moving ahead faster than they are.
People are social beings and do care about their standing relative to others. Of course, average individuals do not, as Mr Ong suggests, compare their situation with that of billionaires like Mr Bill Gates (although other billionaires might), but they do compare it with that of members of their chosen reference group, such as school mates, colleagues or people in their social circle.
To illustrate with an analogy: Imagine you are in a car and driving in the middle lane. You are moving forward slowly. But the cars to your left and your right are moving faster, and this continues for several minutes. Then those cars move even faster while you continue to move as slowly as before. How would you feel? Would you not compare your situation with that of the other motorists?
Second, whether there is anything "suspicious or objectionable" about inequalities depends on what causes them. If it is differences in ability, that is unobjectionable; honestly earned wealth in a fair system, even if it leads to some inequality, should be admired and celebrated.
However, inequalities frequently have other causes. For example, the accumulation of extreme wealth can be the result of cronyism and corruption, or being granted monopoly concessions.
It can also be the result of reckless risk-taking which creates spectacular wealth for some individuals, but causes immense damage to society, as in the 2008 global financial crisis, which ended with taxpayers in the US and Europe having to bail out bankrupt financial institutions. Or it can be the result of corporate bosses paying themselves outsized compensation packages and getting golden parachutes even when their firms fail, while limiting wage increases for workers.
So there are circumstances in which what Dr Brook calls "differences" are both suspicious and objectionable. The Occupy Wall Street movement of 2011, which followed the financial crisis and raised the slogan "we are the 99 per cent" had some valid concerns about inequalities arising from the corruption of the financial elite.
Institutions and social attitudes matter as well and influence the way wealth is distributed. There are some important questions here. For instance: Is there really equality before the law? Are all racial and religious groups treated the same? Do men and women have the same social and economic status? Do the poor have equal access to markets, justice and the financial system as the rich? Do trade unions exist and are they effective?
In many societies, these conditions do not hold. If inequality is the result, as is frequently the case, concern about it is legitimate. To ignore inequality in such circumstances is to condone malfunctioning institutions and social injustice.
INEQUALITY AND POLITICS
As many observers including the Nobel laureate Angus Deaton have pointed out, income inequality can also turn into political inequality as the rich use their wealth to influence the political process - for example, to secure benefits for themselves, such as lower personal taxes, while undermining public services such as government healthcare and other social programmes which benefit the less well-off.
There is also a connection between rising inequality and rising populism. Inequality leads to societies becoming more polarised, with people believing that the system is rigged against them - which, as noted above, is sometimes true. It is no coincidence that the election of President Donald Trump in the US, the Brexit vote in Britain and the rise of populist governments in Europe - all which reflected a growing distrust of elites - happened after inequality hit levels not seen since the 1930s, leading to a financial crisis which led to millions of people losing their jobs and their homes. It is also no surprise that inequality has emerged as a major issue in the run-up to next year's US presidential election.
In closing, noting Singapore's economic freedom, meritocracy and corruption-free institutions, Dr Brook urges Singaporeans "not to wage a war on inequality".
But there is more to Singapore's economic success than the factors he cites. Singapore has not shied away from the redistributive policies that he opposes.
In 1966, a year after its independence, it enacted a draconian Land Acquisition Act, under which it acquired vast tracts of land from private landowners, paying less than the commercial value, in order to build public housing, infrastructure, schools and hospitals. It continues to spend heavily on social programmes such as health and education. It has taken steps to reduce economic inequality - which is still unfinished business - and has made social mobility a policy priority.
Singapore must continue on this path to build an even more egalitarian society.
In a country as rich as Singapore with no absolute poverty, economic inequality just means some people have become richer than others. If they succeeded due to hard work and their own merit without depriving others, then inequality by itself is not a bad thing.
By Yaron Brook and Don Watkins, Published The Straits Times, 1 Jun 2019
Why should we care about economic inequality?
That's a question that deserves to be debated, but one of the frustrating features of today's discussion is that the inequality critics have smuggled into the discussion a perspective on wealth which tacitly assumes that economic inequality is unjust.
THE 'FIXED PIE' ASSUMPTION
Critics of inequality often speak of economic success as if it were a fixed-sum game. There is only so much wealth to go around, and so inequality amounts to proof that someone has gained at someone else's expense. Arguing that "the riches accruing to the top have come at the expense of those down below", Nobel Prize-winning economist Joseph Stiglitz writes:
"One can think of what's been happening in terms of slices of a pie. If the pie were equally divided, everyone would get a slice of the same size, so the top 1 per cent would get 1 per cent of the pie. In fact, they get a very big slice, about a fifth of the entire pie. But that means everyone gets a smaller slice."
What this argument ignores is the fact of production. If the pie is constantly expanding, because people are constantly creating more wealth, then one person's gain doesn't have to come at anyone else's expense.
That doesn't mean you can't get richer at other people's expense - say, by lobbying politicians to give you part of someone else's pie - but a rise in inequality per se doesn't give us any reason to suspect that someone has been robbed, exploited or is even worse off.
Inequality, we have to keep in mind, is not the same thing as poverty. When Oxfam International slams Singapore for being way behind countries such as Thailand, Indonesia and even Afghanistan in tackling inequality, it acts as if it's irrelevant that almost all Singaporeans are rich compared to the citizens of those countries.
Economic inequality is perfectly compatible with widespread affluence, and rising inequality is perfectly compatible with a society in which the vast majority of citizens are getting richer.
If the incomes of the poorest Singaporeans doubled while the incomes of the richest Singaporeans tripled, that would dramatically increase inequality even though every single person would be better off. Inequality refers not to deprivation but difference, and there is nothing suspicious or objectionable about differences per se.
THE 'GROUP PIE' ASSUMPTION
In his speech on inequality, former US president Barack Obama said: "The top 10 per cent no longer takes in one-third of our income - it now takes half."
This sort of phraseology, which is endemic in discussions of inequality, assumes that wealth is, in effect, a social pie that is created by "society as a whole," which then has to be divided up fairly.
What's fair? In their book The Winner-Take-All Society, economists Robert Frank and Philip Cook begin their discussion of inequality with a simple thought experiment.
"Imagine that you and two friends have been told that an anonymous benefactor has donated three hundred thousand dollars to divide among you. How would you split it? If you are like most people, you would immediately propose an equal division - one hundred thousand dollars per person."
In their view, if the pie belongs to "all of us", then absent other considerations, fairness demands we divide it up equally - not allow a small group to arbitrarily take an outsized share of "our" income.
But although we can speak loosely about how much wealth a society has, wealth is not actually a pie belonging to the nation as a whole. It consists of particular values created by particular individuals, often working together in groups, and belonging to those particular individuals.
Wealth is not distributed by society. It is produced and traded by the people who create it. To distribute it, society would first have to seize it from the people who created it.
This changes the equation dramatically. When individuals create something, there is no presumption that they should end up with equal shares.
If Robinson Crusoe and Friday are on an island, and Crusoe grows seven pumpkins and Friday grows three pumpkins, Crusoe hasn't grabbed a bigger piece of - pumpkin? - pie. He has simply created more wealth than Friday, leaving Friday no worse off. It is dishonest to say Crusoe has taken 70 per cent of the island's wealth.
EQUAL IS UNFAIR
It's obvious why the fixed pie and group pie assumptions about wealth would lead us to view economic inequality with a sceptical eye. If wealth is a fixed pie or a pie cooked up by society as a whole, then it follows that economic equality is the ideal, and departures from this ideal are prima facie unjust and need to be defended.
But if wealth is something that individuals create, then there's no reason to expect that we should be anything close to equal, economically. If we look at the actual individuals who make up society, it is self-evident that human beings are unequal in almost every respect: in size, strength, intelligence, beauty, frugality, ambition, work ethic and moral character.
These differences will necessarily entail huge differences in economic conditions - and there is no reason why these differences should be viewed with scepticism, let alone alarm. It's ridiculous to complain about the income inequality that emerges from free, voluntary transactions.
Think about author J K Rowling, who became a billionaire from her wildly popular Harry Potter series. Ms Rowling increased inequality when she became a billionaire, but she did so by making millions of people better off - and anyone who didn't like her books didn't have to pay her a penny.
That's the pattern we see all over the economy. Mr Jeff Bezos, Mr Warren Buffett and Mr Mark Zuckerberg may have billions in the bank, but their fortunes did not come at the expense of their customers, employees or society at large. They prospered by doing something enormously valuable - by running companies that enriched the lives of everyone who chose to deal with them. It was win-win all around.
Thus far, Singapore consistently clinches the top spots of economic freedom indexes as well as having corrupt-free institutions, based on the principles of meritocracy.
I urge Singaporeans not to wage a war on inequality but to celebrate and recommit to ideals such as grit, self-reliance and innovation.
Mr Yaron Brook is the chairman of the California-based non-profit think-tank, the Ayn Rand Institute, where Mr Don Watkins is a senior fellow. Mr Brook is also the author of Equal Is Unfair.
Why inequality, and not just poverty, matters to Singapore
It can be unfair and has a pernicious effect on society, worsening poverty and other problems
By Vikram Khanna, Associate Editor, The Straits Times, 19 Jun 2019
On June 1, Dr Yaron Brook, the chairman of the California-based Ayn Rand Institute, and Mr Don Watkins, a senior fellow at the same pro-free market think-tank, wrote an article in these pages titled Why Inequality Might Not Be Unfair, urging Singaporeans not to concern themselves with this issue.
Then, in response to pushback from readers in the Forum pages, Mr Justin Ong, the co-founder of an organisation called The Philosophy of Life, which hosted Dr Brook in Singapore, wrote a rejoinder, complaining that "many Singaporeans have mistakenly conflated poverty with inequality". The fight is with poverty, not inequality, he asserted.
These diatribes against the more egalitarian societies that Singapore and many other countries are trying to create are surprising, coming after a period when economic inequalities have risen to record levels around the world.
There are countless studies on inequality from organisations such as the International Monetary Fund, the World Bank, the Organisation for Economic Cooperation and Development and others. And the evidence suggests it is not the Singaporeans who have stood up for more equality who are mistaken, but Dr Brook and Mr Ong.
Take, for instance, Dr Brook's central point that "economic inequality is perfectly compatible with widespread affluence, and rising inequality is perfectly compatible with a society in which the vast majority of citizens are getting richer".
First of all, this is a half-truth: Economic inequality is also perfectly compatible with widespread poverty. But more importantly, the evidence shows that if inequality persists, poverty gets worse; the vast majority of citizens will get poorer, not richer.
THE INEQUALITY-POVERTY LINK
Why? Because inequality is damaging, both economically and socially. Consider, for instance, its impact on consumption. The poor and the middle class spend a much higher proportion of every additional dollar that they earn than the rich. So if a greater share of income and wealth accrues to, say, the richest 10 per cent, the consumption growth of the other 90 per cent falls. Thus, over time, persistent and rising inequality leads to a chronic shortage of demand and lower investment. The result is slower economic growth - a smaller pie - and more poverty. In other words, inequality is part of what drives poverty. That is why responsible policymakers focus on reducing both.
Indeed, even those who, like Dr Brook and Mr Ong, are presumably more concerned with reducing poverty, should also be concerned about reducing inequality, because the two problems are related.
This is not to say that any policy aimed at reducing inequality will also reduce poverty. For instance, confiscatory rates of taxation, indiscriminate nationalisation or price controls can lead to outcomes that increase poverty. But this is different from saying inequality doesn't matter. It only suggests that policies to reduce inequality must be carefully chosen.
Such policies are also necessary because, if unchecked, inequality feeds on itself. Studies by the IMF and others show that it leads to lower social mobility across generations, because it affects behaviours that lead to unequal opportunities, which in turn lead to more inequality.
A recent illustration: Super-rich Americans were found to have paid vast sums of money - essentially, bribes - to enable their children to enter Ivy League universities for a privileged education. For every rich, undeserving child that gained admission in this way, there was a poorer, more deserving child who was denied admission. Such behaviour, besides being unfair, inhibits social mobility and perpetuates inequality.
SOCIAL PROBLEMS
Inequality also leads to social problems. For example, crime rates are higher in countries and cities with greater inequality - higher, even, than in places where there is more poverty and less inequality.
Economists such as the Nobel laureate Gary Becker found that this is because criminals also do their own cost-benefit analysis: The wider the economic gap they observe, the greater they perceive their potential gains would be from criminal activities relative to the probability of being caught and punished. Psychologists note that in highly unequal societies, some people feel they have no chance to rise, so they turn to crime.
Other social issues, including school dropout rates and chronic health problems such as alcoholism and drug abuse, are also higher in countries and cities with high levels of inequality.
Sociologists find that poor people in countries with high inequality make riskier decisions - such as taking out loans and mortgages they cannot afford in a desperate bid to get ahead. Economists like Professor Raghuram Rajan of the University of Chicago suggest that the global financial crisis of 2008 which followed a housing bubble built on an explosion of sub-prime mortgages was partly caused by this type of behaviour, which was a response to widening inequality.
DIFFERENCES MATTER
With regard to differences arising from inequality, Dr Brooks makes this argument: "If the incomes of the poorest Singaporeans doubled while the incomes of the richest Singaporeans tripled, that would dramatically increase inequality even though every single person would be better off. Inequality refers not to deprivation but difference, and there is nothing suspicious or objectionable about differences per se."
This is problematic on several counts. First, because "differences" are viewed subjectively. While every person would be better off in a purely arithmetical sense if all incomes rise, it is not clear they would feel better off if those around them are moving ahead faster than they are.
People are social beings and do care about their standing relative to others. Of course, average individuals do not, as Mr Ong suggests, compare their situation with that of billionaires like Mr Bill Gates (although other billionaires might), but they do compare it with that of members of their chosen reference group, such as school mates, colleagues or people in their social circle.
To illustrate with an analogy: Imagine you are in a car and driving in the middle lane. You are moving forward slowly. But the cars to your left and your right are moving faster, and this continues for several minutes. Then those cars move even faster while you continue to move as slowly as before. How would you feel? Would you not compare your situation with that of the other motorists?
Second, whether there is anything "suspicious or objectionable" about inequalities depends on what causes them. If it is differences in ability, that is unobjectionable; honestly earned wealth in a fair system, even if it leads to some inequality, should be admired and celebrated.
However, inequalities frequently have other causes. For example, the accumulation of extreme wealth can be the result of cronyism and corruption, or being granted monopoly concessions.
It can also be the result of reckless risk-taking which creates spectacular wealth for some individuals, but causes immense damage to society, as in the 2008 global financial crisis, which ended with taxpayers in the US and Europe having to bail out bankrupt financial institutions. Or it can be the result of corporate bosses paying themselves outsized compensation packages and getting golden parachutes even when their firms fail, while limiting wage increases for workers.
So there are circumstances in which what Dr Brook calls "differences" are both suspicious and objectionable. The Occupy Wall Street movement of 2011, which followed the financial crisis and raised the slogan "we are the 99 per cent" had some valid concerns about inequalities arising from the corruption of the financial elite.
Institutions and social attitudes matter as well and influence the way wealth is distributed. There are some important questions here. For instance: Is there really equality before the law? Are all racial and religious groups treated the same? Do men and women have the same social and economic status? Do the poor have equal access to markets, justice and the financial system as the rich? Do trade unions exist and are they effective?
In many societies, these conditions do not hold. If inequality is the result, as is frequently the case, concern about it is legitimate. To ignore inequality in such circumstances is to condone malfunctioning institutions and social injustice.
INEQUALITY AND POLITICS
As many observers including the Nobel laureate Angus Deaton have pointed out, income inequality can also turn into political inequality as the rich use their wealth to influence the political process - for example, to secure benefits for themselves, such as lower personal taxes, while undermining public services such as government healthcare and other social programmes which benefit the less well-off.
There is also a connection between rising inequality and rising populism. Inequality leads to societies becoming more polarised, with people believing that the system is rigged against them - which, as noted above, is sometimes true. It is no coincidence that the election of President Donald Trump in the US, the Brexit vote in Britain and the rise of populist governments in Europe - all which reflected a growing distrust of elites - happened after inequality hit levels not seen since the 1930s, leading to a financial crisis which led to millions of people losing their jobs and their homes. It is also no surprise that inequality has emerged as a major issue in the run-up to next year's US presidential election.
In closing, noting Singapore's economic freedom, meritocracy and corruption-free institutions, Dr Brook urges Singaporeans "not to wage a war on inequality".
But there is more to Singapore's economic success than the factors he cites. Singapore has not shied away from the redistributive policies that he opposes.
In 1966, a year after its independence, it enacted a draconian Land Acquisition Act, under which it acquired vast tracts of land from private landowners, paying less than the commercial value, in order to build public housing, infrastructure, schools and hospitals. It continues to spend heavily on social programmes such as health and education. It has taken steps to reduce economic inequality - which is still unfinished business - and has made social mobility a policy priority.
Singapore must continue on this path to build an even more egalitarian society.
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