Inequality Comes With Making Others Better Off

John Steele Gordon contributes to the current debate over income inequality—and Thomas Piketty’s recommendation of high income taxes and a two percent wealth tax to reduce it—with a fine op-ed in Tuesday’s Wall Street Journal, “The Little Miracle Spurring Inequality.” Gordon shows that large fortunes, and hence income inequality, are a consequence of entrepreneurs’ putting technological innovations to work providing goods and services to others.

The full-rigged ship led to fortunes in trade from providing people with goods from abroad. Railroads led to fortunes in transportation by dramatically reducing costs of moving goods overland. That in turn led to fortunes in merchandising, such as Woolworth’s, from providing people with inexpensive goods from all over. Petroleum and steel made possible fortunes in automobiles (and rubber and glass) from providing people with dramatic improvements in personal transportation.

As for the “little miracle” of the title,

Today the microprocessor, the most fundamental new technology since the steam engine, is transforming the world before our astonished eyes and inevitably creating huge new fortunes in the process.

Bill Gates created software for the microprocessor; Larry Ellison created databases that use it; John Walton used it for the inventory control that has let WalMart bring goods to people inexpensively. All have earned large fortunes using microprocessors to make their customers better off.

Gordon does not say it, but I will: These fortunes should not be condemned as harmful to society; they should be celebrated as a necessary part of the glorious process by which entrepreneurs create ever new, better, cheaper goods and services for other people.

If we were to cut off the growth of large fortunes (those earned in free and voluntary exchange are the ones I mean—those earned through crony capitalism are a completely different matter), we would interfere with the process by which innovation raises standards of living for everybody. Why? Because these fortunes arise from profits, and profits—and losses!—are necessary to guide innovation. As I write in Free Our Markets (Chapter 2, p. 72),

[W]hat society requires from profit and loss is … guidance for future action. Forward-looking profit and loss projections together with backward-looking profit and loss accounting give entrepreneurs indispensable (though not infallible) guidance for what to do today to make the world a better place tomorrow, and we can’t have that guidance for the future without rewarding past results.

That is a compelling practical reason for letting successful entrepreneurs keep the wealth they earn. (There are still more compelling ethical reasons, but that’s for another post.)

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