Monday 20 October 2014 5:58 pm

Our obsession with inequality is dangerous – the emerging world knows better

Forget political polls and voting intentions. The most important survey of recent months came from Pew Research on the attitudes of populations worldwide to capitalism and inequality.

As many Western economies labour under the strain of slow growth, an intellectual narrative has taken hold, arguing that free market capitalism causes unacceptable levels of inequality. But in the emerging world, they see the big picture: moving towards free markets works wonders in improving living standards.

The figures are startling. While inequality is seen as a major challenge by the majority of the public in most advanced and emerging economies, the attitudes to capitalism’s role and the potential solutions are starkly different. 

Asked whether a free market system makes most people better off, despite gaps between rich and poor, an incredible 95 per cent of Vietnamese and 76 per cent of Chinese people agree (versus just 3 per cent and 18 per cent who dissent). In Spain, Greece, and Japan, the majority of people disagree.

On solutions too, there’s a clear divide between advanced and emerging economies. Populations in seven out of 10 advanced economies thought high taxes would do more than low taxes to reduce the gap between rich and poor. In contrast, people in 17 out of 24 emerging economies believe that low taxes to stimulate growth are a better cure.

This may be unsurprising. Many advanced economies have been through painful recessions or, in the case of the Eurozone, are still in the midst of deflation induced by a misguided currency project. In a world without much growth, the pie becomes largely fixed. The size of the slices becomes more easily observed, and the politics of redistribution more important. For those countries with exploding numbers of middle class citizens and rising standards of living, it is less of a concern.

But in advanced economies a narrative has developed that inequality is the product of unrestrained capitalism. It is held up as a social evil, with little nuanced thought given to how it may have arisen. It is constantly conflated, almost deliberately, with poverty.

The concern for those of us who recognise the dynamic gains of a free market system is that an obsessive focus on distribution is fermenting the intellectual climate for a range of policies – high taxes, price controls and heavier regulation – which would harm growth further, making the concern about distribution a self-fulfilling prophecy.

Last week, for example, US Federal Reserve chair Janet Yellen said she is “greatly concerned” about rising inequality in the US. And the explosion of wealth seen in emerging economies was barely mentioned in Oxfam’s reaction to a recent report by Credit Suisse on the distribution of global wealth. Instead, it predictably focused on the gaps between rich and poor worldwide. Even the IMF has bought into this trendy conventional wisdom.

To denounce inequality is almost a necessity for gaining acceptance in much of the economics community. But many miss the wood for the trees. Advanced economies do indeed have lots of problems. But they are often the product of not having enough free market capitalism. Cronyism and the protection of vested interests, poor educational outcomes and rigged housing markets all help to exacerbate inequality.

Yet rather than focus on solving these issues, which would also have a growth dividend, many people who should know better continually make generalised denouncements about inequality and capitalism in broad terms.

This new-found egalitarianism may be the socially acceptable thing to say, but if it leads to the sorts of anti-market policies which it is legitimising, we’ll all suffer in the long run.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.