Milton Friedman on Income Inequality

By Cole, Julio H. | Journal of Markets & Morality, Fall 2008 | Go to article overview

Milton Friedman on Income Inequality


Cole, Julio H., Journal of Markets & Morality


Introduction

 
   A society that puts equality--in the sense of equality of 
   outcome-ahead of freedom will end up with neither equality nor 
   freedom.... On the other hand, a society that puts freedom first 
   will, as a happy by-product, end up with both greater freedom and 
   greater equality. (1) 

It seems pretty obvious where libertarians stand on the question of freedom versus equality, and this quotation from Milton Friedman sums it up quite clearly: Libertarians believe that we should be concerned about freedom, and nothing else. If we aim for freedom, we will also get, indirectly, a good measure of equality as part of the bargain, but that is a bonus; if we aim for equality directly, however, we will lose liberty, and we will not get equality anyway.

Whether Friedman was right or not--that is, whether capitalism does in fact result in less inequality, as he claimed--is a question that presumably can be settled by research. The intriguing question, however, is why a libertarian such as Milton Friedman should be concerned with inequality at all. Note the phrasing of our initial quotation. Rhetoric apart, why would both greater freedom and greater equality be a happy byproduct for Friedman, unless he valued equality for its own sake as well as valuing liberty? Of course, we know that he probably valued the latter much more that he did the former, but, still, the phrasing is subtle and suggestive, and his views on this subject might bear a closer reading.

Friedman's case against Equality of outcomes

Friedman's views on income inequality are most clearly stated in Capitalism and Freedom (1962) and in Free to Choose (1980), his two major popular books. In both works, he starts out by arguing that we should indeed be unconcerned about income inequality in a free-market economy, and he provides three major reasons: (1) Some degree of inequality is actually desirable in any well-functioning economic system; (2) in any case, a certain degree of inequality is unavoidable under an economic system based on free-market principles; and (3) the actual degree of income inequality in observed market economies, such as the United States, is much less than is commonly assumed (especially when compared to income distributions in nonmarket economies).

Regarding the first two points, Friedman expresses the ethical principle behind the distribution of incomes in a market economy: "To each according to what he and the instruments he owns produces." (2) That is, and to use a bit of economic jargon, in such an economy, individuals are rewarded in proportion to how much the factors of production under their control (including their own labor) contribute to total economic output. Incomes, in short, derive from property ownership and/or from work performed, and because individuals will differ in tastes and preferences, including relative preferences for leisure and for risk-taking, the principle of "payment in accordance with product" will necessarily result in inequalities of money incomes. Such differentials, however, are necessary in order to provide incentives for certain types of irksome or tedious labor and for certain types of risky activities that would not be performed otherwise. (3)

Friedman goes on to note, however, that a large part of observed income inequality is not due to these "equalizing differences," as he calls them, but rather to "initial differences in endowment, both of human capacities and of property." (4) Most people do not regard inequalities due to differences in inherited personal talents and capacities as negatively as those arising from inherited wealth, though Friedman argues that the distinction is in fact untenable:

 
   Much of the moral fervor behind the drive for equality of outcome 
   comes from the widespread belief that it is not fair that some 
   children should have a great advantage over others simply because 
   they happen to have wealthy parents. … 

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