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This is an important post, Pete. When I posted on this issue at Think Markets, I got some positive replies, but also a lot of push back.

I think liberals (in “our” sense) have to reclaim this issue big time. Think of the bailouts. The big banks are fine while lots of ordinary folks are underwater on their mortgages or lost their houses. That’s not fair and it is most decidedly *not* a product of the “free market.” But the more obvious story to tell for many commenters will be that we need to somehow restrain “the market,” which is to blame for inequality. We should not answer such arguments by talking about the “atavism of social justice” or saying something about how the welfare state supposedly creates dependency. We should answer by pointing to the many ways in which 1) the poor, especially poor blacks, are kept out of the great global division of labor, 2) the elite has acquired special privileges, and 3) we have crony capitalism, not market capitalism. We should be unrelenting on how it’s a rigged system.

Marina Rosser and I in a series of papers in various places, starting with the Journal of Comparative Economics in 2000, showed that there is a strong link between inequality and the size of underground economies. This is at least partly mediated by a strong link between corruption and the size of the underground economy.

Thanks for this post and the quote from Carol Graham. I will use that quote in tomorrow's lecture and provide a link to your post.

The economy of China is in essence a massive underground economy. While there is huge Chinese wealth inequality (just as there was in 18th and 19th century Britain, and also in 20th century America), there is also currently dynamic productivity growth in China, whereas the US and UK are largely stagnant. In Britain and W. Europe, large wealth-leveling has already occurred in an above-ground economy, but at what cost to societal progress?

A Hayekian argument might be that wealth inequality and dynamic progress of a society to some extent go hand-in-hand, and that deliberate results to redress wealth inequality through excessive welfare-state redistribution will inevitably stagnate progress. Hayek also discusses the confusion of merit and results. In a free society, people must be rewarded by results, not merit.

A political comment

Classical liberalism has always been more concerned with equality under the law than with equality of results or with individual financial firepower. Although there may indeed be a popular worldwide myth called the "American Dream", equality of results can never be promised no matter how talented, smart, and hard-working an individual may be.

Indeed it should be stressed that one's chances of accumulating wealth go up if there is persistent practice of *intelligent* hard work, prudence, and a moral and law-abiding personal lifestyle, but again there can never be a guarantee. Perhaps a wealthy nation can indeed provide some minimum floor below which nobody falls, but if all inequality is redressed, progress comes to a halt, and we are no longer living in a "progressive" society.-I realize the post concentrated on the economics and not the politics, yet equality vs inequality and individual liberty are each connected with the working of the unseen hand.

Fogel wrote in "Escape from Premature Death and Hunger: 1700-2100" that the Gini ratio in England was about .65 in 1700 and fell to .55 by 1900. It was about .32 in 1973. It was about the same for the US.

Recently it has risen to about .39, not much of an increase. I think people are more upset about what they think has caused inequality than the actual rise in inequality. They assume the system is unfair and the wealthy are taking from the poor.

Of course, inflation taxes the poor for the benefit of the first receivers of new money, which are usually the wealthy.

But inequality can grow from the bottom and the US has enjoyed massive immigration from the poor south since 1973.

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