Many of the reform reversals observed these days are driven by negative perception of markets – namely that market economies breed inequality and that social systems are better in leveling things out. Nowhere this is more evident than in Latin America, where income gaps between the rich and the poor have been a hot discussion topic for quite some time now.
Anthony de Jasay takes a closer look at inequality within a context of market systems, criticizing attempts to even things out through government regulation. These efforts often include things such as equating endowments and even factors like knowledge and networking. Yet, as he observes, there is one factor that simply cannot be controlled:
even if in some Utopia all individual endowments could, by clever legal, fiscal, educational and technical devices, be flattened out, there would still remain one generator of inequality, probably the most powerful of all, namely luck. It is by definition random, it rides roughshod over government policies as well as over personal merit and desert. If nothing else made for inequality, luck alone would suffice to keep the great Inequality Machine of capitalism churning out a kaleidoscopic pattern of incomes and wealth, in which any advantage gained would provide means for further advantage, helping the rich to become richer.
I remain a firm believer in that markets can and do lift more people out of poverty than they get credit for. The real challenge is that a lot of perceptions of what market economies do and don’t do are often just that – perceptions. They don’t have anything to do with whether a system is a market economy or not.
Often confused with market systems are spot markets – people observe producers and consumers engaging in exchange of products and services for money and are often quick to declare a system to be a market economy. The reality is that institutions of a market economy are much more important in defining a market system than markets as trading places. Distribution of resources in a free price environment, then, is not a determining element of a market economy as some suggest – it is simply a necessary part of a market system.
Going back to de Jasay’s point – luck is certainly an important element of functioning of any political, economic, and social system that cannot be controlled. I do wonder, however, how much weight does luck really have in determining outcomes vs. knowledge, skills, and, most importantly, the availability of opportunities? Afterall, market economies are about choices that individuals make (not someone else makes for them) and opportunities that they can utilize. This is the essence of economic freedom on the level of individuals, which should be the focal point of analysis of whether systems are fair and equality-generating.
Published Date: February 21, 2007