IEA: Dispelling the myths around rising inequality and stagnant incomes

29 Dec 2014 04:55 PM

Capitalism has had a raw deal thanks to the various misconceptions voiced by commentators across the spectrum. Rising inequality and the erosion of social mobility are frequently cited as reasons to abandon markets in favour of a more centralised approach, despite improvements in wages, living standards and poverty reduction, brought about by economic growth.

Capitalism has had a raw deal thanks to the various misconceptions voiced by commentators across the spectrum. Rising inequality and the erosion of social mobility are frequently cited as reasons to abandon markets in favour of a more centralised approach, despite improvements in wages, living standards and poverty reduction, brought about by economic growth.

In Selfishness, Greed and Capitalism, Christopher Snowdon debunks a number of myths and straw men which proponents of free markets often find laid at their door. This failure to grasp the true nature of capitalism and the benefits it provides, has led to unfounded hostility towards free markets, growth and private enterprise.

Despite claims to the contrary, capitalism does not perceive greed as good, nor does it idealise growth. Arguments that criticise economics on the grounds that perfect rationality and free-markets do not exist, are not only misguided but convey a lack of understand of the subject in question.

Correcting economic myths:

• Wages – Over a century’s worth of growth has led to a steady rise in wages across the board. Despite perennial claims that the poor get poorer under capitalism, government figures show that in the UK average real wages have doubled for full-time workers and come close to doubling for part-time workers since 1975. The percentage of full-time workers earning above the national minimum wage has also increased, 98% earning at least £6.19 per hour in 2013 compared to only 55% earning more than this amount in 1975 in real terms.

• Income – Between 1977 and 2011/12, the incomes of the poorest 20% of individuals rose by 93% in real terms. The recent recession saw the incomes of the richest fifth of households hit hardest, their disposable income falling by over 5% in real terms between 2007/08 and 2012/13. According to ONS figures, during the same period average incomes of the poorest fifth rose by over 3% in real terms – the provision of state benefits cushioning declining pay.

• Inequality – Rising income inequality and relative poverty are often mentioned by critics of capitalism. Neither offer a meaningful measurement of whether or not the poor are better off. Having peaked in 1990, income inequality in Britain has been declining ever since. Despite real disposable incomes of the poorest fifth of households rising by 50% between 1975 and 2005, the number living below the relative poverty threshold increased from 13% to 15%. Reductions in inequality and relative poverty typically coincide with periods of general impoverishment which harm the poor.

• Social mobility - Social mobility in Britain has not ground to a halt, mobility remaining broadly constant in relative and absolute terms for at least 100 years. The majority of those that are born poor move swiftly up the income ladder, almost all becoming wealthier than their parents. Intelligence and ability play an important role in determining individual progression.

• Working hours - Average working hours for British employees continue to fall. According to OECD figures, over half of UK workers are working less than 40 hours a week and fewer than 12% work more than 50 hours a week. Only those on high incomes have experienced an increase in their working week.

• Economic growth - Sceptics of further economic growth should bear in mind the benefits to be had from ongoing prosperity. Between 1965 and 2000, average incomes worldwide have doubled – contributing to improved living standards and a substantial reduction in poverty. Aside from job creation and the boost to wages, further economic growth is vital in order to afford increasingly burdensome welfare spending.

Commenting on the paper, its author Christopher Snowdon, Director of Lifestyle Economics at the IEA said:

“Free markets are essential to the improvement of society, a fact that has been overshadowed in recent years by the many exaggerations and misrepresentations that dominate discussions about economics. Fears over rising inequality, poor social mobility and falling levels of happiness not only fail to stand up to empirical scrutiny but paint an unjustifiably pessimistic picture of free-markets that should not be taken at face value.”

Notes to editors:

To arrange an interview about the report please contact Camilla Goodwin, Communications Officer, cgoodwin@iea.org.uk or 07821 971 443.

The full report, Selfishness, Greed and Capitalism, can be downloaded from www.iea.org.uk.

Christopher Snowdon is the Director of Lifestyle Economics at the IEA. He is the author of The Art of Suppression,The Spirit Level Delusion and Velvet Glove, Iron Fist. He has also authored a number of publications for the IEA, including Sock Puppets, Euro Puppets, The Proof of the Pudding, The Crack Cocaine of Gambling and Free Market Solutions in Health.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.