Milton Friedman

Proponents of economic equality push forward vague notions that people should have more or less the same amount of stuff, and nobody should have much more stuff than other people because It Feels Very Unfair when some are so rich while others are so poor. That is not a very sophisticated way to understand economic life. What's the relevance of comparing how much one person has, to how much another person has? Milton Friedman's Capitalism and Freedom (great book, google it) challenges us to think a bit more intelligently about the meaning of 'equality' in the context of a market economy. If we are to translate the ideals of equality into reality we'll need a conceptual framework that's a bit more sophisticated than 'everyone having the same amount of stuff' or 'paying everyone the same wage'. 

Friedman asks two helpful questions in understanding the 'income inequality' debates: 

1. What is the justification for state intervention to promote equality? 

2. What has been the effect of the measures actually taken?
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​The starting point in approaching these questions is the principle of private property. If you start with communism or state ownership of everything then obviously you're going to ask different questions, run different arguments and end up with a different result. But if you start with private property, you generally won't end up with conditions where everyone has the same amount of stuff.

Is there a way to protect private property while at the same time ensuring that everyone has the same amount of stuff, perhaps by introducing laws to achieve equality while still retaining private property?​

According to Friedman, that depends on what you mean by 'equality'. After all, equality could mean that those who expend an equal amount of effort x should all get an equal outcome y. So it would actually be unequal and unfair to treat those who expend different amounts of effort in the same way by ensuring that they all get outcome y. It might be more 'equal' to pay the same wage to the industrious as to the slackers, but that would be a very superficial and unfair way to understand the meaning of 'equality'.

In part, the two principles are not contradictory. Payment in accordance with the product [to each according to what he and the instruments he owns produces] may be necessary to achieve true equality of treatment. Given individuals whom we are prepared to regard as alike in ability and initial resources, if some have a greater taste for leisure and others for marketable goods, inequality of return through the market is necessary to achieve equality of total return or equality of treatment.
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One man may prefer a routine job with much time off for basking in the sun to a more exacting job paying a higher salary; another man may prefer the opposite. If both were paid equally in money, their incomes in a more fundamental sense would be unequal.

Capitalism and Freedom, 162.
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True equality in this sense is more than looking simply at the amount of money or amount of stuff people have. It takes into account the preferences of different individuals and their ability to secure, through the market, what they value most. It also takes into account their appetite for risk-taking. Some people think taking risks is fun and others would pay a premium to avoid uncertainty. Not everyone values the same stuff: so we are not equal in having the same amount of stuff but we are equal in achieving what we set out to do and (hopefully) in keeping what we have lawfully acquired.

But what if my preference is to be a surgeon, or a movie star, or a premier league footballer, or something else quite prestigious and high earning? Sadly, I lack the talent to achieve any of these things, but if I still have a really strong preference to do this can we equalize things by paying me the same as a surgeon or movie/sporting star (or at least taxing them and redistributing the extra money to me), so that it's a bit more equal? 

Let's leave aside the moral issue of whether people should be ok with accepting handouts, because that's a matter for everyone's private moral code, and take a situation where someone is poor for no fault of their own.

After all, it's not my fault if my dreams didn't work out - if it wasn't because of laziness or something for which I am morally culpable, but more due to things beyond my control (the wrong parents, the wrong school, the wrong teachers, the wrong housing estate, etc). Not everybody begins life with equal opportunities to achieve their dreams.

Though much of the inequality of income produced by payment in accordance with the product reflects 'equalizing' differences or the satisfaction of men's tastes for uncertainty, a large part reflects initial differences in endowment, both of human capacities and of property. This is the part that raises the really difficult ethical issue.

Capitalism and Freedom, 164.
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Isn't it surprising to see that Friedman was very much aware that life is not fair and that not everybody starts out with the same advantages! It's the same sort of surprise you get when you discover that Adam Smith was aware that markets are not perfectly free and competitive and even knew that markets produce unequal outcomes! I know, shocking. It's easy to assume that the only reason Adam Smith preferred free markets to the old feudal 'command and control' society was because he didn't know that some people might end up richer than others. But no, it seems he was quite smart and he figured that out all by himself:

​Smith did not imagine that this liberal program would solve all of humanity's problems, or that it would result in a social order with even rough equality of possession. Smith writes, "the rich and opulent merchant who does nothing but give a few directions, lives in a far greater state of luxury and ease...than his clerks, who do all the business." The clerks too live better than the artisans, Smith notes, who in turn live better than the poor labourer on whose efforts the whole system relies.

John Tomasi, Free Market Fairness, 8, 9.

So whatever reason Smith had for saying things that caused people to later view him as the founding philosopher of capitalism, that reason was not that he hadn't read Karl Marx (Marx having, alas, not yet walked the earth while Smith was around). Smith's reasons were more to do with the overarching benefit to be gained from free markets, despite the inherent inequalities of fortune:

​Smith adamantly rejected the view, common in his day, that the working poor had fundamentally different capacities than those in more fortunate classes...Smith was convinced that the surest way to improve the condition of the poor over time was by creating the conditions of a flourishing free market in which the productive resources of a nation - material, technological, and human - might be developed and exercised.

Tomasi, Free Market Fairness, 9.
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By now everybody over the age of 5 is very much aware that life is not fair and that not everybody starts with the same advantages. The more important question is whether everyone has the capacity to make something of himself or whether, instead, we should just assert that some people will never improve their lot if left to their own devices so we might as well start redistributing everything.

Even if we want to proceed cautiously by redistributing some things and not others, by what principle shall we decide which things to redistribute and which things to leave untouched? As Friedman asks, if you embark upon a scheme of cutting the rich down to size on what basis would you choose to treat self-made wealth differently from inherited wealth? After all, isn't 'self-made' wealth usually 'inherited' indirectly by people who had supportive parents, or went to the right schools, or met the right people, or grew up on the right side of the tracks, etc? How will you distinguish between the deserving and undeserving rich? 

Consider also that every redistributive mechanism can be side-stepped by anyone with an averagely good lawyer (and these days all the hacks are available for free on google for anyone with an average amount of smarts). Now that inheritance is taxed, all the rich people are deciding not to leave an inheritance; there are more tax-efficient ways to funnel the money, for instance by buying up a small African principality or an island of your own somewhere in a remote sunny clime where the authorities are too clueless to know one end of a tax law from the other. You then end up with a situation where the state must encroach more and more on private citizens to stop them from evading/avoiding every redistributive effort the government can come up with. By such increments, chasing after equality is not only elusive, but it also comes at a cost to freedom.

This is why Friedman's book is called 'Capitalism and Freedom', not 'Capitalism and Wealth'. It's really a book about freedom.

I find it difficult to justify either accepting or rejecting [the capitalist ethic], or to justify any alternative principle. I am led to the view that it cannot in and of itself be regarded as an ethical principle; that it must be regarded as instrumental or a corollary of some other principle such as freedom.

Capitalism and Freedom, 164, 165.
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It's not a defence of capitalism because of how ethical and morally upstanding capitalism is. It's a defence of freedom.

It is just very unfortunate that freedom leads to some people becoming very wealthy, because of course wealthy people are so infuriating, dripping diamonds everywhere and buying expensive bottles of wine while others are starving. Instead of annoying everyone rich people should do everything within their power to sell all they have and give away all their money to charity. It's for the redemption of their own mortal souls.

​Meanwhile, encroaching upon everybody's freedom in a bid to get rid of the 1% of rich people is just cutting off your nose to spite your face - feeling happy to be a bit poorer as long as it means your neighbour is also a bit poorer, rather than face a situation where you are a bit wealthier but your neighbour is massively and intolerably wealthier than you. After all, wanting to be free is the first and most basic principle of being human, so becoming less free as a way of ensuring that other people will become less rich is not a worthwhile trade-off.