Liberal welfarism has both supporters and critics, especially when it comes to wealth creation and the upliftment of economically weaker sections of society. One argument has favoured minimal, cost-effective state intervention to help individuals realise their optimum potential by creating healthy conditions for competition. Yash Dubey makes the argument.  

Liberalism, despite its successes remains the target of critiques, particularly regarding economic disparity in pay, income and wealth; of these, wealth inequality is much more serious than the other two. Income inequality could be acceptable if people earn according to their productivity and contribution. Wealth is different — people are born with inherited wealth; therefore, the inequality of endowment is of interest to many experts.

In some ways, wealth inequality can give an advantage to those with more wealth, but the solution to this is not just redistribution. The ‘incentive’ problem will come up, leading to a lack of wealth generation in the economy, in turn causing severe long-run instability. Wealth inequality is better than no wealth, and economists are always searching for ways to solve these complex problems. But beyond finding a solution, it is crucial to understand whether solving wealth inequality addresses endowment inequality, or if it is even a problem worth focusing on.

Endowment, not Wealth

Each individual is born with different qualities; it is not just their inherent wealth and assets that differ. For example, consider two boys: one is born in a middle-class family, and the other into a wealthy one. Based on economic analysis, the latter appears more advantageous but if his mother died after giving birth to him, can it still be claimed that his endowment is better? Perhaps not, as the middle-class boy most likely will not sacrifice his mother for wealth. The other boy might be willing to exchange his endowment, but adding more information regarding the endowment of both might lead him also to not accept an offer of exchange.

There can be factors outside economic phenomena that have direct and indirect effects on an individual’s economic progress. Even if wealth equality is guaranteed and the incentive problem is controlled (which is unlikely), the system still cannot be claimed to be ‘fair’ as there are inequalities that have not been taken into consideration and also cannot be controlled.

Some might have economic advantages but will lack other forms of endowment. So there is a higher probability of a system becoming more unfair if wealth inequality is guaranteed. People are meant to deal with their problems and challenges based on a given endowment. The endowments are heterogeneous and heterogeneity is an essential feature of social phenomena that makes this world an interesting and complex place to live in.

Competition and Wealth

The benefits of competition in an economic system are well-known: fair competition is crucial for the economy to evolve, and in any competition, the endowment of players is never the same. In a sprint race, each athlete possesses a different endowment. Some may be short while some are tall or very tall; those who are short have shorter strides but those tall can face disadvantages with starting blocks. Some might have great reaction time but bad finishing while some might have great natural speed but bad technique.

Every athlete has his qualities and weaknesses which differ from others; so, the challenges they have faced throughout their career would also differ. Yet, such competition cannot be regarded as unfair because endowments are also heterogeneous alongside unequal. If only a few aspects are considered, then there would be an omitted bias in concluding the existence of inequality.

Fortunately, the market system is not a zero-sum game like a sprint race. The sharing here is not form a single pie, and more pies can be produced over time. Those unable to succeed in a particular activity can switch to another sector where they might have more potential to succeed. The market system is a type of game with a scope for everyone to be a winner. Data has shown that liberal policies in countries like the USA after the 1970s have not only made the rich richer but also lifted the incomes of the poor; the same holds true for India after the 1991 economic reforms. This is because the market system is based on voluntary exchange and wealth creation.

There is therefore a need to encourage more competition in the economy. The fear that unequal endowments might lead to biased results (and not socially optimal results) remains. In most cases, policies aiming to solve income or wealth inequality tend to affect the competitive environment while not properly able to solve the endowment inequality. Solving endowment inequality is complicated because the planner has to deal with heterogeneity.

Competition is meant to play a role in giving efficient results in such heterogeneity. Its task is to optimise the given endowment sets and achieve the best possible results. The sprint race example cited earlier applies to all kinds of competitions where the endowments are always different, and still they give brilliant results with potential fairness.  It can also be argued that there is a greater possibility for people to have more freedom to deal with their problems and challenges by utilising the qualities and facilities they have with themselves to succeed in the competition.

Developing and developing countries must aim to increase competition and make it fairer with free entry and exit of firms. Government intervention in the price system and other important mechanisms must be avoided. This will lead to more development in the form of consumer sovereignty, entrepreneurship and innovation along with growth of output and employment which can also help in generating funds for welfare programs.

The Role of the State

First, there is a need to avoid policies that restrict people from take risks. Those who do not own capital to compete with others need to take up entrepreneurship and become risk-takers. Inequality plays a crucial role in providing such incentives to individuals of all income/wealth groups to do better but if it is not happening then it must be made sure that the political system or policies in a region are not causing any restrictions (less ease in doing business, inadequate infrastructure, etc.).

Rather than focusing on issues like pay, income or wealth inequality, importance should be given to increasing the competency of people. Research has shown that one of the key reasons behind economic disparity lies in skill disparity. Competent individuals are capable of improving their skills and competition is one of the primary requirements to increase competency level among individuals in society. Those in the lower income or wealth decile must not be provided with economic benefits that attempt to put them on par with others, rather there must be an assurance that they remain competent to put themselves in that position by creating value in society.

Too much poverty in terms of income and capability can induce demotivation and hopelessness, leading to further incompetency; on the other hand, too many freebies can also lead to lethargy and incompetency. The approach must be a balanced, and cost effective. Some popular policy approaches like redistribution via progressive taxes have been costly and quite ineffective as their preferential focus on income inequality seems to affect individuals’ competency by giving unequal treatment. Likewise, policies for increasing the ‘capability’ of individuals ironically tend to decrease competency.

People will become competent if they are left free to take responsibility of themselves in a competitive environment. There might be a need for the government to ensure some basic capability to its citizens, enabling them to compete effectively. Beyond that, they should be left to pursue their capabilities. This will lead to cooperation and flow of information in society, in turn leading to growth and development.

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Competition and competency must be prioritised over wealth disparity. A region’s economic performance should not be judged on income/wealth equality but on entrepreneurship and innovation that play key roles in generating value in society. Income inequality by unfair means is not supported but inequality by competent means is fair and just. Equality of income and wealth cannot necessarily make liberal market outcomes socially optimal, a conclusion based on theories with simplified conditions. Many factors are beyond our control and observation and many kinds of capabilities cannot be equal or just. It is better to do efficiently what is more in our control and assist people where needed with minimal costs.

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Banner image © Mohit Tomar, Mumbai, 2018, Unsplash.

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