Recently, as I sat in my small undergraduate economics class, another student raised his hand to share a thought about the current state of markets. Though quite well-spoken, he quickly began expressing disdain for the system of capital markets that has created the prosperity and flourishing of modern life, encapsulated in the oft-cited sentiment that “the elites are getting richer while the rest of us are held down!”
The student cited the success of entrepreneurs such as Jeff Bezos and Elon Musk, along with the growth of wealth inequality in the United States and between the developed and developing worlds. This sentiment has only grown in light of political division and rampant populism, and has now spread to both left and right, albeit with different “flavors.” While my classmate may have been speaking to sentiments that are deeply felt for Americans across the political spectrum, the quantitative and qualitative reality could not be further from the truth. In fact, the very market forces now blamed for inequality have quietly delivered more concrete improvements to ordinary life, especially for the poor, than any system in human history. Arguments for aggressive government redress of inequality often risk undermining precisely the innovations that benefit consumers most.
Empirically, statistics about inequality are often static, based only on income without taking account of consumption. This means they ignore price declines, quality improvements, and common access to goods formerly thought of as luxury. Furthermore, access has largely replaced ownership as the priority for many consumers due to the relative convenience of streaming services such as Netflix rather than purchasing and owning DVDs, for example. What matters for human flourishing is not whether billionaires exist, but whether regular people can do more, flourishing in the “ordinary business of life” as Alfred Marshall famously said. This can be seen in our access to services never dreamed of even thirty years ago. Uber and Lyft have reduced transportation costs substantially, and generated substantial consumer surplus just in the past fifteen years. The convenience of such a service for both drivers and riders has expanded access in previously underserved areas.
As an MIT study points out, “In many cities, ride-sharing platforms extend affordable transportation into outer neighborhoods where taxis rarely traveled, expanding mobility for people without cars…a form of latent quality-of-life enhancement not captured in income statistics.” Ride sharing is just one of many examples of increased consumer surplus, only made possible by a profit incentive on the part of entrepreneurs. The same could be said for food delivery, smartphones, and Amazon. Time is a real economic good, as Bastiat’s broken window fallacy points out, and convenience that increased consumer surplus disproportionately benefits lower-income households, even when these gains are not captured by income statistics.
Twentieth-century Austrian economists F.A. Hayek and Joseph Schumpeter offer helpful resources to explain the benefits of markets despite popular narratives. For Hayek, markets themselves — interaction of buyers and sellers — coordinate knowledge that no government has the ability to possess, meaning attempts to centrally correct perceived ‘inequality’ are not merely undesirable, but epistemically incoherent. As Hayek points out, “The economic problem of society is thus not merely a problem of how to allocate ‘given’ resources… it is a problem of the utilization of knowledge not given to anyone in its totality.” The consumer benefits of rideshare and delivery services are a direct result of competitive price discovery made possible by capital markets, local knowledge, and trial and error. In an almost prophetic sense, Schumpeter argues that “the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation…”
Within Schumpeter’s model of “creative destruction,” such innovations may be painfully disruptive at first, but they prevent stagnation — which would be far worse — and ultimately expand human possibility.
The benefits of capitalist innovation are diffuse, incremental, and uncelebrated, while the costs are concentrated, visible, and politically mobilizable. Schumpeter anticipated this, pointing out that “The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses. But it also, in doing so, creates conditions that make the masses unwilling to tolerate the social discipline required by the capitalist system.”
The frustration and impatience with markets of the populace is caused and enabled by the very success of the market system. Both the left and right mistake transition for decline, pointing out the “inequality” of entrepreneurs who benefit from their innovation while omitting the access and surplus offered to them.
Returning to my undergraduate classroom, the frustration of my peer is real, but his diagnosis is sorely mistaken. The ‘cure’ offered by populist would-be saviors and technocrats is worse than the disease, stifling both producers and consumers through regulatory overreach. The greatest achievements of markets rarely look like triumphs; they look like ordinary conveniences. So ordinary, in fact, that we forget how extraordinary they are.
