by Fred E. Foldvary
Inequality, Poverty, and Unemployment
All large economies have unequal distributions of income. We first examine how to measure inequality, and then inquire as to why it is ubiquitous, existing in all cultures and economic systems, and the morality of equality.
A simplistic way to measure inequality is to count the percentage of the income obtained by the top or bottom x% of the people, such as saying that the top 10% own 50%. But to really measure the extent of inequality, we need to take account of the entire distribution, not just one part of it.
One widely-known way to depict inequality is the "Lorenz curve." This is a square with a diagonal drawn from the bottom left to the top right. The horizontal axis measures the cumulative percentage of population, with zero at the left and 100% at the right corners of the square, from the poorest (on the left) to the richest. For example, the point 3/4 of the way from the left indicates the lowest 75% of the population.
The vertical axis plots the phenomenon being measured, such as income or wealth, with zero at the bottom and 100% at the top. If the distribution has complete equality, the Lorenz curve coincides with the diagonal line. The more unequal the distribution, the closer the curve to the bottom and right sides of the square. A totally unequal distribution would have one person owning everything and the rest nothing, which would be a curve along the bottom and right sides of the square.
The Lorenz curve can be used to generate a number that
measures inequality, called the "Gini coefficient". This is
calculated by measuring the area between the diagonal line and
the Lorenz curve, and dividing it by the area of the triangle
formed by the diagonal and the sides of the square. The greater
the ratio, the greater the inequality. The Gini coefficient (G)
can also be measured directly from the distribution. Let n be
the number of persons or units in the distribution, y be the
average income or wealth of the distribution, and y1 be the
highest income (or wealth), y2 the second highest, etc., then G
= 1 + 1/n - (2/(n2 * y)) * (y1 + 2y2 + ... + nyn).
An easier way to calculate inequality is the "inequality
index" developed by the author. First we measure the
concentration of the distribution. Suppose the distribution is
(50, 30, 20) for three persons. The Herfindahl concentration
index is calculated by first computing the fraction of the total
held by each person. This would be: (5/10, 3/10, 2/10). Then
square each fraction: (25/100, 9/100, 4/100). Finally, add up
the squares: the total in this case is (25+9+4)/100 = 38/100, or
.38. This is the concentration index C. To get the inequality
index I, simply multiply C by N: .38 * 3 = 1.14. Perfect
equality has an index of 1, so the greater the inequality, the
greater the index. For example, for three persons, if one had
all and the other two had nothing, the index I equals 3.
To understand why inequalities exist, we can divide
incomes by the returns to factors, as wages, rent, and capital
yields (along with interest income, which originates in any of
the three factors). Obviously, if the ownership of land and
capital goods is unequal, then this explains a major source of
income inequality. But then we can go deeper and inquire as to
why assets are unequally owned.
Property is obtained by two methods: voluntarily and by
force. Some wealth and a great amount of land has been obtained
through conquest, which accounts for many great fortunes, and
thus much inequality in places such as Latin America, where
estates date back to the Spanish conquest. In some cases,
monopoly power has been a source of income which is inherently
unequal, and government-provided privileges and subsidies have
been a key source of unequal income.
But a great deal of wealth has also been accumulated
through voluntary means, by entrepreneurs and their lucky heirs.
The profits of entrepreneurs are a return to their labor. Wages
are unequal due to differing abilities, education, goals,
effort, and just plain luck. Discrimination is also a cause of
inequality, although in a prosperous market, it is a minor
cause, since there are ample opportunities, including self
employment, and the market penalizes discrimination with higher
costs and lower profits. Normally, effort plus talent are get
their just rewards in a pure market economy. But when
interventions create unemployment, employers can be more choosy,
and are then able to discriminate against those they dislike.
Some social scientists have argued against income
inequality, saying that a poor person values an extra dollar
more than a rich person. But this is not universally so, and
such subjective values cannot be measured or compared. Even if
this is true for most people, it does not morally justify
stealing wealth from the rich, and taxing the rich to benefit
the poor would also create disincentives to create wealth,
leading to less production and employment.
A sounder argument against inequality is that the rich
can give their children a better head start, with better
education and other opportunities. In a pure market economy,
however, all have an opportunity to obtain an education and
employ their labor, even though the wealthy have better
opportunities. But again, the universal ethic does not permit
stealing out of envy, and economically, such theft would reduce
opportunities by reducing enterprise.
Much of the inequality that exists in the world today is
not due to better talent or luck, but from privileges and
plunder gained through government coercion, especially the
taking of land from previous inhabitants. Taxes on wages deepen
this cause by reducing the ability of workers to save income and
accumulate capital. As Henry George (1883, p. 9) stated, "at
the bottom of every social problem we will find a social wrong."
When the benefits of land and other natural resources are shared
equally, a major cause of inequality is eliminated without
resort to the forceful taking of legitimately earned wealth.
Taxes can be characterized by how they relate to
inequality. A tax is called "progressive" if the tax rate is
higher for higher amounts of the thing being taxed, whether
income or property. A "regressive" tax has a higher rate for
lower income or property. A flat or proportionate tax has the
same rate for all levels of income or property. An income tax
may appear to be progressive, with higher rates on higher
incomes, but actually not be if high-income earners are able to
avoid the tax with deductions and exemptions. Also, a tax or
fee may appear to be proportionate, but actually be progressive.
For example, if an assessment is paid by land owners, equal to
the amount of their land rent, then the tax rate is
proportional, with the same rate for all sites, but if the
ownership of land is concentrated among the wealthy, then in
effect the assessment is progressive.
Taxes are often imposed not just to raise revenue, but
to redistribute income to something allegedly more just. But as
Henry George (1883, p. 83) noted, "As to what is the just
distribution of wealth there can be no dispute. It is that
which gives wealth to him who makes it, and secures wealth to
him who saves it." A just distribution is the outcome of a just
process. And the universal ethic (described in Chapter 1)
prescribes that the just process in the distribution of income
is the full retention of wages and capital yields by those who
produce wealth, and the sharing of the yield of land by members
of a community. Whatever inequalities arise from this process
stems ultimately from unequal talent, effort, and luck. Those
inheriting past wealth, or talent, or finding luck, may not
deserve them more than others, but justice is not about fairness
in the fortunes of fate but the deeper equality of each person
being able to freely pursue one's own life.
2. Poverty: the great enigma of economics
We began this book with the question of prosperity and
social justice, and the realization that our ideals must be
founded on sound principles. The first eight chapters have laid
out the principles of micro-economics, the theoretical
foundation of economics. We will now apply them to analyze the
issues of poverty, economic inequality, unemployment, and other
The greatest problem in economics is the explanation for
and solution of poverty. The French economists of the 1700s,
whose school of thought is called "Physiocracy" (the rule of
natural law), examined the poverty of French peasantry and
proposed free trade and a tax only on "net product," which we
now recognize as rent. Adam Smith also called for unrestricted,
free exchange as the way to create the "wealth of nations."
David Ricardo analyzed free trade further and also noted the
suitability of land as a source of revenue. Henry George,
therefore, did not really break new ground in his policy that
called for free trade and a tax only on land rent, but he was
foremost in focusing on the problem of poverty in the midst of
progress, on just why advancing wealth and technology did not
George starts his classic Progress and Poverty with a
statement of the puzzle:
"At the beginning of this marvelous era it was natural
to expect, and it was expected, that laborsaving inventions
would lighten the toil and improve the condition of the laborer;
that the enormous increase in the power of producing wealth
would make real poverty a thing of the past" (p. 3). Not only
could one expect material prosperity for all, but also, in
lifting everyone from want and economic anxiety, the moral
uplifting of social life:
"And out of these bounteous material conditions he would
have seen arising, as necessary sequences, moral conditions
realizing the golden age of which mankind have always dreamed.
Youth no longer stunted and starved; age no longer harried by
avarice ... discord turned into harmony!" (pp. 4-5). This is
not to say we would have utopia, but that the core of our
economic problems would disappear, making other social problems,
such as raising our children as sympathetic members of society,
much easier to resolve.
Such were the hopes of enlightened people at the dawn of
the industrial age. George wrote 100 years after the beginning
of the industrial revolution, and it is now another 100 years
later. The idea of progress has remained popular, but, as
George wrote, "Now, however, we are coming into collision with
facts which there can be no mistaking. From all parts of the
civilized world come complaints of industrial depression; of
labor condemned to involuntary idleness; of capital massed and
wasting; of pecuniary distress among businessmen; of want and
suffering and anxiety among the working classes" (pp. 5-6).
That these words apply today just as much as they did
100 years ago is a sad testimony to the failure of our
institutions to have implemented the remedies for these
problems. This in part is due to the economic ignorance of the
public, which is exploited by authorities. Armed with economic
knowledge, the public will demand that the remedies be applied
immediately and no longer be fooled by fallacies and economic
For George then points out that the existence of similar
problems throughout the world cannot come from local and unique
causes. These problem occur under many cultures, historical
settings, and types of government. "Evidently," he wrote,
"beneath all such things as these, we must infer a common cause"
(p. 6). Moreover, a study of new territories versus old ones
and the history of economic development demonstrate that while
people may start out in equality, as an economy develops, as
wealth grows, so too does poverty. Social difficulties are
"engendered by progress itself ... The promised land flies
before us like the mirage" (p. 8).
George, of course, does not deny that on an absolute
scale, the condition of many workers has improved with technical
progress. But the lowest classes still lie in the muck of
poverty - witness the homeless in the U.S.A. today, and the
slums of the inner cities. "Those who are above the point of
separation are elevated, but those who are below are crushed
down" (p. 9). So, George poses the problem:
"This association of poverty with progress is the great
enigma of our times. It is the central fact from which spring
industrial, social, and political difficulties that perplex the
world, and with which statesmanship and philanthropy and
education grapple in vain. From it come the clouds that
overhang the future of the most progressive and self-reliant
nations. It is the riddle which the Sphinx of Fate puts to our
civilization and which not to answer is to be destroyed. So
long as all the increased wealth which modern progress brings
goes but to build up great fortunes, to increase luxury and make
sharper the contrast between the House of Have and the House of
Want, progress is not real and cannot be permanent" (p. 10).
As George (1883, p. 81) stated, "For every social wrong
there must be a remedy. But the remedy must be nothing less
than the abolition of the social wrong."
But instead of eliminating the cause, many political
interests have come forth with superficial treatments of the
effects. Quack economic medicine can be recognized by noting
that it only treats effects, ignoring the causes. Even eminent
economists such as J. M. Keynes have misdiagnozed the cause as
inherent instability in markets, requiring government
intervention, when in fact it is interference in the natural
economy that has caused the turbulence in the first place.
Quack remedies include the ideas that "labor and capital" are in
fundamental conflict, that automation and technical progress is
responsible for unemployment, that profits or interest are
evils, that more and more money can solve a "lack of demand,"
and that the government has to pump up investment and demand.
Such ideas, recognized George, bring the masses under the power
of "charlatans and demagogues" (p. 11).
But economics can tell us the answer, by examining the
causes and their consequences. This we have done. We have the
philosophical foundation in Chapter 1 and the three resources or
factors of production in Chapters 2 though 4. There we saw that
the margin of production determines the wage level, and that the
wealth produced after the payment of wages and the return to
capital constitutes rent. We saw how as the margin extends to
poorer lands, wages decrease while rent increases, and how rent
also vastly increases as communities and commerce arises. We
saw how land speculation accelerates these trends by using up
land faster than warranted by current use, decreasing wages by
moving the margin of production to less productive land. We saw
how the use of more capital goods increases wages, but increases
rent also, and how wages declined back again if the capital
goods extend the margin once again to less productive lands.
Competition can lead to efficient production, but cannot by
itself raise wages which have been driven down to an
We have seen also how the taxation of wages makes
workers poorer and reduces employment, while the taxation of
production, trade, and enterprise reduces the amount of
production from what would otherwise take place, reducing
employment and wealth. Workers at the bottom, or those without
work, and thus squeezed in the double pincers of costs imposed
by government and, over the long run, ever-increasing rent. The
diversion of the rent to the holders of land title is not a part
of a pure market, since much intervention consists of taxing
labor to provide public works that benefit especially the owners
of land, thus transferring income from workers to landowners.
But government restrictions and costs are imposed, in part to
treat the effects of social problems, in part due to special
interests that lobby and pressure for privileged benefits with the
excuse of benefiting the public, and in part due to ignorance about
the causes and effects. Social problems thus provide manure for
ever more taxes and restrictions. Hence, the original and ultimate
cause is as described by George (p. 282): "The reason why, in
spite of the increase of productive power, wages constantly tend to
a minimum which will give but a bare living [for those at the
lowest end of the wage scale], is that, with increase in productive
power, rent tends to even greater increase, thus producing a
constant tendency to the forcing down of wages."
"As land increases in value, poverty deepens and pauperism
appears. In the new settlements, where land is cheap, you will
find no beggars, and the inequalities in condition are very slight.
In the great cities, where land is so valuable that it is measured
by the foot, you will find the extremes of poverty and of luxury"
Suppose a great island arose in the ocean, on which people
could cultivate plants that would give them twice the wage in the
old country. What would happen to wages in the old country. As
workers leave the old country, rent rapidly decreases as marginal
land is abandoned for the new land, and thus wages rapidly rise.
With good free land available, rents in the old country must fall
and wages must rise.
Now imagine, as George did (p. 294) that a small village grows
into a large city. Will wages be higher, will the return on
capital be greater? No. What, then, will be higher? "Rent; the
value of land. Go, get yourself a piece of ground, and hold
possession." And when the city is built, we will find luxurious
mansions armed with guards and alarms to protect themselves from
the thieves and muggers that fester in the slums.
Though poverty in the midst of progress has puzzled even
economists who should know better, "so simple and clear is this
truth, that to see it fully once is always to recognize it" (p.
295). George describes those pictures made up of a labyrinth of
lines, which you can keep staring at but can't make out - "until
once the attention is called to the fact that these things make up
a face or a figure." One follower of George looked at just such a
picture, and then realized it showed a cat. Once he saw the cat,
the figure was clear and obvious. Adherents of George's thought
henceforth have said that when one grasps the central idea of the
cause of poverty, you have "seen the cat!" The jumble of economic
activity become clear, as springing from a central principle: "The
great cause of inequality in the distribution of wealth is
inequality in the ownership of land." Land has been the foundation
of great fortunes, as said the Brahmins ages ago (George, p. 296):
"To whomsoever the soil at any time belongs, to him belong the
fruits of it. White parasols and elephants mad with pride are the
flowers of a grant of land."
Governments throughout the world react to poverty mostly by
treating the symptoms rather than the underlying causes. Old-age
insurance, medical aid, food coupons, government housing, and
welfare payments may prevent the poor from suffering, but they do
not cure the problem. They instead perpetuate poverty, first by
funding these programs with taxes on production, reducing
employment and wages, and secondly, by making it costly for the
poor to escape poverty, since they both lose benefits and get taxed
if they obtain employment. Minimum wages compound the problem by
preventing the least able from working legally. Laws prohibiting
drugs create large profit opportunities to those in the slums but
the resulting violence and crime makes it even less desirable for
business to employ people there.
Only a policy that removes the cause of poverty will cure it
permanently. The ultimate antipoverty program is the desire of
each person to better his or her own condition. All that is really
needed is to avoid putting barriers in the way of self-improvement.
George (1883, p. 78) put the matter very succinctly: "There is
in nature no reason for poverty." Remove the restrictions and tax
barriers to employment and collect revenue from site rents instead.
The elimination of taxation will raise the wage at the margin, and
the collection of the land rent will, by eliminating the
speculative and consumptive ownership of less productively used
land, move the margin toward more productive land. With this
remedy, the poverty problem will rapidly melt away as communities
regenerate themselves spontaneously.
A person is "unemployed" if she or he is willing and able to
work at the prevailing wage rate, but is unable to find employment.
As George (1879, p. 5) put it, the unemployed are "condemned to
involuntary idleness." Since an alternative to being employed by
others is to become self-employed, the presence of unemployment
implies also that it is difficult or infeasible to start one's own
enterprise as well.
But why should this be? George (1879, p. 270) called it a
"strange and unnatural spectacle" that willing workers "cannot find
employment." In his book Social Problems (p. 8), George
illustrates how odd this really is:
"Give us but a market," say manufacturers, "and we will supply
goods without end." "Give us but work!" cry idle men.
Is it possible that the number of jobs might be limited? But
people can create their own jobs, so this must imply that all
desires have been filled. But the 10th foundational proposition of
economics, as stated in Chapter 1, states that human desires tend
to be unlimited. There cannot be too much production in general,
especially so when "people suffer for the lack of things that labor
produces" (George, 1879,. p. 270). Hence, there is always a demand
for labor to fulfill these desires. The other original factor of
production being land, labor can always be applied to land, unless
something is blocking it - "somewhere there is an obstacle which
prevents labor from producing the things that laborers want" (p.
One possible block is a shortage of land, of natural
resources. If the economy an area of the earth, such as a desert,
is mainly geared to using the scanty vegetation, such as for
grazing, then too many users will lead to poverty, but not
necessarily to unemployment, unless the land is closed off to
additional users. Here, then, is the key to unemployment. The
problem is not an overall lack of natural resources. If that were
so, the prices of basic commodities such as metals and grains would
be going up as they became scarcer. But this has not happened.
Even with today's massive population, the earth has plenty of
resources available. We are not running out of oil, metals,
agricultural land, or living space.
Some unemployment is short term and an unavoidable part of a
dynamic economy in which enterprises change and workers search for
better opportunities. This "frictional" unemployment consists of
the time needed for job search, such as getting information and
interviewing. This "natural unemployment" is not part of the
Another type of unemployment is called "structural." As some
industries shrink or move to better locations, workers are left
stranded. To be employed at their accustomed wages, they need to
move or to become retrained. Again, this is natural in a dynamic
economy, and in a free market, the prospering industries can absorb
this structural unemployment, which again is temporary. "Full
employment" is thus defined not as 100% employment, which is not
even desirable, but as the situation in which the only unemployment
is short-term frictional or structural.
"Cyclical" unemployment occurs during the depression phase of
a business cycle, when many workers are laid off and can't easily
find work because the entire economy is depressed. The remedy is to
eliminate such cycles, as is discussed in the chapter on business
The unemployment problem as such is not the frictional,
structural, or even cyclical types (which is primarily a cycle
problem), but the chronic joblessness in which workers cannot find
jobs even during more prosperous times, and often remain unemployed
for years. Why would labor be continuously unemployed?
If the problem is not a lack of land, or natural resources, it
must be that some barriers have been erected between land and
labor. Something is blocking the ability of labor to freely access
natural resources to produce wealth. Who has done this? The only
institution with the power to prevent labor from mixing with land
The barriers erected by government include the prohibitions,
restrictions, and taxes imposed on labor and enterprise, as well as
barriers indirectly caused by government policy. As discussed in
Chapter 2 on labor, high taxes create a wedge between the cost of
labor to an employer (including the self-employed) and the net
earnings of an employee. By making labor more expensive, this tax
wedge reduces employment. Taxes on enterprise reduce profits and
sales, and therefore reduce employment. Policy which induces land
speculation (such as public works that increase land rent while not
collecting that rent to finance the works) can raise the price of
land above that warranted by present uses, thus reducing current
enterprise and employment.
The situation becomes even worse when restrictions are
imposed, such as minimum wage laws. Labor that would have been
employed at the below-minimum rate now is unemployable.
Unemployment insurance and welfare enable the unemployed to eat,
but make it even more difficult to find employment, since switching
from welfare to employment typically brings little extra reward for
the lowest-paid workers.
Other restrictions, preventing people from working in
certain occupations, days and hours, and other costs, such as
the costs of filling out forms and making it difficult to fire
workers, result in even less demand for labor and the attempt to
substitute machinery for workers.
Employment is like a race around a track. If we put up
high hurtles that the runners must leap over, the most able and
determined can jump them, but the others cannot. The least able
and motivated become unemployed. But if we remove all the
hurtles, then all runners can go through, even the weak ones.
Let the walls come tumbling down - eliminate the barriers of
taxes and restrictions, and all willing and able to work shall
Unemployment is not only a personal and social tragedy,
but wasteful of labor. As George (1883, p. 76) put it, "this
enormous waste of productive power is due, not to defects in the
laws of nature, but to social maladjustments which deny to labor
access to the natural opportunities of labor and rob the laborer
of his just reward."