0.4 Income distribution  (Page 11/18)

As we will see in Chapter 7A, the most efficacious way to reduce the threat of labor displacement in production is by expanded and improved public investment on the expenditure side of the government budget. Successful investment in new human capital bolsters employment in the face of rapid technological change. We have already noted that the best way to increase income inequality is to have a large number of people with zero income (i.e. unemployed).

Income inequality and the economic literature

Concerns over economic inequality are by no means new in economics. Adam Smith, widely recognized as an early effective advocate for capitalism, pronounced himself in 1776 in favor of measures, such as progressive taxes, to achieve some income redistribution in favor of the poor. To quote, Smith from The Wealth of Nations , Chapter 2: “The rich should contribute to the public expense, not only in proportion to their revenue, but something more than that proportion”.

Among the most prominent among 20th century economists voicing concern over income inequality was Professor Henry C. Simons, widely recognized as one of the founders of the “Chicago School of Economics”.

While Simons was clearly market oriented, his various books show that throughout his career, he was troubled about excess rewards to the wealthy in capitalism. He sought to “prevent capitalism from destroying itself by its own excesses”. See Henry Calvert Simons (1948), Economic Policy for a Free Society , Chicago, IL: University of Chicago Press AND________________________

Winston Churchill, the politician-historian who led the U.K. during World War II, also pronounced on inequality: “The inherent vice of capitalism is unequal sharing of blessing. The inherent virtue of socialism is the equal sharing of miseries”. Churchill speech, House of Commons, October 22, 1945.

Simons was not alone in believing that capitalism unchecked could worsen income distribution. This view was also voiced by other early members of the Chicago School, including -Frank Knight, Jacob Viner, and, to a degree the Austrian Friedrich A. Von Hayek. Von Hayek came to Chicago in 1950, very late in his career. Other leading universities in Britain and the U.S. did not seek him out. But Von Hayek’s approach was clearly reflected in much of the Chicago school’s thinking almost from the beginning.

Of these four, only Hayek won the Nobel Prize (in 1974). Frank Knight, a true pioneer in the analysis of risk and uncertainty, died before the prize could come to him. Henry Simons might also have become a Nobel Laureate, but for his premature death by his own hand in 1947.

Knight, Von Hayek, Viner and Simons were all profoundly serious thinkers. All cared deeply about the uses to which the discipline of economics were put. All were critics of the results of unfettered laissez-faire capitalism, but all abhorred socialism and central planning. Knight believed that capitalism inevitably produced growing inequalities of income. Still he thought capitalism the only workable basis for economic organization. Hayek and Viner rarely pronounced on income inequality , but Henry Simons was clearly against it.