-Caveat Lector-
~~for educational purposes only~~
The Rich Get Richer, and the Poor Get...
by Mark Skousen
"The modern market economy accords wealth and distribution
income in a highly unequal, socially adverse and also
functionally damaging fashion." --John Kenneth Galbraith
The allegation is appearing everywhere: Real average
wages are stagnating and the distribution of wealth and
income in the United States is becoming more unequal. In
his latest book, Galbraith cites recent Federal Reserve
statistics: "By 1992, the top 5 percent were getting an
estimated 18 percent, a share that in more recent years
has become substantially larger, as that of those in the
poorest brackets has been diminishing. This, the good
society cannot accept.'' According to the Bureau of Labor
Statistics, average real wages have been declining since
the mid-1970s. If benefits are included, total real
compensation has been rising, but only modestly. Finally,
Business Week (February 25, 1996) declared, "Is America
Becoming More of a Class Society?'' The magazine cites
several academic studies indicating less upward mobility
for less-educated Americans. The Wall Street Journal
(December 23, 1996) adds, "Inequality may grow for
lifetime earnings."
Critics of market capitalism are often misled by
conventional measures of economic well-being, in
particular the Lorenz curve, which measures income
distribution.
The Lorenz curve measures the percentage of a nation's
total income as earned by various income classes.
Typically, it is divided into five income groups. In
the United States, the highest fifth (the highest income
earners) usually receive 40 percent of the nation's
income, while the lowest fifth (the lowest income earners)
receive around 5 percent, Using the Lorenz curve, U.S.
income appears to be seriously maldistributed, "now the
extreme case among the major industrial countries,"
says Galbraith.
However, the Lorenz curve establishes an unfair and
misleading guide for measuring social welfare.
Suppose, for example, that an "ideal" line of "perfect"
equality is achieved on the Lorenz curve, i.e., the
highest fifth (top 20 percent of income earners) only
receive 20 percent of the nation's income, while the
bottom fifth (lower 20 percent) increase their share
to 20 percent. What does this ideal mean?
Everyone -- the teacher, the lawyer, the plumber, the
actor -- earns the same amount of income. (1)
Since few economists think equal wages for everyone
is an ideal situation, why do they think moving toward
"perfect equality" on the Lorenz curve is appropriate?
Moreover, the Lorenz curve is unable to show an increase
in a country's standard of living over time. It merely
measures distribution of income.
To measure changes in social welfare, economists often
rely on a second measure-average real income. This,
too, has its shortcomings. A single statistic may mask
improvements in an individual's standard of living over
time.
For example, average real income shows hardly any change
since the mid-1970s. Yet other measures of well-being,
such as consumer expenditures and the quantity, quality,
and variety of goods and services, show remarkable
advancement over the past 20 years. Consumer spending
rose a dramatic 40 percent per person in real terms
during this period. As Professor Richard Vedder says,
"How many Americans in 1975 had VCRs, microwaves, CD
players, and home computers?" (2)
The Work of Stanley Lebergott
Stanley Lebergott, professor of economics at Wesleyan
University, has probably done more work in this area
than anyone else. Instead of relying on general
measures such as average real income, he uses a more
commonsense approach -- looking at individual consumer
markets in food, clothing, housing, fuel, housework,
transportation, health, recreation, and religion. His
work is fascinating.
For example, he developed the following table to measure
improvements in living standards from 1900 to 1970:
Living Standards, 1900-1970
Among All Among Poor
Percentage Families Families
with ... in 1900 in 1970
Flush toilets 15 99
Running water 24 92
Central heating 01 58
One (or fewer)
occupants
per room 48 96
Electricity 03 99
Refrigeration 18 99
Automobiles 01 41
Source: Stanley Lebergott, The American Economy
(Princeton University Press, 1976), p. 8.
In Pursuing Happiness, Lebergott demonstrates repeatedly
how American consumers have sought to make an uncertain
and often cruel world into a pleasanter and more convenient
place. Medicines and medical facilities, artificial lighting,
refrigeration, transportation, communication, entertainment,
finished clothing -- all have advanced living conditions.
Regarding women's work, Lebergott notes that weekly hours
for household and family chores fell from 70 in 1900 to
30 by 1981. The 1900 housewife had to load her stove with
tons of wood or coal each year and fill her lamps with coal
oil or kerosene. "Central heating also reduced the housewife's
tasks. She no longer had to wash the carbonized kerosene,
oil, coal, or wood from clothes, curtains, and walls, nor
sweep floors and vacuum rugs as persistently. Automated and
mechanical equipment reduced her labor further .... By 1950,
over 95 percent of U.S. families had the facilities [of]
central heating, hot water, gas, electric light, baths, and
vacuum cleaners." (3)
Regarding water, Lebergott comments, "The average urban
resident consumed about 20 gallons of water per day in
1900. Rural families had virtually no piped water; 55
percent did not even have privies .... By 1990, American
families devoted two days' worth of their annual income
to get about 100 sanitary gallons every day, piped into
the home." (4)
Benefits to the Poor, Too
This kind of historical perspective is refreshing and
eye-opening. The increase in the standard of living as
measured by the quantity, quality, and variety of goods
and services has increased dramatically and profoundly
in the twentieth century, for people of all incomes.
In many ways, the poor have advanced the most and are
now capable of living in decent housing, owning an
automobile, and enjoying many of the pleasures previously
afforded by the wealthy. Cheap airline services allow
them to travel extensively. Television gives them the
chance to see sports events and musical shows previously
limited to the rich and the middle class. Compared to
yesteryear, every house today is a castle, every man
is a king.
1. John Kenneth Galbraith, The Good Society:
The Humane Agenda (Boston: Houghton Mifflin
Co., 1996), p. 50.
2. For a critique of the Lorenz curve, see my
work Economics on Trial (Irwin, 1991), pp. 187-197.
3. Stanley Lebergott, Pursuing Happiness: American
Consumers in the Twentieth Century (Princeton,
N.J.: Princeton University Press, 1993), p. 58.
4. Ibid., pp. 117-118. See also Lebergott's latest
work, Consumer Expenditures (Princeton, N.J.:
Princeton University Press, 1996).
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