Business Is One Reason For

Economic Inequality--And Also

For Equality
Bill Conerly
Senior Contributor

Is business a reason for economic inequality, or does business reduce

economic inequality? I believe the answer is “Yes.”

Private business both increases and decreases inequality, in conjunction

with changes in the structure of the economy, technology, social attitudes
and public policy. Private business does not definitively determine the
distribution of income, but it influences it.

(This article is based on my presentation in Moscow, Russia at a conference

sponsored by Carnegie Moscow Center, September 19, 2018.)

I will preface my remarks with a caution about being too focused on

inequality. I care much more about poverty. For example, income
distribution is far less equal in my own country of the United States than in
a country such as Cambodia. Yet the poor in America have much higher
incomes than the average Cambodian.

Business practices affect inequality in three different ways, through

corruption, scalability, and the search for undervalued resources. I close
with a story about a for-profit business helping people who have lost their
jobs.
Corruption

Let’s begin with a sad case in which business increases inequality and
shrinks total economic activity. This is corruption.

I first studied income distribution when I was in my early twenties. As you

can see from my hair color, that was a few years ago. Professor Martin
Bronfenbrenner, an expert on the subject, told us that Haiti had the most
unequal income distribution. This was during rule by the Duvaliers, Papa
Doc and his son Baby Doc. The inequality arose from government favors to
key business leaders, such as granting monopolies and government
contracts. The rich got richer, and the poor people got less for the money
they spent and had fewer opportunities to earn money. The problem was
not business, but the collusion between corrupt government officials and
dishonest business people.

This pattern plays out over and over again. The extreme examples include
the Philippines under Marcos, Indonesia under Sukarno, and today
Cameroon under Biya. And other cases are abundant.

Business will be corrupt where government officials are corrupt. But where
government is generally honest, business will be generally honest. Business
leaders will reflect the morals of the government and the society under
which they operate.

Reducing corruption produces two good results: it increases total economic

activity, while also increasing the welfare of poor and middle-class citizens.

The sad part of this issue is that I cannot tell you how to get from here to
there. Take Sicily. The island has a history of corruption dating back
hundreds of years. How can Sicily become more like Sweden? I don’t know,
but I am certain that Sicilians would be much better off with less
corruption.
Scalability of Innovation

Now I turn to the greatest force generating economic inequality today:

scalability, in technology and in business. Venture capitalists considering an
investment in a start-up will typically ask, “Will it scale?” A simpler
question would be, “If we want twice as much revenue, do we have to work
twice as hard? Consider Google. Once it built its search engine so that one
person could use it, providing the service to additional users was very easy.
We say that it scaled

My maternal grandfather was a farmer, who had about 40 hectares of

scrubby land. If he had been a great farmer, he might have been able to buy
more land, increasing the scale of his farming. The benefits of his great
ability might be spread over 100 hectares. That would not have made him
rich, but he would not have been so poor.

Now think of a scientist developing better seeds or fertilizer or pesticide. If

this scientist is great, benefits could be spread over millions of hectares. The
gains would mostly go to the consumers of agricultural products, with some
also going to farmers using the scientific advances, but a small share of the
gains would go to the scientist or the company employing him or her. That
small share, multiplied by huge, global value, produces a large fortune. The
scalability of the achievement increases inequality, at the same time that it
makes everyone better off: scientists, farmers, and consumers of
agricultural products.

My other grandfather was a clerk. He made a living doing arithmetic. If he

had been a really great clerk, he might have been promoted to a manager of
other clerks, helping six or seven other clerks do better work. But today a
computer programmer can help millions of clerks do better work. The
programmer, or his company, will gain a portion of the benefit, increasing
economic inequality while the overall economy grows larger.
This concept extends to managers of organizations. A person who improves
the overall performance of a large corporation, helping thousands of
workers be more useful, has added billions of rubles of value to the world.

The ability of corporations to benefit from the work of their scientists,

engineers and managers increases the compensation of these workers.
Today in my country, very few of the wealthy people inherited their
fortunes. Most of them earned their fortunes by providing great value.

An alternative view of inequality derived from older experience. In this

view, we all produce goods and services, but people in power extract a larger
share. That certainly appeared to be the case in feudal societies. And corrupt
countries validate this view: that some of the rich stole their fortunes. But
great wealth can also come by providing value that scales across the
economy. Public policy makers should understand that this source of
inequality is actually good.

Undervalued Resources and Underserved Markets

So far I have talked about business increasing inequality through corruption

and scalability of innovation. Now let’s turn to how businesses reduce
inequality, and this is a wonderful story. Businesses use resources,
including land, raw materials and labor. Businesses are always alert for
undervalued resources, which means resources that can be bought cheaply.
When businesses can find people willing to work at low wages, they will hire
them. As businesses compete for these low-wage workers, the wages and
working conditions improve.

After 1945, Japanese labor was cheap. American companies imported many
products from Japan, and this use of undervalued labor led to higher wages
for the Japanese. The same process pushed wages up in Hong Kong, Korea,
Singapore and Taiwan, the “Four Tigers” of Asia. Poverty was greatly
reduced in these countries.
The greatest example of improved conditions for poor people is China.
Hundreds of millions of people lived on dreadfully low incomes under
communism. After the country opened up for business, production
increased and poor people did better. When international trade increased,
the poor did much better.

China’s neighbors learned the process, and growth has helped poor people
across Asia, especially in the poorest countries of southeast Asia.

We define extreme poverty as living on less than $1.90 per person per day.
That’s about ₽132 person per day. The number living in extreme poverty has
dropped by over one billion people in a 30-year period. This is the greatest
reduction of poverty in the history of the world. Let me repeat that: The
greatest reduction of poverty in the history of the world.

This wonderful achievement was not the result of a government initiative.

Government provided roads, a justice system, and other necessary
processes, but it was private efforts that made the difference. Adam Smith
had the great insight that widespread benefits come from people in business
pursuing their own self-interest. And this alleviation of poverty is a tribute
to the power of self-interest, pursued honestly.

At the same time that companies are looking for undervalued resources,
they also look for underserved markets. We find private companies bringing
inexpensive clothing to poor people. Cheap mobile phones. And pay
attention to India, where the country’s richest man is offering extremely
cheap mobile calls and data. Poor people’s incomes are rising, and their
ability to buy goods is increasing.

Small Initiatives

Finally, I will close with one illustration of ways in which profit-seeking

businesses earn a profit and reduce inequality at the same time.
In the United States, people who are laid off from their jobs receive
unemployment compensation equal to about half of their wages, for a
period of six months in most cases. Businesses are taxed to support this
system, and the taxes reflect how much each company adds to the costs of
the system. Each company is taxed based on the number of people they lay
off, their wages, and how long it takes these people to find another job.

Years ago I researched this system and discovered a few examples of

organizations helping unemployed people find new jobs more rapidly. My
research was incorporated into a company called NextJob, which is a for-
profit company helping people find jobs. (I am not affiliated with this
company.) Some of their fees are paid by companies that laid off workers,
who keep their tax bills low by helping their former employees find new jobs
quickly. Another source of fees is banks that have lent money to people who
then lost their jobs. If they can find new jobs quickly, they can pay back the
banks.

This company is helping workers stay in the middle class. It’s helping
employers keep their tax costs down, helping banks collect on the loans they
have made. And NextJob itself is making a profit.

Conclusion

Profit-seeking businesses are a part of the evolutionary process of the

economy. At their best, they find ways to improve the world, by innovation
in technology and business processes, through using undervalued resources,
and offering products to underserved markets. In an honest society, profit-
making businesses help the poor as well as the rich.