Debating Income, Wealth, Self-Help, and Thrift Inequality

Which articles are which, however, often turns on what readers have come to expect and wish to believe.

Robert Samuelson in the Washington Post outlines inequality claims, facts, and statistics, and makes clear that no easy solutions exist. For students debating freedom vs. equity “in the realm of economics,” this article is worth reading carefully.

To track economic progress, writers on income issues often separate society into “quintiles” so income changes over time across households in each fifth can be compared. Critics of income and wealth inequality also look at income gains for those in the top 10%, 1%, and sometimes top .1%.

But slicing up society this way and comparing household income is challenging. In looking at changes in household income over time–from 1980 to 2010, for example–not only income can change, but also the composition of households. If there are more single-parent families in 2010 than in 1980, then lower household income data may be a consequence of a more single parents trying to manage families. More on changing households from Population Reference Bureau here. Big changes since 1940.

(More on federal policies and family structure in John Goodman’s Forbes article “Are Liberals At Fault For The Breakup Of The Family?“)

Another key issue: individuals and families move from one quintile to another over time. The U.S. continues to be a mobile society, with people often moving from place to place, job to job, and from one income level to another.

In college, for example, most have low or no income and many accumulate much debt. But once in the workforce with a college degree, people usually jump to higher income quintiles. And those without college who get training as, say, mechanics, plumbers, electricians, or health care training, soon move up the quintile ladder. No surprise too that people working longer hours, sometimes at two jobs, earn higher incomes than they would working fewer hours.

Plus, people and households have very different spending and savings habits. Some eagerly buy new clothes, cars, and gadgets, and live in larger homes or apartments. Others are more frugal and thrifty.

In my family, we have relatives in Scotland. Usually when my mother and uncle mentioned our Scottish relatives, they would make some reference to them being overly frugal. No surprise that in old age our Scottish relatives have accumulated significantly more wealth.

The Scottish tradition of thrift and self-improvement has its origins in Calvinism and the Scottish Enlightenment. Samuel Smiles, author of Self-Improvement, Thrift, and Character, helped popularize these values in the 19th Century. Nearly the entire country of Scotland rose from poverty to prosperity through the 18th and 19th Centuries. The Economist has this in an article on Samuel Smiles:

Smiles’s idea of self-improvement, however, was different from the torrent of positive-thinking verbiage that dominates the market today. He was raised in the Scottish lowlands and drew from the Calvinism of his surroundings a belief that life was not merely best understood, but also best experienced, as a struggle. Difficulties, he thought, were there to weed out the weak and build what he called “pushing character”. The sort of people Smiles held up as models—the potter Josiah Wedgwood and the engineer George Stephenson were two favourites—epitomised the virtues of doggedness and conviction.

For Smiles, striving was the foundation of society as well as the key to success. Hard-working men (and he nearly always had men in mind) produced good laws and a strong economy. They also limited the damage caused by bad leaders, although an intrusive state might wear down their best qualities over time. “Where men are subjected to over-guidance and over-government,” he wrote, “the inevitable tendency is to render them comparatively helpless.” [Economist source.]

Smiles actually saw too much wealth as a challenge to developing sound habits and good character (he is critical of aristocrats living on rents and privilege rather than the wealth of self-made men):

Most of all, Smiles loathed those born to wealth and privilege. He regarded the aristocracy, so praised by earlier conduct-book writers, as a bunch of layabouts. Men could, he explained, overcome their coddled origins, but it was a hard and (literally) laborious road that few were likely to take.  

Lawrence Reed writes about Samuel Smiles’ Self-Help in his article, “Dusting Off a Man and His Classic,” which begins by noting its influence as far away as Turkey and Japan:

In 1870 the sultan of Turkey gave a book by a Scotsman to his entire entourage of top-ranking officials. The Khedive of Egypt had the same work inscribed and painted on the wall of the Royal harem. Two years later the Meiji dynasty ordered the book to be issued throughout Tokyo’s school system. Eventually every prefecture in Japan followed suit. General George Custer described the volume as his favorite text. Many people kept it next to their Bibles. 

What was this book, and who was its author? It was called, simply, Self-Help, and its author was a man named Samuel Smiles.

Smiles book Thrift is free for Amazon Kindle and on Google Books and Gutenberg. From the Preface to Thrift:

This book is intended as a sequel to “Self-Help,” and “Character.” It might, indeed, have appeared as an introduction to these volumes; for Thrift is the basis of Self-Help, and the foundation of much that is excellent in Character.

The author has already referred to the Use and Abuse of Money; but the lesson is worthy of being repeated and enforced. As he has already observed,—Some of the finest qualities of human nature are intimately related to the right use of money; such as generosity, honesty, justice, and self-denial; as well as the practical virtues of economy and providence. On the other hand, there are their counterparts of avarice, fraud, injustice, and selfishness, as displayed by the inordinate lovers of gain; and the vices of thoughtlessness, extravagance, and improvidence, on the part of those who misuse and abuse the means entrusted to them.

Returning from the Sultan of Turkey, Egyptian harems, and Meiji dynasty Japan to 21st Century America, we return to today’s debates on income inequality. (Somehow we don’t hear of debates over “thrift inequality” where choices about saving and spending would take center stage.)

Summarizing, debates over income and wealth distribution in America should include changes in household size and measures of income mobility. Below is LearnLiberty.org video from 2012 with scholars discussing and debating these issues.

But first, here is a key point on overall wealth gains since 1980, made by Robert Samuelson in his Washington Post article:

True, the top 1 percent outdid everyone. From 1980 to 2010, their inflation-adjusted pretax incomes grew a spectacular 190 percent, almost a tripling. But for the poorest fifth of Americans, pretax incomes for these years rose 44 percent. Gains were 31 percent for the second poorest, 29 percent for the middle fifth, 38 percent for the next fifth and 83 percent for the richest fifth, including the top 1 percent. Because our system redistributes income from top to bottom, after-tax gains were larger: 53 percent for the poorest fifth; 41 percent for the second; 41 percent for the middle-fifth; 49 percent for the fourth; and 90 percent for richest. [Source]

This LearnLiberty.org page has background and a two-minute overview of Steven Horwitz’s discussion of income mobility. And the 24-minute inequality debate is below: