This article was originally published by Michael Njoku at The Mises Institute. 

It is popularly deemed a sign of moral superiority and a mark of the “progressive” mind to heavily criticize the existence of inequalities of wealth and income within the social order of the division of labor and private ownership in the means of production.

However, the sober mind, careful of being unduly biased by errant ideological presuppositions, is often found to hold views that run contrary to the prevalent lines of reasoning advanced by these critics. This includes the validity of the teachings of economics, not on the basis of blind belief, but as an outcome of scrutinizing the logical chains of reasoning advanced and the necessity of certain conclusions, including the reality of the existence (and even benefit) of inequalities in a free-market, capitalist society.

This article affirms an economic ground for differentials in wealth and income of individuals under a capitalist system of production. Additionally, it offers a defense of these differentials, as logically necessary outcomes of socio-biological inequalities among acting men within the social order of division of labor and private ownership in the means of production.

Social Division of Labor As Means To Ends

Classical economics recognizes that greater productivity is to be derived from the social division of labor relative to autarkic self-sufficiency. It also recognizes that labor—the human factor of production—is essentially defined by its variability and differences in capacities possessed by various individuals in society. In regard to this last fact, all that the economist can say is that inequality exists among individuals and that it is causally relevant to the emergence of subsequent differences in outcomes among acting men within a market economy. Mises put it very clearly in Human Action as follows:

Economists must never disregard in their reasoning the fact that the innate and acquired inequality of men differentiates their adjustment to the conditions of their environment.

Thus, individuals with varying skills, personalities, and mental dispositions integrate themselves into the social division of labor in order to satisfy their most urgent wants better than they would under autarkic conditions. The Ricardian Law of Association explains the tendency of these individuals to intensify their voluntary cooperation in the social division of labor given the prospect of better want satisfaction.

Origin of Differentials of Individual Wealth and Income in a Capitalist Society 

Each individual, in choosing his career or line of work, goes where the expected marginal value productivity of his labor is higher. This is achieved by means of the price system. For specific economic categories, such as the entrepreneur and capitalist, this is a risky venture implying the possibility of losses, since all actions aimed toward the future are necessarily uncertain. Furthermore, each participant in a given productive venture has claims to definite quantities of output by virtue of titles to definite quantities of input factors in the production process. Also, the contributions of each participant are imputed as a premium, which is graduated according to the height of value attached by the consumers to this contribution in the final product. The interplay of these facts explains the origin of inequalities of wealth and income in a market society. Thus, we can essentially boil down the origin of inequality of wealth and income in a capitalist system to the following factors:

1. a) differentials in the physiological constitution and geography of acting men as evidenced in their various skills, competencies, and intelligence;
2. b) better foresight and correct anticipation of the future state of the market by certain individuals relative to others;
3. c) marginal value productivity of various input factors—implying that only the final consumers, by their evaluations, can judge whether one’s contribution to the final product is worthy of high remuneration or not.

Consequent upon the above demonstrations, the Marxists’ claim that the entire output of production belongs to labor, as an economic category distinct from entrepreneurs, capitalists, and landowners, becomes grossly unfounded on the following grounds: First, labor is not the only input factor in the production process; it combines its powers with the natural powers stored up in the capital goods and resources previously accumulated by the capitalists and landowners, respectively. Second, the central entrepreneurial task of directing these factors of production to those lines that aim at satisfying the most urgent of the not-yet-satisfied needs of consumers, and the subsequent success of this task as evidenced by profits, would not have been made without the purposeful actions of the entrepreneur.

Comparative Criteria of Justice Under Capitalism and Socialism

Every socioeconomic system implies a logically prior ethical framework by which the actions of individuals are evaluated. With the prior sanction of this ethical system, it becomes established how the future actions of men in society would be evaluated. Here, we shall look at the comparative criteria of justice under capitalism and socialism, respectively.

The distributive justice of a capitalist system is tied to its peculiar ethic of private property. All property in a capitalist society—including inputs to productive ventures and proceeds from them—are clearly defined and can be traced to specific owners. Ownership title to property is gained through the original appropriation of previously unowned resources and contractual transfer of existing property titles from a previous owner to a new owner. Every man cooperating in the social division of labor is entitled to the products of his efforts in the production process. There is no room for arbitrariness under this distributive criterion. Only by not participating in production or by means of aggression and violence by the state can a man be denied his entitlements.

The socialist distributive criteria, on the other hand, disconnect productivity from reward insofar as property relations between individuals and input factors are less defined, and given that all the input factors are “collectively owned” by the socialist community with control of its allocations being vested in the hands of a designated caretaker. Under this state of affairs, income is assigned and calibrated according to the arbitrary value judgments of the planner as against the evaluations of the final consumer under capitalism. This includes the decision to enforce quantitatively equal distribution of proceeds of production among participants in the social division of labor of the socialist community—regardless of differentials in skill and level of complexity of the task.

From the above, it follows that justice in a capitalist system is evaluated differently from justice in a socialist commonwealth. More particularly, the socialist conception of justice aims at the violent enforcement of egalitarianism and subjection of the able and competent producers in complete servitude of the less able and less competent.

Misapplying the criteria of the distribution of socialism to a capitalist system would have the effect of destroying the incentive structure that impels action under a capitalist system of production. When individuals can no longer tie the level of productivity to reward due to violent intervention, they become disincentivized to produce as they would in the absence of violent intervention. Thus, the ultimate outcome of this would be a fall in productivity.

There is a critical error in discussions about wealth and income distribution and, consequently, justice under a capitalist system. This leads to a tendency to transfer the arbitrary distribution criteria of a centrally planned economy to the private property criterion of a free-market economy. When people criticize the distributive justice of a capitalist system, all they merely imply is a substitution of the socialist distribution criteria for the existing state of affairs.