Thomas Piketty and his colleagues at the World Inequality Lab recently released the Global Justice Project, a sweeping call to shrink global income and wealth gaps through steep taxes on the world’s richest and a new fund to redistribute the proceeds. Meanwhile, self-described “democratic socialists” are scoring wins or nominations in New York and other blue states for the upcoming midterms. Their chief complaint about American capitalism is its excessive economic inequality.
It is the latest chapter in a long-running argument: that capitalism inherently widens the gap between rich and poor, and that only an expansive redistributive state can close it. One need only look to Karl Marx, or more recently to Piketty himself, for the intellectual scaffolding.
However, our systematic review of the evidence, recently published (with Vincent Miozzi at Florida Southern College) in the Eastern Economic Journal, presents a more nuanced picture. Our study suggests that the relationship between economic freedom, as measured by the Economic Freedom of the World (EFW) index, and income inequality is not as dire as commonly portrayed.
Economic freedom embodies principles of individual choice, private property rights, and market competition. Historical evidence strongly supports the view that economies characterized by greater economic freedom generally enjoy higher levels of prosperity and innovation. Yet, the prevailing narrative often highlights the threat of increasing inequality as a consequence of these freedoms, leading many to advocate for more taxes and regulations in the name of equality.
Our research, which aggregates findings from 19 published studies encompassing over 300 empirical estimates, unveils a more complex relationship. We found that a sizable jump in economic freedom — a full standard deviation on the EFW index — corresponds to only a faint uptick in inequality, about one-seventh of a standard deviation in the Gini coefficient, the most widely used measure of income inequality. And most of those correlations weren’t even statistically significant. In other words, economic freedom on its own does little to worsen income inequality.
The evidence suggests that stronger property rights and a solid rule of law promote greater equality. Interestingly, factors like sound monetary policy and freer trade show only weak correlations with inequality. The size of government does not significantly influence income inequality, contradicting the belief that larger welfare states are necessary for a more equitable income distribution.
Furthermore, in stark contrast to collectivist economies which enforce caps on high incomes, free-market systems allow individuals to pursue unique objectives and investment opportunities based on their preferences and motivations, ultimately driving economic dynamism.
Critics often focus on the notion that increased economic freedom leads to greater wealth concentration among a select few. However, the modest positive correlations found suggest that while there may be instances of rising inequality alongside greater economic freedom, the overall impact is neither consistent nor large. In fact, proponents of economic freedom argue that by fostering competitive markets and reducing political interference, opportunities are expanded, which can mitigate the disparities in wealth distribution.
In a world that increasingly seeks a balance between equality and economic growth, the evidence suggests a lopsided trade-off: a small, uncertain rise in inequality against an estimated $22,000 more in real GDP per person. Whether that exchange is worth making is a value judgment, but we suspect most people would take the deal.
The debate over economic freedom and inequality is more than a mere academic exercise; it is a vital discourse with real-world ramifications. Before remaking the global economy on the premise that freedom and fairness are fundamentally at odds, we can examine the empirical evidence and move toward a more informed understanding of how to build prosperous societies that respect both individual freedoms and equitable opportunities.
It is time to shift the narrative and recognize that economic freedom, far from being the enemy of a fair society, is a reliable engine of prosperity that makes one possible.
Robert Lawson holds the Jerome M. Fullinwider Chair and Meg Tuszynski is a research assistant professor in the Bridwell Institute for Economic Freedom in the Cox School of Business at Southern Methodist University in Dallas.