Freedom to move upward in social and economic status
Multiple opportunities for individual economic success must be available in a society. In an ideally productive society, according to Landes, people “would rise and fall as they made something or nothing of themselves. . . . It would not be a society of equal shares, because talents are not equal; but it would tend to a more even distribution of income than is found with privilege and favor. It would have a relatively large middle class.”
During key years in their economic development, Britain had a large and relatively prosperous middle class, and the United States was a society of many small landowners and relatively well-paid workers. The American people’s sense of equality “bred self-esteem, ambition, a readiness to enter and compete in the marketplace, a spirit of individualism and contentiousness.”
By contrast, there was little social or economic mobility in a number of other nations. The barrier to mobility in German lands was “the division of society into status groups . . . of reserved vocation and privilege . . . lords . . . serfs and tenants . . . soldiers . . . merchants . . . journeymen [for the industrial crafts].” Similar social and economic stratification occurred among groups in India and Japan. Once a person was a part of one group, his social and economic status were determined, and it was difficult if not impossible to break free and move to another group.
Economic growth is stifled by structures and traditions that prevent social and economic mobility. Benjamin Friedman explains:
Stagnant economies do not breed support for economic mobility or for openness of opportunity. In short, they discriminate. Getting ahead is almost always linked to either getting in politics, with access to the national treasury, or by taking what others have. When growth prospects are absent, anyone with even the slightest evidence of wealth or capital accumulation is viewed suspiciously. Positive mea?sures to promote economic mobility are absent and discrimination based on birth is the norm. Issues like openness and tolerance are in the first instance a matter of making good the basic principle of equal opportunity, which in turn holds out the prospect of real economic and social mobility.
Countries also can stifle economic growth by allowing wealth to be concentrated in the hands of a few specially privileged and powerful families while the vast majority of people are trapped in poverty. In Russia and in other Slavic countries, “serfdom persisted in its worst form” long after the Industrial Revolution in Northern Europe. “So much wealth” was held “in the hands of a spendthrift nobility,” but the poor peasants had so little they could not even provide adequate demand for the purchase of ordinary consumer goods if such goods had been produced. Russia under the czars had “a privileged, selfindulgent aristocracy contemptuously resisting modernization.” Many newly independent countries in Latin America had similar problems, with a very few wealthy people at the top and masses trapped in poverty: “At the top, a small group of rascals, well taught by their earlier colonial masters, looted freely. Below, the masses squatted and scraped.” Landes sums up what happens in these situations, to the detriment of both rich and poor:
Where society is divided between a privileged few landowners and a large mass of poor, dependent, perhaps un-free laborers—in effect, between a school for laziness (or self-indulgence) over against a slough of despond—what the incentive [sic] to change and improve? At the top, a lofty indifference; below, the resignation of despair.
In every case where vast wealth is held in the hands of a privileged few and everyone else is trapped in poverty, the free market is not allowed to operate. Certain wealthy people are above the law. Crimes can be committed and contracts broken without fear of punishment.
Monopolies are tolerated or even enforced by government. Obtaining a license to run a business or obtaining documented ownership of property is so difficult that it is essentially impossible for ordinary people.
These are not the failures of the free market, but the failures of a government to protect the free market and allow everyone to compete fairly in it. Where a government allows the free market to operate, ordinary human ingenuity and ambition provide more and more competition and diversity in the marketplace. More and more people find that they can rapidly advance to higher levels of income and status in society simply by hard work and skill in what they do. The free market, if it is truly allowed to function, provides such social and economic freedom to move upward in generation after generation.
Economic mobility in the United States is still a significant part of its strong economy today: “Eighty percent of America’s millionaires are first-generation rich,” Thomas Stanley and William Danko reported several years ago. Moreover, most of them did not inherit their wealth, because fewer than 20 percent of millionaires inherited 10 percent or more of their wealth, and fewer than 25 percent of them ever received a gift of $10,000 or more from parents or other relatives.
Many of “the poor” do not, for the most part, remain poor generation after generation, or even year after year, but many advance to higher economic levels. Neither do “the rich” necessarily stay rich year after year and generation after generation.
Many people who are poor one year actually start becoming wealthier in the next year. If we divide the U.S. population into five groups, with 20 percent of the people in each group (five quintiles), and study what happened to each group from 1975 to 1991 (sixteen years), we find that 98 percent of those in the lowest income group moved to a higher group! In the next-lowest income group, 78 percent moved to a higher income group, while 58 percent of those in the third group moved to a higher group. On the other hand, 31 percent of those in the top income group moved to a lower group, as did 24 percent of those in the second-highest group (see Figure 3 following page 192).
Such patterns have also been seen in more recent studies. A study on income mobility for 1996-2005 found that for those in the lowest income brackets, median pre-tax income rose 77.2 percent, compared with 67.8 percent for the previous period. Another study by the Department of the Treasury found that roughly half of the taxpayers who began in the bottom quintile in 1996 had moved to a higher tax bracket by 2005. The study also found that among those with the very highest incomes in 1996—the top 1/100 of 1 percent—only 25 percent remained in this group in 2005. In addition, their median real income dropped during this period as well. Income mobility often works both ways: up and down.
One example of such movement would be a poor medical school student who is barely supporting herself, but who then graduates and moves from “low income” status to “moderate/high income” status in one year, and soon after that to “high income” status. A similar thing happens, in general, to poor college students who earn a small amount at part-time jobs in college, but then graduate and begin climbing their career ladders. It also happens to poor immigrant families who initially are learning the language and looking for business opportunities, at which they soon begin to succeed. This shift from “low income” to “high income” also happens to “low income” entrepreneurs who take very low salaries and live primarily off savings for two or three years while starting businesses; they show up as “the poor” in national income distribution charts, but when their businesses do well, they quickly join the ranks of middle- or upper-middle-income earners. So when people talk about “the poor” and “the rich,” we must remember that there are different people in the groups over time.
In other words, various measures show that there has been tremendous income mobility over time in the United States (although this has diminished somewhat in recent years with a relatively stagnant economy and persistent high unemployment). This kind of free economic mobility is crucial for nations that want to move from poverty toward greater prosperity.