It’s common to want to divide the world into the “haves” and the “have-nots.” After all, it’s obvious that some people possess and earn more money than others. Some people live lives of luxurious indulgence while others have to choose between paying for rent or paying for medicine.

It’s perfectly reasonable—and very human—to look at that dichotomy and wonder about the disparity. Is it something systemic that’s leading to these widely differing outcomes? If capitalism is supposed to reward hard work, why does a cushy desk job pay more than manual labor? Is capitalism itself to blame for what is so frequently referred to as “economic inequality”?

These questions demonstrate an admirable attitude of concern for the wellbeing of our fellow humans, but they aren’t quite the right ones to ask if we genuinely want to improve economic outcomes for the least well-off among us.

First, let’s address a common economic misunderstanding: that simply because work is hard, it is inherently more valuable. Economists call this the labor theory of value. It’s the belief that because a task or product creation requires a lot of effort or time, it is inherently more valuable than one that requires less of those things.

Unfortunately, that simply isn’t true. But don’t feel too bad—even Adam Smith fell for that one.

Value doesn’t come from inputs alone. In fact, it’s completely subjective and changes all the time based on circumstances. 

The diamond-water paradox explains this pretty well: water is essential for life but often cheap, while diamonds are nonessential yet expensive. If someone asked you on a normal day which you would rather be given, a bottle of water or a sack of diamonds, you’d certainly choose the diamonds. But if you’d been lost in the desert for two days and were dying of thirst, that same offer would result in a very different choice. 

Ultimately, humans value everything—from objects to labor to ideas—only as much as they solve our problems or meet our desires.

Next, we have a semantic issue. Lots of people use the term “economic inequality” when what they’re really talking about is “economic inequity.” Those two words certainly look like they ought to be synonyms, but they aren’t.

A difference in wages, living standards, and so on is a matter of inequity. Economic inequity is a difference in outcome. 

A difference in requirements or standards is inequality. Economic inequality is a difference in opportunity. 

While it’s not a bad thing to want to improve the lives of the “have-nots,” using regulation and legislation to force markets and society toward decreased inequity creates a different problem. This approach, by its very nature, demands an increase in inequality. 

Individuals are, well, individuals. We all have unique sets of skills, talents, preferences, and needs. Capitalism, as a concept, and the rule-of-law system necessary to protect it apply the same requirements and restrictions to everyone equally—what political philosophy refers to as equality before the law.

This kind of equality allows for every individual to rise to the level of their ability and ambition. Or, at least, that’s the idea. We already discussed ways in which cronyism and other top-down interventions skew results and insert dysfunction into markets.

But not every person has the same abilities or ambitions. What you can do well and what you want out of life are never going to be exactly the same as your next-door neighbor.

Enforcing equal outcomes requires treating different people unequally, giving some people advantages while putting restrictions on others, which is simply an alternative—and more insidious—flavor of the unfairness people see when they call out economic inequity.

So, in a way, yes. Capitalism does result in a certain amount of inequity. But in the ways we’ve clarified our definitions here, that’s a feature, not a bug, and removing it would cause more harm than benefit, particularly to the very people we’d be trying to help.

If we really want to improve the outcomes for the “have-nots” of the world, a better solution looks more like what we covered last month—expanding opportunity by actually leveling the playing fields instead of putting a governmental thumb on the scales of success.

The path to prosperity isn’t paved with policies that guarantee equal results regardless of input. Rather, it’s built on systems that protect equal rights and opportunities for all individuals to create, innovate, and exchange freely according to their own unique abilities and preferences.

Learn more about capitalism here.