The modern intellectual agenda has, as one of its major priorities, the rejection of the free-market capitalist system. You might think that this is an extremely valid cause – after all, intellectuals of the Cold War bashed the communist ideology the same way modern thinkers disregard capitalism. Author Yuval Noah Harari said that “since capitalism dominates our world, we should indeed make every effort to understand its shortcomings before they cause apocalyptic catastrophes.” However, the critics of this system don’t realize the advantages and attainments that it has.
As far as I know, capitalism has been a tremendous success. The promises of perpetual growth and global cooperation have been fulfilled. The UN Declaration of Human Rights – which is the closest we can get to a worldwide constitution – has assured virtually all states’ participation in the political landscape. For centuries priests and rabbis tried to explain that there was no way that we can eradicate hunger, disease and world conflict from our essence. Then along came the bankers, investors, and capitalists, and within 200 years managed to do precisely that.
Although we experience some economic crises and international wars, capitalism has besides not only managed to prevail but also to rein in the planet’s most threatening issues. We, as a human race, have basically terminated poverty. Yuval explains that “mass famines still strike some areas from time to time, but they are exceptional, and they are almost always caused by human politics rather than by natural catastrophes. There are no longer natural famines in the world; there are only political famines. If people in Syria, Sudan, or Somalia starve to death, it is because some politician wants them to.”
Having said that, capitalism does have its detriments. In order to achieve progress, we also risk an ecological meltdown. But we also have, in recent decades, emerged out of the satisfaction of job growth, and have taken a shot at why this very characteristic also represents something inherently wrong. And that’s income inequality.
What people don’t understand, however, is that there still isn’t a necessarily right solution to this issue. That’s because, for many years, industrialists have seen income inequality as a simple opportunity for even more growth, and not the catalyst for inequity that we are so used to perceiving it as. We have learned to abide by a myth, while industrialists learned how to cultivate the other.
1. Myth One: Income Inequality is Bad
The word “inequality” has had an increasingly resistant connotation over the last few years. It has been used to describe gender differences, class disparity, and ethnic superiority. Nowadays, it is hard to find this term connected to positive words such as “benefits,” “economic growth,” and “happiness.” That said, this is what I’m about to do. You see, there’s something that the common carrier of the word “inequality” doesn’t realize: that it’s beneficial for all of us.
Many people cite the income inequality phenomenon as being unfair and unwanted. Many are infuriated by the reality that some people are rich, and many others are not. “The gap between American’s net worth is even bigger when looking at the wealth of different racial groups,” The Atlantic writes. There’s nothing wrong with this fact, though; the problem is in the interpretation of them. What The Atlantic – along with many other news outlets – lacks in their elucidation of income inequality is that their miscalculations hinder their complaints. They seem to forget that income inequality creates prosperity within a free-market system.
To understand this, one must also realize that the economy is made up of millions of individuals who strive to sustain their lives by earning money. Money in itself, however, means nothing. It has no inherent value to us. Preferably, is it a pathway to the prospect of happiness. Most of the times, people have “mental lists” of what they want to do, how much they would like to work on a daily basis, and what they want to buy. In return, they can become satisfied by small moments of gratification.
Growing up, I was raised thinking that I am free to pursue anything that best suits my most proficient abilities. For me, that would probably be writing, debating, researching, and some others. On the other hand, for someone else that might be painting, or teaching, or banking, or playing basketball. This freedom helps us to construct our own paths through life.
Imagine that you are tasked to analyze two teenagers that live in the same socioeconomic status. Throughout the years, you would most certainly see drastic differences when they approach adulthood. This contrast is caused because of this divergence in thought, passions, talents, and ambitions. This is caused due to a type of freedom which is also an expression of inequality. Just like those two teenagers, we’re all different. We all have different talents, aspirations, and dispositions.
In a free society, we can seek out opportunities that best fit our personal strengths, distinguishing us from others. As long as you have the freedom to guide your destiny, you have a chance to reach your full potential.
Imagine if the government told you that your ambitions had limits and that there’s a ceiling in which you can’t pass through. Obviously, that would be a terrible thing to imagine – your biggest dreams being deemed as unreachable. This idea is why forced equality means less freedom, for it equates to less opportunity to pursue what makes you individually unique.
Many detractors of income inequality argue that “every life is equally important,” meaning that it is intrinsically wrong to go against this rule. However, we disregard this idea all the time. When we put serial killers and gruesome rapists to death, we’re not thinking about the value of his life, but the consequences of his actions. In the event of war, for example, the soldiers from Country A try to kill all the combatants from Country B. In a circumstance like this, we would indeed be willing to sacrifice equality for the sake of the nation’s survival. We would value our own lives over other people’s, only because it makes sense to do so. If we were to be utterly reliable for equality, every benefit we give to the poor would have to mean a benefit to the rich – which would, in return, increase the wage gap.
Income inequality’s case is different, though. We can’t value a rich man’s life just because his net worth is bigger. At the same time, they are the only ones who have the appropriate status to provide opportunities for the poor and generate the continuing growth of the system of production.
c. The Wealth Gap
Everyone knows that there is a gap between the wealthy 1% and the other 99%. What about it, though? In a free-market economy, people become wealthy by making what the rich enjoy today into something almost everybody can enjoy tomorrow.
Take a look at the cell phone as an example. Today, we all have them. But when Motorola manufactured the first one in 1983, it was the size of a brick, had a 30-minute battery life, and terrible reception. All of this costing 4,000 dollars.
However, if no one had bought that $4,000 brick, there wouldn’t be a 40 dollar version of it today. A version, in fact, which excels in size, battery, and cellular reception.
In the 1960s, a single computer the size of a room cost over 1,000,000 dollars. Nowadays, thanks to billionaires like Michael Dell, we have incredibly advanced computers which cost us just a few hundred dollars. Also, since 2000 the price of a 50-inch plasma TV has fallen from $20,000 to $550.
What was once available to the few becomes available to the many, and having a difference in wealth is an essential factor in this process. Author John Tamny wrote that “the free market is about turning scarcity into abundance.”
d. The 1% Club
Anyone can be a part of the 1% club. This ideal emphasizes why different social classes are equally taxed. The belief that it is more moral to pay a higher percentage of your income as you make more money is based on the idea that others decide what you somehow deserve to earn. Economists have argued that we can’t solve this inequality by making the rich poorer. Instead, it’s by making the poor richer.
Personally, I was already part of the 1%, but I was also part of other percentages. That doesn’t make me more or less immoral. This is why proportions exist. It turns out that you don’t have to be in the 1% club to live a happy life. Often, one’s sense of achievement and productivity causes the same effect.
e. The Power of Outsourcing
At the start of 2017, Trump tweeted, as precisely articulate as he always is:
Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.
Now, why did he write this? Well, justly because Mr. Trump cares more about political messaging than political effectiveness. He successfully played on people’s nostalgia of the manufacturing age: a time when American society was based on an industrial model of Henry Ford. Trump, then, is an example of the misuse of the potential of outsourcing. Instead of utilizing it, he sacrificed economic growth by shifting the American focus to his everlasting sense of patriotism.
As an example, take Nike. This company employs 40 times more manufacturing workers in Vietnam than in the United States, but it could not afford as many American workers as it has without the efficiencies of outsourcing. American commentator George F. Will wrote that “Americans incessantly ‘outsource’ here at home by, for example, having Iowans grow their corn and dentists take care of their teeth, jobs at which Iowans and dentists excel and the rest of us do not. LeBron James could be an adequate NFL tight end, but why subtract time from being a superb basketball player?”
In any case, the lesson becomes clear – individuals and nations should always do what they do better and let the others do other things.
f. Facts are Friends
Statistics have shown that developed countries with more income inequality have higher standards of living for the lower classes. Journalist Scott Winship compared the living standards enjoyed by the poor and by the middle class to inequality measures of over 160 countries and concluded that none of these point-in-time comparisons constitute solid evidence that inequality raises or hurts living standards. “Any number of economic, political, cultural, or demographic factors could be operating undetected,” he says, “making it look like inequality affects living standards even though something else is behind both.”
In fact, evidence from fifteen years of economic research has concluded that in developed countries, more inequality is tied to stronger economic growth. Nobel laureate Joseph Stiglitz discovered that middle-class Americans enjoy incomes more than three times higher than their counterparts in Venezuela and Iran, more than ten times higher than those in the Philippines, Jamaica, Guyana, Yemen, and Nicaragua, and more than 40 times higher than middle-class Ugandans. Winship writes that “the concern that income inequality hurts the living standards of the poor and the middle class is implicitly one about the inequality produced by markets, that is, inequality before government redistributes income via taxation and transfers.”
(Market Income Concentration vs. Middle-Class Living Standards Across 13 Countries.)
In the image above, the dotted line indicates that countries in which the top 1 percent of tax units receive a more significant share of income generally have higher median incomes as well. In other words, “when the richest tax filers secure more of the pretax and -transfer economic pie, the middle class still gets more post-tax and -transfer pie than in low-inequality countries.”
That said, it seems like we’ve got ourselves a proper equation: Higher Inequality = Lower Classes x Wealth.
Income inequality might just be the most prominent motivator we have, too. In the book The Upside of Inequality, Edward Conrad explains that entrepreneurs become more likely to take risks the higher the potential payoff is. Becoming rich is a huge reward for creating a successful idea, meaning that people may see this as the only possible way to escape a world of economic hardship and transition into a world of financial stability.
“It’s the payoffs for risk-taking that motivate risk taking and create these institutional capabilities,” Conard said. “They logically take the risks that create more institutional capabilities that make our most talented workers more productive.” Hence, income inequality is a concept of innovation within a knowledge-based economy.
h. The Gini Coefficient
In the study Inequality Does Not Reduce Prosperity, the author explains that the Gini coefficient is the most widely used “measure of income inequality, ranging from zero (perfect equality, where everyone has the same income) to one (complete inequality, where one household enjoys all the income and everyone else gets nothing).” However, knowing a country’s Gini coefficient does not, of itself, reveal anything about the living conditions of the poor or the middle class. That’s because it disregards many other factors that take a toll in defining this type of difference. In truth, there are larger historical, cultural, and geographical factors that are most likely behind the correlation between inequality and living standards. As said in the study:
The Gini coefficient is regarded as a measure of overall inequality; but when estimated from surveys, it is best thought of as measuring inequality below the top 1 percent. For confidentiality purposes, surveys often put a ceiling on the reported incomes of the richest households; when income concentration is high, that ceiling can artificially produce lower levels of recorded inequality.
2. Myth Two: Income Inequality is Good
In spite of all of that, there’s a problem in the system. Income inequality is a regular part of the system we live in today, but there are some drawbacks directly attached to it as well.
a. The “End” of Innovation
From 1870 to 1977, inequality fell by about 40%. During this time people actually got more innovative, evidenced by their productivity. In fact, innovation is a primary factor when it comes to income inequality. For instance, looking at the list of the wealthiest individuals across U.S. states in 2015 compiled by Forbes, 11 out of 50 are listed as inventors in a US patent and many more manage or own firms that license.
Maybe this is caused because we are naturally running out of ideas. Or perhaps it’s part of a broader trend that has implemented limits into our innovation standards.
In Outliers, Malcolm Gladwell explains that we could have settled for a much better world. He says that “we are so caught in the myths of the best and the brightest and the self-made that we think outliers spring naturally from the earth. We look at the young Bill Gates and marvel that our world allowed that thirteen-year-old to become a fabulously successful entrepreneur. But that’s the wrong lesson. Our world only allowed one thirteen-year-old unlimited access to a time-sharing terminal in 1968. If a million teenagers had been given the same opportunity, how many more Microsofts would we have today?”
He then concludes, stating that “to build a better world we need to replace the patchwork of lucky breaks and arbitrary advantages that today determine success – the fortunate birth dates and the happy accidents of history – with a society that provides opportunities for all.”
b. Ecological Meltdown
Remember when I mentioned that capitalism risks ecological meltdown to support its perpetual system of production? Well, this is where this concept becomes significant.
Today, we are used to fixing the lower classes to work hard by giving them opportunities to do so, but the harmful consequences of this long-lasting system will most definitely take a toll on them. A poor worker in India – whose life consists of the disadvantages of their country’s ecology – is much less likely to succeed than a “just-as-poor” American man that lives in Brooklyn.
This difference is directly involved with income inequality justly because it affects the way we think. If an Indian citizen can’t make it through the constraints of the free-market due to the invalidity of climate change, why would we give that individual more value than a poor young man from a New York suburb that jumped over the limitations that are essential of human control (such as discrimination and lack of education)? If capitalism affects nature, that means nature affect behavior. It’s a simple cause and effect paradigm. Those who are periled by the ecological aspect of the system are merely rejected from the opportunities that American lower class citizens can have.
c. The Moral Argument
Some people say that inequality is fundamentally unfair. Even though every man-made society has had inequity ingrained in its framework, there is a great deal of truth in this statement. Peter Singer, a professor and philosopher at Princeton University, stated that “a justification for reducing inequality through non-voluntary means, such as taxation, needs to explain why redistribution of this kind is not just robbery.”
If you think about it, that’s quite true. What is it that differentiates plain robbery with a government that taxes you, claiming that it will be used for the good? I don’t mind taxes, but the philosophical crux of it is intriguing when we see it at face value.
The truth it, taxation is not theft due to our democratic consent to it. Taxes are not impositions decreed by a tyrannical government. Rather, they are the dues we pay in exchange for membership in a society. Still, the morality behind income inequality stems from the fact that we might be the participants of a huge robbery scheme.
d. The Dark Side of Fairness & Control
We live in a society that equates wealth to the degree of control we have. If that’s the case, then the top 1% are responsible for a massive amount of control over society. For instance, if you own a public media outlet, you can give control over how others in the organization view themselves and their lives, and how they understand the community around them. This facilitates the process in which the “rich elite” can forge information just to fool the masses.
In addition, political institutions seem to be turning less fair as years go by due to the recognition that is invested in wealth. “If those who hold political offices must depend on large contributions for their campaigns, they will be more responsive to the interests and demands of wealthy contributors, and those who are not rich will not be fairly represented,” said Harvard professor T.M. Scanlon. Thereby, this means that the entire economic system becomes rooted in injustice. If wealth is prioritized, the aforementioned “knowledge-based economy” will soon become the money, money, and more money-based economy. Although you might think this has always been the case, the economic paradigm might shift only towards it if this trend continues.
In Paul Krugman’s review of Capital in the 21st Century by Thomas Piketty, he mentions these statistics from the US Bureau of Labor Statistics: “Real wages for most U.S. workers have increased little if at all since the early 1970s, but wages for the top 1 percent of earners have risen 165 percent, and wages for the top 0.1 percent have risen 362 percent.”
In John Rawls’s Difference Principle, he establishes that citizens must enjoy equal basic liberties, but that this can only occur if there’s fair equality of opportunity. He writes that he can’t understand a society that can reach fulfillment without the interlink between these two things. This means that if an economy is producing an increasing level of goods and services, then all those who participate in providing these benefits — like workers — should share in the result. Even though they are paid for what they do, no one has reason to accept a scheme of cooperation that places their lives under the control of others. They have to, however, since it technically benefits them.
This same concept applies to everything we do and experience – such as parenting, school, government, and the film industry. But we then must ask ourselves: how can we make the authority idea permissible within a society categorized by class? Isn’t that a fundamental part of the structure already?
In the end, we all have to not only adapt to the methodology of income inequality, as try to change it as well. That’s because, although this is a crucial and beneficial part of the free-market system, there’s still lots of work to be done.