We have all seen the reports on the rampant inequality in the world and within countries. According to Oxfam, the wealthiest 10 people now own more wealth than the poorest half of the world’s population, and the richest 1 percent owns more than the remaining 99 percent together. Millions of people have to survive on less than $2 a day while a CEO in a finance company can earn millions of dollars a day. A CEO in the business sector today on average earns several hundred times more than his company’s employees, and so on. From having declined during the post-war period up until the late 1970s, inequality since then has accelerated to today’s obscene levels.
Income inequality is usually justified by a moral and a practical argument. The moral argument says that it is fair to be rewarded based on the value of one’s contribution to the creation of output. According to neoliberal economists, this is how the market works. The impartial market values resources — land, factories, machines, tools, labor, etc. — based on how productive they are in the production of goods and services. The owners of resources (including labor) are rewarded with consumption opportunities — income — based on this value. The more productive a factory, a machine, tools and labor are, the greater the compensation. If your income is 100 times greater than mine, it means that your resources are 100 times more productive.
However, it is a myth that the market compensates individuals based on the value of one’s contributions to production. Many CEOs in the banks and financial institutions that caused the financial crisis in 2008 through speculations, unhealthy marketing and creative accounting, and thus cost society huge sums, and yet were rewarded with big bonuses in the years following the crash. And salary increases for senior executives regularly follow on years of lower profits, or even losses. Obviously, it is not a person’s contribution that mainly decides his salary and other remunerations, but his bargaining power, which depends on many different circumstances. This is true also for blue-collar workers. For example, active and strong unions with many members improve workers’ bargaining power and enables higher wages and better working conditions compared to workers in industries where unions are weaker with fewer members.
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In addition, and principally more important, even if the market would actually reward capital owners and workers based on the value of their contributions, as the theory says, it would not be fair because a person’s ability to contribute with productive assets and labor mostly depends on factors that they cannot influence, such as luck, inheritance, intrinsic characteristics and talents, upbringing, etc. Ownership of productive resources is transferred between generations without any conditions, and children are born with varying potential to develop the characteristics that the market values. Furthermore, some children are born into families and networks that prioritize and stimulate personal development, while other families do not have the same opportunities to provide such an environment. All these circumstances are beyond the control of the individual and depend on chance alone.
In principle, it seems fair that the distribution among individuals of society’s benefits, in terms of produced goods and services, should be based only on efforts or sacrifices that individuals can influence. Income distribution should therefore be as equal as possible after considering the burdens that people choose to bear, i.e. efforts and sacrifices including longer working hours, higher work intensity, greater risks or poorer working conditions, when producing socially valuable goods andservices. In addition, however, in order for society to be humane as well as fair, it also needs to consider burdens due to circumstances that people normally cannot influence, such as old age, illness or natural disasters, which means that individuals with more needs may receive a higher income than someone whose needs are less, regardless of effort.
The practical argument is that inequality is needed to motivate different forms of productive economic activity. This argument is normally used to justify large salary increases and bonus payments for society’s most privileged and best-paid positions, such as CEOs, managers, certain types of academics and other senior positions in industry and the public sector. Mysteriously, this argument is not used in the same way for the lowest-paid workers. Their wages, on the contrary, need to be as low as possible in order to make them profitable to hire. In their case, there is no concern that low compensation will have a negative impact on motivation. Instead, the most vulnerable workers must be forced to agree on low wages and poor working conditions by making their lives as miserable as possible if they refuse to accept these conditions — for example, through low unemployment benefits and extensive requirements when unemployed. Here it is the “whip” that applies instead of the “carrot” that is deemed necessary for the more privileged.
However, it may actually be necessary to reward certain jobs with more compensation for motivational purposes also in a fair economy. But then we are not talking about tasks or jobs that are popular, stimulating and empowering to begin with, but quite contrary: tasks that are necessary but undesired because they are boring, repetitive or menial; for example, garbage collection andcleaning.
The Effects of Inequality
The negative effects of inequality are extensive and pervasive. Epidemiologists Kate Pickett andRichard Wilkinson show in their book The Spirit Level that there is a clear relation between unequal societies and mental and physical ill health, shorter life expectancy, less well-being, less inclination to trust one’s fellow human beings, etc. The more equal a society is, the happier its inhabitants, andthe fewer social problems it has. All citizens of a society are experiencing and exhibiting these effects, regardless of where in the social hierarchy they are situated. In an unequal society, citizens are more often judged based on status indicators and possessions, and considerable efforts are made to obtain the correct residential address, car, clothes, holiday trips, etc. The problem is that these efforts will never be enough, since there will always be others who are higher up in the social pyramid with more desirable possessions, which creates feelings of inadequacy and poor self-esteem.
An unequal society limits the freedom of many of its citizens, partly because status-hunting consumes large resources in terms of time and money that instead could have been devoted to developing and promoting other more important and valuable potentials and goals for the individual, and partly because an unequal distribution of resources in itself creates major differences in the citizens’ opportunities for self-realization and development.
Inequality also adversely affects the democratic process of society. Access to large financial resources means great political influence as well, and many powerful opportunities to influence both the elections and the actual decisions, including what issues that are to be addressed, through lobbying, financial contributions to parties and candidates, and shaping of opinion through think tanks and the media, among other things. Political elections and decisions, as well as shaping of opinion, become something that can be bought for money, and democracy is thereby in fact dismantled. Those with the lowest income and wealth often do not have the time, energy or resources to actively participate in opinion formation or even to study and publicly discuss the issues addressed by the democratic institutions.
Finally, an unequal distribution of income and wealth can be negative for society’s economic development. People with large financial assets generally use a higher portion of their income for savings and investments in financial assets such as stocks and real estate, which may result in speculation and price increases for such assets without any positive effects on the real economy. A redistribution of income from those with high incomes to those with lower incomes may therefore reduce speculation and increase society’s overall demand (and production), since more income will be used for consumption. With regard to the effects on climate change, society could in this context prioritize collective and public consumption over private consumption, since private consumption typically causes more greenhouse gas emissions.
It is possible to reduce inequality even within the framework of capitalism. Society’s tax system can be designed so that those with higher incomes pay a larger share in tax than those with lower incomes. Also, inheritance, real estate, wealth and capital income can be taxed relatively more while income from work is taxed to a lesser degree. The total tax burden is thereby allocated between income earners in a way that makes income after tax more equal.
Furthermore, certain services such as housing, health care, education, child and elderly care, public transports and utilities can be provided collectively by society outside the logic of markets and made available to everybody based on need at no or low cost and regardless of income.
Finally, vulnerable groups with low or no other income can be assigned allowances, so that those not able to work due to illness, or who are too young or too old to work, or who are studying or seeking new employment, have access to a reasonable income.
These tools for balancing income and wealth have been used and are used to varying degrees in most capitalist countries, although the extent varies considerably between countries and between different times. The Scandinavian countries were among the most successful in reducing inequality in these ways during the post-war period and until the late 1970s. Since then, development has gone in the opposite direction.
A Fair Economy
All modern economies need to provide certain services collectively if society is to function at all, and all economies need to give out allowances based on need in certain situations — for example, to those who are too weak, too old or too sick to work. The extent to which collective services and need-based allowances are provided, and the size of the allowances, depend on society’s values and its power relations.
However, a truly equitable economy must go one step further and abolish the sources of unfair work compensation and profit, and replace the institutions that reward work and ownership based on arbitrary, uncontrollable factors, with institutions that compensate work based on effort and sacrifice.
In a fair economy, the society’s productive resources — land, factories, machines, etc. — cannot be owned and controlled privately by individuals who will receive dividends, rents and interest solely based on their status as owners. Nor can compensation for work be determined in labor markets, where the size of the compensation, regardless of who owns the productive resources, is determined by the bargaining power of the jobseeker or their productivity.
A fair economy must abolish private ownership rights to productive resources and labor markets andreplace these institutions with institutions that create just compensation, while also promoting economic democracy and self-management. A proposal for an economy whose defining institutions are designed to achieve these goals is the participatory economics model launched by Michael Albert and Robin Hahnel. More information is available at www.participatoryeconomics.info.