The High Price of Income Inequality

Those content with income inequality claim that the evidence supports their contentment. The evidence they cite comes from economic models, historic case studies, and human nature. In practice, that means they draw from economics, history and evolutionary psychology to explain and justify how differences determine different incomes; contentment with unequal incomes comes from acceptance of economic, historic, and biological facts, they say. Those content with inequality – such as Harvard economist Gregory Mankiw (2013) and Steven Pinker, Robert Wright, Matt Ridley, Thomas Sowell in books that boast mass popularity (Pinker, 2018; Ridley, 2015; Rodrik, 2015; Sowell, 2014; Wright, 2001) use variations of the following claims: 

  1. Economics demonstrates that inequality is necessary for economic growth, efficiency, and the end of poverty.
  2. History and the examples of failed state policies shows how inequality is inevitable.
  3. Evolved human nature favours competition for resources so unequal outcomes make perfect sense in our contemporary economy because of that evolutionary lineage

The line of reasoning that those content with inequality simply view the world more accurately than social justice supporters is sustained through a combination of these narratives. But, these justifications are false or misguided. I will do my best to explain why. First, though, my reducing the debate to these three points might seem silly or naive, and prompt ridicule that I have failed to delve into minutiae detail. On the contrary, though, simplification can help see the complex whole. The tilt of the earth, for example, is a one sentence fact that has implications for worldwide weather. And no one would deride the tilt of the earth for being too simple, brief, or reductive. A similar case can be made for elegantly simple socio-economic arguments. For a ‘social’ example, the United Nations Universal Declaration of Human Rights is just eight pages (United Nations, 1948.) and works well exactly because of that brevity (If you want complexity I invite you to read Thomas Piketty’s Capital and Ideology at 1115 pages.) So, let’s get started.

  1. Does economics demonstrate that inequality is necessary for economic efficiency? 

Dani Rodrik and Thomas Sowell say that economic inequality is, by most economists’ consensus, a trade-off for economic efficiency. And with greater economic efficiency comes more growth and thereby more public expenditure and support—known as Wagner’s law—for lifting the impoverished. This raises living standards and makes everyone better off but in the process some people get more than others, since inequality is a matter of competing rates-of-gain co-dependent on individual circumstances and individual competences that vary with time. To make everyone better off requires this; without any pain there can be no gain.

Marginal productivity theory shows how people are paid commensurate with the value they create. A banker creates magnitudes more value in the economy than a cleaner does, so the banker being paid more is an incentive for more people to take up productive jobs, like banking. The US and UK have done well on the world stage because people are free to choose, and hard-work and entrepreneurial creativity are rewarded more than elsewhere. Those with, say, a banker’s skills are scarce so need to be rewarded and incentivised more than lower-entry jobs. Attempts to make national policy favour equality will just encourage the rich to flee and take their money and workers’ jobs with them.

Yet these storylines are false.

Economies with more equal rules of the game like Norway and France have grown at the same time as the USA and UK. The growing economy of the UK in the sixties was about as equal a society as Sweden (Wilkinson & Pickett, 2020). Productivity has increased over the years despite real wages remaining stagnant in the US, so reward for productivity fails to explain wealth and income disparities (Michael Jacobs & Mariana Mazzucato, 2016). Instead pay has become lopsided because those at the top in finance, and other executives in mimicry, have been allowed to set their own incomes and how those are apportioned. For instance, an executive is rewarded with a bonus for the federal reserve lowering interest rates because that raises their company’s stock. Despite the executive having no causal relation to that stock value rise. 

Money going to richer people also hinders economic growth because it makes for weaker aggregate demand, as those lower down spend more on tangible goods that grow the economy; with money distributed up rather than down more money goes unspent on production than otherwise. Poorer people also lack opportunity to fulfil their potential which means that productivity is hindered and the number of possible entrepreneurs and skilled workers diminishes. Indeed the International Monetary Fund (IMF) in Berg & Ostry (2017) and the International Organisation for Economic Development (OECD) in Cingano (2014) conclude that inequality hampers growth. Cingano even concluded that in nations like the US, UK and Italy, economic growth would be “six to nine per cent higher over the past two decades”, if not for policies that promote or invite inequality. As the economist and Noble laureate, Joseph Stiglitz contends in Rethinking Capitalism (Michael Jacobs & Mariana Mazzucato, 2016), Far from being either necessary or good for economic growth, excessive inequality tends to lead to weaker economic performance”.  62-in-100 leading economists, polled for the Chicago Booth School, go so far as to agree with the statement that ‘inequality is a major threat to capitalism’. 12-in-100 meanwhile disagree.

Granted, developing countries do spend more on public goods with growth but economic efficiency and utility is best measured in persons’ wellbeing. Becoming richer like the USA has less utility than becoming rich like Denmark. Or becoming rich like Norway that continuously tops the United Nations’ Human Development Index. An index that operationalises life quality. The US and UK performing well in mean average is near-to-meaningless for median workers who never see the spoils, unlike in Norway or Denmark. Moreover, inequity does not make for more creative dynamism. For its wealth and size the US actually underperforms compared to smaller more equitable lands, having, for instance, fewer patents-per-person (Lower Levels of Inequality Are Linked with Greater Innovation in Economies, 2014)

So, the idea that more economic growth necessitates more inequality in the long-run is wrong. 

The idea that everyone wins through inequality just to different degrees depending on hard-work is also dubious. Another example that undermines hard-workers being paid more for sacrifice and effort is that those high in employment hierarchies actually report less stress and better health outcomes than those lower down in the hierarchy. Top executives have less stress and more money than those in middle management—because they have more control—and in the long run the higher up in an organisation hierarchy you are, the higher your life expectancy and health quality-of-life indicators such as lower incidences of angina, ischaemia, or chronic bronchitis (Marmot et al., 1991). Inequality is bad for your physiological health (Sapolsky, 2004) and psychological health (Wilkinson & Pickett, 2020) in peer appraisal comparisons and status anxiety and financial insecurity. These health outcomes obviously have personal costs in wellbeing and financial costs in health service and health insurance transactions, scarce resources in public money that could be efficiently reduced by reducing inequalities. The idea that poorer people should get over their envy and foster gratitude for what they have – as Harvard psychologist Steven Pinker suggests in Enlightenment Now, and Harvard economist Gregory Mankiw brushes aside in Defending The One Per Cent – is utterly inadequate and betrays a lack of experience at the lower end of the distribution, or even acquaintance with those who are far from well-off, who suffer job and social and financial precarity today.

  1. Does history and failed policies show how inequality is inevitable?

Thomas Sowell and Steven Pinker cite failed states like the USSR and Maoist China, to show equality programmes to be overambitious, even utopian. When states interfere with markets and try to make humans organise in ways unnatural to them, such as without proper reward for hard work and improper reward for soft work, then societies become worse, not better. Strong trade links and open markets allow for human flourishing with some inevitably getting more just as some score more on IQ tests. Expecting everyone to get the same lot in life is like expecting everyone to get the same grades, as a matter of statistics distribution varies. People who want equality fail to appreciate how history shows trying to even up the distribution will fail. What matters is human dignity and poorer people appreciating their lot without envy, as former presidential candidate Mitt Romney lamented as ‘the bitter politics of envy‘; it could be worse as a slave or a serf of days past. 

These storylines are misguided. Absolute equality – say between children and parents – is infeasible, but advocates for equality want fairness rather than interchangeable assets and jobs; inequality advocates nonetheless shift the goal-posts to mean a utopian wish rather than a deliverable goal (Krugman, 2020). Right-wing media newscasters, for instance, deliberately conflate authoritarian Venezuela’s ‘socialism’ with Denmark’s Socialism or Social-Democracy. Denmark or Sweden, are aspirational whereas the USSR and Maoist China are clearly not what democratic groups campaign for. Moreover, states interfering in markets have had failures, but also landmark successes. The rise of Britain and the USA and now China is thanks to state stewardship that ignored pleas for free markets and free trade (The Political Economy of Industrial Policy, 1998.). Being free-enough but not so free as to lead to exploitation or corruption is obviously desirable. A free market for slaves for example is never free for all transacters present. And this is a serious contemporary example since over 40.3 million people are slaves today.

There is a kernel of truth to equality claims varying with statistical distribution—some set of people have to be poorer and poorest at any given time—but claims for equality rest on rewards being commensurate with effort or value-creation rather than passive ownership or rent-extraction (Mazzucato, 2018). Contrary to everyone being a winner with the ultrarich a byproduct to wealth, a few being rewarded magnitudes more is not a commensurate reward. Dividing the wages of a cleaner compared to an executive makes that clear since both do what had to be done, and the one who earns less – the cleaner – is actually more of a ‘key worker’ than the one who earns more, the executive. Instead of being a win-win, the rich gaining more does come at a cost: it hinders aggregate demand, causes missed opportunities for workers to become more productive as they lack money, as Joseph Stiglitz explains in his essay in Rethinking Capitalism (Michael Jacobs & Mariana Mazzucato, 2016). And upstream inequality leads to higher public spending on treatments for those suffering from conditions exacerbated by low-socio-economic status.

In historical terms, inequality has been present for centuries, but the values of equality have led to good markets outcomes rather than goods markets led to valuable equality (Larry Siddentrop, 2017.). Demands for more equality does not necessitate demands for sameness. Looking at the unfairness of Mediaeval Europe, Ancient Rome, or Victorian cotton-mills does not mean we should acquiesce. Indeed, learning the lessons of history implies we should be more pro-active than status-quo quiescent. If human dignity matters most then each person’s basic needs should matter foremost. Whilst one could look at the injustices in history and find gratitude for not being a serf or a slave, one can likewise question how there are now people richer and more powerful than kings at a time when there are more human-trafficked and labour slaves than there ever have been (Forced Labour, Modern Slavery and Human Trafficking), 2022). One can also question how the right of ownership of huge amounts of wealth is codified any more justly than was the divine rights of kings or feudal lords (Federici, 2004; Standing, 2019).

Moreover, the history that comes up within equality versus inequality debates actually ignores the majority of human history, our evolution.

  1. Does our evolution vindicate market bargaining and interpersonal competitive reward?

They say humans are competitive for social and financial status, and so distributions tend to polarise from these in-born – genetic and biologic – predilections. Contrary to an emphasis on differences between cultures among ‘those on the left’, similarities come out in big hierarchies and competition for resources. As societies develop they learn to pool their resources in markets in which everyone gains from transactions – they are non-zero-sum – with some who have misfortunate circumstances or misallocated scarce resources (time, work experience, income, assets, genes) failing to prosper compared to those with fortunate and competently placed resources, but all winning compared to days past.  Just as those who are born tall are fortunate to succeed in basketball, those born short just never will, the same is true for other competencies that are partially innate. 

However, evolution and evolved adaptations and predispositions do not favour a few having more. On the contrary, groups who live approximate to – but still distinct from – our evolutionary ancestors are actually egalitarian because sharing food allows each person to fail in gathering or hunting in the short-run, but gain in the long-run through co-operation, by sharing their resources (Hrdy, 2011). Forms of parenting are also communal and instead of genetics implying inevitable favouring of close relatives, this varies with some societies favouring children in general without even knowing whose children are whose, thereby undermining narratives that genetic relatedness determines disproportionate favour within families.

In studying children, too, children already have an inclination to share and evenly distribute their spoils. In experiments where adults feign confusion, children attempt to help unrelated adults to attain their goals, despite no obvious reward to the child, other than the adult respectively gaining positive regard for them (Wilkinson & Pickett, 2020) Meanwhile among primate relatives, food and other goods being unequally distributed outrages the marginalised party (Sapolsky, 2017) so much so that the party is sometimes submitted by dominant conspecifics (meaning members of the same species) in their socio-dominance hierarchy. Being outraged at inequality seems to be a biological trait, therefore, in intra-species relations among our primate relatives, and us of course. Rather than markets being evolutionary or biological and a basis for inequality, markets are exceptionally cultural and must be learnt and re-navigated as they change. Indeed the more rigid social-dominance hierarchies in other primates may hold them back from having proto-markets at all, whereas our flexible social-dominance hierarchies allow markets exactly through egalitarian principles, albeit principles more-and-less realised in practice. 

It is tenable, therefore, that evolution actually favours equality rather than inequality. Six archaeological sites that constitute ancient cities seem to have had non-hierarchical relations and a system of mutual, astonishingly equal, exchange (Graeber & Wengrow, 2021). Another example from history in ice-age Europe, shows that societies shifted from equal societies in bountiful summer (when resources weren’t scarce) and to hierarchical societies in winter (when resources were scarce) without hierarchy and top-down control becoming ‘natural’ but instead a concession part of a seasonal cycle (ibid). While, thousands of years prior to the present, feature slaves and even worldview dogmas that priortise natural inequalities, those empires are historically anomalous—being in the minority of humans long history—and, regardless, were less prosperous than nations today that operate at odds with natural selection’s end-goals. For example, richer women, with more resources, tend to have fewer children.

The equivocation of natural inequalities with genetics, inherited height and basketball success in analogy, is also questionable. For sure, those born tall will have the opportunity to succeed in high-level basketball whereas those born-to-be short never will (if the society even values basketball enough to reward such sportspeople), and bear in mind that they could never succeed as a jockey, a job which demands a short stature. Taller men also superficially succeed in getting, on average, higher wages and higher voter turn-out (Sapolsky, 2017). But it does not follow that tall people, therefore, deserve more because of their height. On the contrary, inherited genetics like inherited wealth is no more deserved than their opposites: inherited short genes and inherited poverty. For equality of opportunity to be meaningful then reward must be commensurate with the scope for opportunity that any one individual has rather than options open to an imagined aggregate (Rawls, 1999). A short person or impoverished person has less scope or elbow-room because of disadvantages imposed on them, rather than chosen by them. Whereas a taller or richer person has more scope and elbow-room because of advantages given to them, rather than chosen by them. From such a comparison it follows that the richer are no more deserving of their wealth than the poor in corollary are deserving of poverty. 

For example, Bill Gates’ acumen partially being down to fortunate genetics and fortunate circumstances—such as being a state competitor in maths at a young age, attending a private school where he met Microsoft co-founder Paul Allen, and boasting a mother with connections at IBM—in no way legitimises his having magnitudes more than someone with misfortunate genetics and/or misfortunate circumstances (Harden, 2021), just the opposite. Bill Gates’ wealth of 131 900 000 000 USD is equivalent to the annual salaries of 3 139 465 Britons’ salaries (around one-third of all Londoners) at a median of 31 000 GBP. In 2021, Gates had an income, new money added, of 26 000 000 000 USD, equivalent to the salaries of 618 848.335 Britons, or 574 724 British nurses at 33 300 GBP. (For convenience I put tax rates aside, average citizens pay more tax than the ultra-rich anyway.)

Gates’, and other rich persons’, luck-to-others’ unluck ratio is the opposite of proportional and fair, on any accurately meritocratic basis. See for example attempts to value professions’ salaries by value destruction and value creation. Being a ward cleaner for cardiovascular patients, say versus a Big Tobacco advertising executive (New Economics Foundation 2009), illustrates the disparity between under-rewarded value-creation on the one hand and under-penalised value-destruction on the other. Therefore, the arguments for being comfortable with inequality stemming from a proper appraisal of the facts and evidence is, funnily enough, a counterfactual and opinionated standpoint. The costs of inequality are economic inefficiency, the lessons of history favour equality, human evolution can play out in more egalitarian than hierarchical manners, and appeals to commensurate reward and commensurate fairness at the top and at the bottom are hypocritical. The reason inequalities continue are not due to scientific facts, the givens of economics, the wisdom gained through history or an inborn predisposition towards competitive accumulation. A proper appraisal of facts suggests that political inertia and the interests gained from those who do well within the current rules of the game, for instance, successful pro-inequality article and book authors who (mis)justify inequality through a series of appeals to economics, history, human nature, and birth-given advantages—these people tend to read into the evidence-sets more than they accurately draw from them.


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