A large number of people are convinced that rising inequality between the rich and the poor is the primary driver of the ills that plague our society. Both the #Occupy movement that arose after the housing bubble burst, and the fervent support for the self-proclaimed socialist Bernie Sanders, are proof of this.
This opinion is backed by supposed logic and apparent economic law that can be articulated in ways that are quite convincing. I recently came across an article that attempts to prove the thesis that capitalism generates inequality, and which offers a policy proposal (addressed in Part 2) that will alleviate it. The author does so in a way that will be perceived as fair, reasoned, and possibly even correct to the lay reader. Such an article must be refuted.
The author begins:
“At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality. Typically there is freedom to trade and equality under the law, meaning that most adults – rich or poor – are formally subject to the same legal rules. But with its inequalities of power and wealth, capitalism nurtures economic inequality alongside equality under the law.”
He begins well enough, continuing:
“Using data from twenty-three developed countries and from the separate states of the United States, they observed negative correlations between inequality, on the one hand, and physical health, mental health, education, child well-being, social mobility, trust and community life, on the other hand. They also found positive correlations between inequality and drug abuse, imprisonment, obesity, violence, and teenage pregnancies.”
It is possible that there is a correlation to be observed which indicates that increasing wealth inequality leads to a rise in negative effects that are allegedly associated with that inequality. But correlation does not imply causation. It is equally possible that there is a correlation between increasing artificial economic intervention and a rise in the same negative effects.
Therefore, causal mechanisms must be presented to prove the allegations brought forth by these observed correlations. The author describes one such mechanism as such:
“Much of the inequality of wealth found within capitalist societies results from inequalities of inheritance. The process is cumulative: inequalities of wealth often lead to differences in education, economic power, and further inequalities in income.”
Accepting (for now) the causal argument associated with inheritance, let’s instead look at the next statement where he describes the consequences of the resulting inequality. That “inequalities of wealth often lead to differences in education, economic power, and further inequalities in income.”
Looking at the condition of access to education, it is clear that any differences in education are negligible at best. A person at the bottom of the economic inequality spectrum has, through the internet, access to virtually ALL information – free of charge. That person, therefore, has equal access to education as a person at the top.
If this point is rebutted by saying, “yes, all people have equal access to education, but there is unequal access to university degrees and accreditations,” it will need to be pointed out that this is a VERY different argument, and that while there may be some truth to the rebuttal, there are numerous state economic interventions that could be pointed to for having caused this particular inequality.
Then comes the argument that differences in economic power is a negative consequence of inequalities of inheritance. Only a fool would argue that the latter will not tend to produce the former. It is also indisputable that those individuals who are the beneficiaries of substantial inheritances are better off than those who do not. But neither of these facts prove that differences in economic power are bad, nor that they are insurmountable.
The author correctly admits:
“Some inequality results from individual differences in talent or skill.”
Then states as fact that:
“this cannot explain the huge gaps between rich and poor in many capitalist countries.”
But why should this be so? If huge gaps of talent and skill exist between individuals, then why shouldn’t huge gaps in wealth follow? Certainly, it cannot be argued that talents and skills should be appropriated and redistributed.
If this premise is accepted, the rebuttal may be that receivers of inheritance have not justly earned their economic advantage. That the resulting “unjust” economic power must be appropriated and redistributed. But what is so unjust about receiving an inheritance?
Being born to a rich family is the same thing as being born to a poor family – blind luck. Being born rich is the same as being born with above average intelligence or ability. Certainly there is no reason to punish a person born with above average ability, so what reason is there to punish a person who begins their life with an existing sum of wealth? Aren’t both equally a product of happenstance?
The author then proceeds to attempt to further identify exactly what aspect of capitalism leads to inequality. He first examines markets, offers a satisfactory portrayal of their function, and concludes that markets are not the aspect which should be blamed.
Having found that markets are not guilty, he proceeds to identify the difference between capital and labor as where blame should lie for economic inequality. He says:
“Capital is money, or the realizable money-value of collateralizable property. Unlike labour, capital can be used as collateral and the loan obtained can help generate further wealth.”
Here, he is making the claim that capital owners have access to credit (loans) that is unavailable to workers. That with this access to credit, the inequality between capital owners and workers will tend to grow exponentially.
The problem is this assumes that the people who are capital owners, and the people who are workers, comprise an unchanging static environment. But there is no reason for this to be so. Capital owners often make bad decisions, go bankrupt, and join the realm of workers. Similarly, workers can save, invest in collateralizable property, and then have similar access to credit.
“Because workers are free to change jobs, employers have diminished incentives to invest in the skills of their workforce.”
This is another fallacious argument put forward in the author’s attempt to prove his thesis. His point is that if a worker cannot improve his skill set, then he will be unable to bridge the inequality gap. On the surface, the author’s claim appears plausible. The counter-intuitive truth, though, is that despite the risks of losing employees to competing firms, employers routinely invest in training, certification, and educational programs. Further, even if a firm was to make no investment in workforce skills, doesn’t the worker have an incentive to improve his own skills?
Continuing in his attempt to prove the thesis, the author states:
“Another source of inequality results from the inseparability of the worker from the work itself. By contrast, the owners of other factors of production are free to trade and seek other opportunities while their property makes money or yields other rewards. This puts workers at a disadvantage.”
While superficially plausible, this point misses some important facts. Capital investment in technological improvements have caused vast increases in worker productivity over the last several centuries. As workers are able to produce more with their labor, the results will be to put downward pressure on prices of goods and services. The worker (who is also a consumer) sees his standard of living rise as his wages increase vis-a-vis consumer prices. The worker is increasingly presented with the opportunity to work less and have more time to invest in growing his skills, and/or to save more and to invest those savings in collateralizable property.
As shown, the author has unsatisfactorily defended his thesis that capitalism generates inequality. Nevertheless, he continues undeterred (see Part 2) in proposing specific economic policies for the state to adopt and enforce.