Is capitalism redeemable? Part 6: Inequality – it ain’t fair

Nov 18, 2014

We get a laugh out of the Monty Python sketch of four Yorkshiremen competing with one another to tell stories of the hardship they endured when they were children, 30 years earlier – “you think you had it tough …”.

Without going into Pythonesque exaggeration, four older Australians could easily recount similar stories. If they grew up in a Brisbane middle-class suburb, their house probably had no indoor toilet: there would have been a bucket toilet in the backyard emptied by the “dunnyman” (the “sanitary collector” to use one common euphemism) . If they grew up any distance from a city they probably didn’t have electricity, and the idea of turning on a tap to get hot water was almost beyond imagination.

Like the Python characters, who all claimed they “were ‘appier back then”, they wouldn’t consider they had led deprived childhoods, because those were the standards of the time.

Those material standards now, however, would be considered deprivation. Even if our own material conditions don’t deteriorate, if everyone else’s conditions improve, we feel hard done by.

We have a natural concern for fairness, a concern not to be confused with envy. In our concern for fairness we want to see our own and others’ conditions brought up: envy is about wanting to see others brought down.

This may all seem to be no more than commonsense, but there is a strong economic philosophy captured in the slogan “a rising tide lifts all boats”, essentially saying that any outcome is a good outcome so long as no-one is made any worse off. Inequality doesn’t count in other words. This philosophy, based on the work of the Italian Fascist Vilfredo Pareto, made its way into schools of economics and into public policy in the latter part of last century and is a mainstream of economic thinking.

It was influential not because academics and public servants had any attraction to fascism, but rather because it came in a neat “value free” mathematical package, absolving the academic or public servant from having to worry about fuzzy things necessitating moral judgements, such as equity.  And it provided an easy rationalisation for the economic philosophies of the Reagan and Thatcher administrations in the early 1980s, later to be taken up across the political spectrum.

Since the 1980s Australia has become more prosperous, but the benefits of that prosperity have gone disproportionately to those who are already most privileged. Research by Andrew Leigh and others shows that over the twentieth century Australia’s income distribution became more equal up to around 1980, but then started diverging once more. By now those gains have been lost: our income distribution is now roughly similar to what it was in 1900. Thomas Picketty’s research, which also takes in wealth, has similar findings for other ‘developed’ countries.

If that widening inequality were a result of choice it should not necessarily be a policy concern. There are people who choose to work hard and to take risks, while there are others who choose to join religious orders with vows of poverty or to seek low-paid but safe employment. Australians show no appetite for enforced social levelling.

But when inequality results from entrenched privilege, inheritance, “old boy” networks, exercise of political influence, denial of access to quality education and corruption, we are properly indignant. As a general point, we are less concerned with inequality in itself, than with the fairness or otherwise of the processes that lead to inequality. An almost uncontested political value in a country like Australia, transcending traditional “left’/”right” divisions, is a belief in equality of opportunity – a “fair go” in the vernacular.

While the fair go may be an aspiration, Australians don’t believe it holds in reality. In a recent survey by Essential Media respondents were asked “which has more to do with why a person is rich” – “because he or she has worked harder than others” or “because he or she had other advantages”. Hard work scored only 28 per cent while “other advantages” scored 56 per cent.

The capitalist economic system works when there is a strong connection between contribution and reward. That’s the very theoretical and practical basis of market economics.  That connection will never be perfect: even in the fairest system there is an element of luck. But when the connection between contribution and reward is badly severed the economic system itself loses its legitimacy. When legitimacy is lost people are inclined to reject the whole capitalist model, turning to superficially attractive but destructive alternatives. The plutocrats who show off their riches so vulgarly and the politicians who dismiss our concern with fairness don’t seem to realize that they’re threatening the very viability of the system that has supported them.

Even before reaching that self-destructive outcome, an economic system that results in inequality is one that is wasting many opportunities.  That’s the subject of the next article.

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