The Inequality Paradox - Part I

Here's a book that drills down into one of the leading social phenomena of our time - why it is that the gulf between rich and poor is to be getting wider. Doug McWilliams' book is a cracking good read - well written (which means it's easy to understand and assimilate), extremely well researched and comprehensive in its depiction of the problem and the various policy solutions intended to remedy it. It's a book that should set any active mind racing - crammed with insights that set off trains of thought. If you are at all interested in how our society functions, it's worth a read. As such, the book deserves an in-depth review over the course of the next few blog posts.

Today I shall cover no more than the first part, Setting the Scene.

The book kicks off with football - a comparison of the earnings of Wayne Rooney with those of Sir Bobby Charlton, whom readers of my generation will remember as also having played for Manchester United, albeit some 40 years earlier. Both players contributed to their club's greatness, both scored a similar number of goals for England. Yet at the height of their careers, Rooney was earning £13,500,000 a year; Sir Bobby made £15,000. Allowing for inflation, "Rooney earned 53 times more relatively than Sir Bobby did for doing essentially the same job". In 1972, Sir Bobby earned eight times as much as players in lower leagues. In 2015, Rooney earned 45 times as much as players in lower leagues.

How did this come about? The reason lies in the two great drivers of inequality over the past half-century - technology and globalisation. Technology - in this case satellite TV - allows English football league matches to be shown to paying viewers around the world. The revenues of the world's best clubs no longer come only from fans within a train ride of the stadium. Rooney might have been earning 45 times more than Sir Bobby, but by 2015, Manchester United's revenue was 70 times higher (allowing for inflation) than it was in Sir Bobby's day.

* * * * * * * *

Between 2000 and 2017, the number of billionaires in the world has grown more than four-fold (from 470 to 2,043), despite the impact of the financial crash of 2008. [WealthX Billionaire Census 2019 gives the number of individuals with net wealth over over $1 billion as 2,604.] It is not only the number of billionaires that's rising, but the number of billions they possess is growing too.

Yet the paradox in the book's title is that while this is going on, the number of people living in absolute poverty in the world has been falling at the fastest rate ever - even as the concentration of wealth among the richest people increases. Between 1990 and 2013, the World Bank says that people living in 'extreme poverty' has fallen from 37.1% of humanity to 10.7%, while the overall population rose from 5.3 billion to 7.1 billion during those years. Taken in that perspective, one may think that given the vast number of human beings lifted out of abject poverty in such a short space of time is so wonderful that one needn't worry too much about a few thousand people gathering extreme amounts of wealth. And yet it is a worry - not least because of what that wealth can buy - power. Power over you and me.

Thomas Picketty's Capital in the Twenty-First Century is a highly influential book, as McWilliams explains, spawning a great many economic studies into the causes of rising inequality. There are more causes than just the exploitation of the poor by the rich, the result of the accumulation of capital and bending the rules to favour the rich. The second chapter of part one looks at how economists from Adam Smith, Keynes, Hayek and Friedman looked at inequality and how it is considered today. The second chapter, an overview of serious economic studies of inequality, lifts this book from being yet another opinion from yet another pundit. This work is solidly grounded in economic number-crunching; it's much more than just random observations and anecdotes strung together to form a loose theory.

Adam Smith, as the founding father of modern economics makes pertinent observations as to how the rich should behave, the notion of 'equity' - fairness, and the avoidance of entitlement as a way of thinking among the rich. And Smith's 'invisible hand' - which requires competition and trade, creates positive net economic outcomes. "My attempts to make myself better off generates wealth of other people provided that they trade freely with me as suppliers or customers." [Good stuff. It reminds me of the 'double thank-you of capitalism', coined by TV pundit John Stossel: "How many times have you paid $1 for a cup of coffee and after the clerk said, 'Thank you,' you responded, 'Thank you'? Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win." Coffee's coffee. But there are many instances where there's no thank-you from the buyer - because they feel forced to buy something (like additional insurance) or pay more than they feel is fair.]

John Maynard Keynes points out that "if an excessive proportion of income accrues to the rich, this might lead to underconsumption because of the lower propensity of the rich to consume. Keynes distinguished between the entrepreneurs and the rentier class, the latter being parasitic, the former benefiting society by way of their 'intelligence, determination and executive skill'. The underconsumption point dilutes the trickle-down wealth theory. Once you hit a certain wealth level, you have so much money you can no longer spend it on things you need or even want - you just park the surplus money where it is of no benefit to the shopkeeper, craftsman, tradesman or builder.

Here I am thinking of the extreme salary of Denise Coates, CEO of Bet365, who last year was paid £323m. In one year. Whatever could she do with the money?  She has five children. One day, they could become extremely wealthy. How much of that £323m earned in 2018 will trickle down?

Milton Friedman's famous phrase is mentioned: "A society that puts equality ahead of freedom... will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force... will end up in the hands who use it to promote their own interests". Something that Eastern Europe knows only too well from its postwar history.

More modern economists cited by McWilliams include Jeffery Sachs, Joseph Stiglitz and Paul Krugman for their insights into inequality. The broad overview of how economists past and present see the subject make for a solid foundation for the rest of the book.

In the third chapter, McWilliams points out that inequality has different causes, which need to be distinguished.

Two forms of equality should naturally lie beyond the scope of this discussion. Equal legal protection for rich and poor is enshrined in law and should be taken as a given. As should equality of opportunity - human potential must not be stifled because a person's provenance or birth. Noble born or humble, black or white, male of female - everyone should have the chance to develop and profit from their talents, innate and developed.

But about equality of outcomes?

Should everyone's income be the same, regardless of what they do? Is it desirable that each human's wealth be the same? If this is indeed so - how can such a situation be achieved without wrecking the economy and damaging society? Would such policy goals be acceptable to the electorate? OK then - maybe not identical outcomes - but outcomes which are less glaringly unequal? McWilliams quotes the Times' economic correspondent David Smith: "people are relaxed about inequality as long as their own position is improving. But when they believe their own position is deteriorating, they assume that inequality is rising... and blame inequality for their own problems."

So what causes inequality? McWilliams identifies four types:

1. Inequality caused by increased exploitation
2. Inequality caused by early-stage globalisation
3. Inequality caused by technology
4. Inherited inequality

The first type is that which Picketty focuses on. It is caused by the abuse of power. The inequality that results from people or groups extracting wealth or income from the rest of society involuntarily. From simple protection rackets to rent-seeking lobbyists pushing legislators to insulate their clients' industries from fair competition, from CEOs pushing their boards for more pay to bankers' bonuses. These activities add no value to the economy nor to society.

The second type happens when the business owners in developed economies close down factories or service centres and move them to developing countries with lower wages. Less-skilled work evaporates from rich countries but helps lift people in poor countries out of poverty. The business owners increase their wealth, while rich countries' poor get poorer. [In practice, the 'business owners' are both rich individuals as well as ordinary folk - pension-fund savers.]

The third type is caused by technology. The transformation to digital thus far has increased productivity at the cost of old-school employment, but creating new jobs. However, further advances in tech (robotics, AI) will drive down overall employment, as robots get to build robots, and machine-learning AI programs will get to build new programs. Again, it will be business owners that get richer as this process accelerates.

The fourth type is hereditary. McWilliams says this is a relatively new phenomenon, sparked by the broadening of tertiary education to women after WW2. These days, university graduates overwhelmingly marry other graduates, bringing up their young differently to those without tertiary education. These 'superbabies' will be born wealthier and will stay wealthier than the children of parents who didn't go to university.

Why does any of this matter? Why are we banging on about inequality? Some could argue that it's a natural condition of mankind - nay, of any animal - after all pecking orders exist in all animal societies. There's been inequality throughout human history - just look at the Egyptian pyramids! Sometimes inequality decreases - after the Black Death and the Great Plague; after the French and Russian revolutions; after the world wars of the last century. But generally, it has a natural tendency to increase. So what?

McWilliams explains why growing inequality is a bad thing for society. Despair and alienation, health inequality and falling life expectancy are symptoms of rising inequality. Weakening social cohesion and its political fall-out can severely damage nations. He quotes Prof Jane Mansbridge writing in the Washington Post: "the extraordinary growth in incomes at the top of the income distribution makes possible the discretionary money that can be poured into politics, and those who contribute to politics are, on average, a good deal more extreme in their views than the average voter."

If you earned $200m last year, the temptation to buy think-tanks, influence the public discourse through the media and propagate your political views far and wide becomes overwhelming. And if your worldview is that the the rich are entitled to get richer without leftie do-gooders getting in the way, so be it. Money becomes power. More power becomes more money. More money becomes more power. And so inequality grows inexorably... Is there a solution?

My long-form review of The Inequality Paradox continues here with Part II.

In the meanwhile, some good stuff here from The Economist ('Have billionaires accumulated their wealth illegally?')

This time last year:
From West London to South Warsaw

This time four years ago:
Anger and hate have no place in political discourse

This time six years ago:
Is Conservatism rural or urban in nature?

This time seven years ago:
Poland's roads get slightly less deadly

This time eight years ago:
It's expensive being rich in Warsaw 

This time ten years:
Winter commuting in colour and black & white

This time 11 years ago:
Zamienie in winter

This time 12 years ago:
Really cold (-12C at night)
[last night's low: +2C]