From the French Revolution to the rise of the Communist Party in China, inequality has been the primary motivating factor of the great evolutions of society. Many commentators seem to have hit the nail on the head with their observations that human history could best be described as a progression of times when groups which had less rebelled against those which had more.
From 2010 to 2013 incomes increased for the highest earning ten percent of our society by two percent while the average U.S. income contracted by five percent, and the Gini coefficient (the standard measure of inequality) has grown year over year since 1980. Faced with ever increasing inequality, we must decide what sort of societal change we want to initiate to resolve this issue.
One option is related to the adage that a rising economic tide raises all ships. The driving force of this concept is the upward pressure a full employment economy places on wages. The Congressional Budget Office has declared 5.5 percent unemployment as the full employment rate while other economists concur with a range of five percent to 5.8 percent.
When full employment is reached, economic theory says that market forces will cause wages to climb as companies must compete for labor against one another. A full employment economy will likely be effective in raising the standard of living in low income households across the U.S. Theory says that as demand for labor increases, profits will be shared with workers to a greater degree through higher wages.
The full employment solution, which focuses on incentivizing economic growth and job creation, is contrasted with the redistribution solution. Over the short term, redistribution of wealth is likely much more effective at resolving inequality as wealth is taken from the rich and given to the poor. Over the long term, though, economies shrink when too much is taken from the wealthy.
In most capitalist nations, redistribution is most commonly achieved through increased taxes, which can also cause economic contractions. Where redistribution could be effective, under Keynesian economics, is through the injection of the redistributed profits back into the economy creating a multiplicative effect that outweighs the negative effect of taxes. The common flaw in this argument is that the giant bureaucracy and pork laden bills at the heart of our government make it impossible to believe that the tax dollars would be effectively deployed. For this reason a better way to go about this redistribution is to incentivize individuals to give away part of their money on their own accord, through charitable practices. Ideally policies should be pursued that make it easy for someone to give away money anonymously to bring about more good rather than leaving it in their estate.
Economists do not see these as the only two options. In economic models, continual growth in individual income is dependent on what economists call improvements in the production technology. An improvement in the production technology means that, with the same amount of labor and capital, one can produce more output than before. This increased production will be split between labor and the owners of capital at the same ratio. Improvements in the production technology come through increases in education, technological advancements (the internet), and process innovations (a better assembly line). Any good investment in one of these three areas will bring less inequality and do so with fewer negative long term consequences.
I don’t have a preference between the different ways that capitalism can correct the inequalities that it creates. I just want to see those standing in the way of greater equality move aside.
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