Growing wealth inequality has been a hot topic over the last few years, arguably since the 2008 financial crisis. Left leaning folks view wealth inequality as the primary destabilizing force in politics and society at the moment. Others, primarily on the right, argue that wealth inequality is a natural phenomena within human culture that results from rewards of productive activity in society. This paper will attempt to reconcile these positions by recognizing that wealth inequality itself is not bad, but that wealth inequality is intimately connected to the reason why societies are destabilizing today. Inequality of opportunity, caused in large part by wealth inequality, is the primary issue facing developed nations at the moment, which is causing internal conflict.
Perhaps the best place to start this investigation of wealth inequality is by acknowledging the Pareto Distribution, otherwise known as the 80/20 rule. It generally describes that through any productive endeavor, 20% of the people are responsible for 80% of the productivity. It also describes the accumulation of resources, wealth, etc. throughout society. This rule is exponential, and means that the fraction of productive output and its resulting rewards is generated by a smaller segment of people in contrast to the larger society. It’s the reason that smart and industrious people often climb the societal hierarchy. They are simply more productive than other people. This is a natural law of man (1) since all individuals have particular strengths and weaknesses, and so long as access to basic opportunity is available and relatively equal, this distribution helps society allocate resources and wealth fairly and productively.
This is of course a good thing. It rewards productive members of society and enables them to become even more productive and useful in society, which raises the quality of life for all of its members. As the famous free-market expression goes: “a rising tide lifts all boats”.
Past a point, however, the Pareto distribution is no longer reinforcing the merit from productive endeavors, but instead the exponential increase in the accumulation of wealth afforded through existing advantages. The wealthy are not rewarded from productive output in society, but instead from the momentum of “winning”. As Edgar Bronfman has put it “To turn $100 into $110 is work. To turn $100 million into $110 million is inevitable” (2).
This distribution also works inversely, and is a reinforcing downward trend for a majority of society. This is precisely where issues arise. It’s not about how the super rich accumulate and maintain their advantages, but instead how little societal mobility there is for the majority of people. Lack of access to opportunities because of disadvantages in wealth, resources, education, etc. reinforce to the point where inequality of opportunity in society is so high that the society itself becomes brittle and prone to major disruption.
Destabilization because of inequality of opportunity is described best by the Gini coefficient in relationship to crime. The Gini coefficient is a measure of statistical dispersion that represents the income or wealth inequality within a society. A study published by The Journal of Law and Economics, which has been cited nearly 1,400 times, examined the effects of inequality on violent crime. The researchers found “a positive and significant effect” between income inequality on homicide rates. A 2.4% reduction of the Gini coefficient within a country would decrease the homicide rate by 3.7% in the short term and 20% over the long term (3). The researchers also found that a country's gross domestic product’s (GDP) growth rates had a “significantly negative effect on the homicide rate” (4). Therefore, the more productive a nation is, and the better they are at ensuring everyone within the nation is seeing the benefits of that productivity, the lower the crime rates will be.
This makes perfect sense on a psychological level as well. As prominent Canadian psychologist Jordan Peterson has explained, people want to climb the social hierarchy since being closer to the top means a better shot at survival and reproduction. This psychological characteristic is inherently imbued in the human mind, encoded from billions of years of evolution. The higher up someone is in society, the more easily they can fulfill their needs. When people get stuck at the bottom, however, and feel that there is no hope of legitimately climbing to the top, then there are major issues. Young people, men in particular, will turn to aggression when they feel that there is no hope of playing the “standard social game” to climb the hierarchy (5). In other words, if the current societal game feels rigged, cheat to get ahead, or change the game (revolution).
It is also important to note that although modern civilization continues to become more prosperous than previous generations, our psychology measures us in contrast to our current relative position in society, not how much better off we are than our grandparents.
Is the current societal game of Western Capitalist Democracies, particularly the United States, not working properly for the majority of its citizens, especially young people? Yes, and a quick look at some disturbing facts paint the picture quite well.
Though productivity has been steadily growing in the western world, much of the gains have been decoupled from typical workers’ compensation. A study from the Economic Policy Institute found that “Between 1979 and 2013, productivity grew 64.9 percent, while hourly compensation of production and nonsupervisory workers, who comprise 80 percent of the private-sector workforce, grew just 8.2 percent. Productivity thus grew eight times faster than typical worker compensation” (6). Before 1979 productivity and hourly compensation grew together evenly.
The decoupling of workers compensation from productivity has had a devastating effect on the middle and lower class. A report from Ray Dalio, founder of the world's largest Hedge fund, Bridgewater Associates, shows that “prime-age workers in the bottom 60% have had no real (i.e., inflation-adjusted) income growth since 1980. That was at a time when incomes for the top 10% have doubled and those of the top 1% have tripled” (7). He adds “the percentage of children who grow up to earn more than their parents has fallen from 90% in 1970 to 50% today. That’s for the population as a whole. For most of those in the lower 60%, the prospects are worse” (8).
The world's leading generational demographer, Neil Howe, has noted some trends that further sketch out the current issues. Firstly, multigenerational living is at its highest point since 1937-1938, with millennials staying home much later than the previous two generational cohorts. Twenty percent of 25-34 year olds are still living with an older generation, typically their parents (9). This is a profoundly deflationary trend, and shows that young people are not thriving. “By the time Boomers had reached a median age of 35, they collectively owned 21% of the nation’s wealth—versus just 8% for Gen-Xers at age 35 and maybe even less for Millennials when they reach that age . . . even after standardizing the figures into per-capita equivalents, the generational wealth gap is very impressive” (10).
These disparities in income and wealth translate into inequality of opportunity. “One’s income growth results from one’s productivity growth, which results from one’s personal development” Ray Dalio has noted in his article “Why and How Capitalism Needs to Be Reformed”. He goes on to say that “the top 40% of income earners spend almost five times as much on their children’s education as the bottom 60% of income earners do, while those in the top 20% spend about six times as much as those in the bottom 20% do” (11). Wealth inequality is contributing to inequality of opportunity since people do not have the means to invest in themselves adequately to productively contribute within their societies. Although citizens in developed nations today have a better quality of life than their grandparents, they are increasingly frustrated by the inequality of opportunity which inhibits their ability to become meaningful participants in society.
Inequality is inevitable across human beings, the laws of natural selection require variation for efficiencies to emerge, and any productive human endeavour is no different. Wealth inequality helps allocate resources and wealth efficiently, fairly, and productively. It rewards smart and hard working people, and produces a better quality of life for society through fair incentives for good work. But maintaining the levels of inequality of opportunity tolerable for all people must be a concern if we wish to maintain progress in civil society. The science is clear that societies destabilize when inequality of opportunity becomes too great, and people can’t get ahead. Moreover, equality of opportunity should be a primary goal of any society so that everyone can contribute as much as individually possible to the prosperity of their communities.
The last time income and wealth inequality were this high was in the 1930s (12), which needless to say was a time of immense destabilization. People are correct to be concerned with the levels of wealth inequality, but the goal when addressing wealth inequality must be focused on attempting to create more equality of opportunity, which implies small but very important differences when framing the issues at hand. It is not about making everyone as equal as possible in terms of wealth, but instead giving everyone in society the most opportunity possible to flourish. Even more difficult discussions must be had now about how to correct inequality of opportunity so that democracy and free markets can work their enlightened mechanisms to make societies a more fair and productive game, and prevent further disruption.
References
1. Fred D. Merritt, “Cours D'Economie Politique. Vilfredo Pareto,” Journal of Political Economy 6, no. 4 (1898): pp. 549-552, https://doi.org/10.1086/250536.
2. Edgar Bronfman, “Forbes Quotes,” Forbes (Forbes Magazine, 2015), https://www.forbes.com/quotes/2382/.
3. Pablo Fajnzylber, Daniel Lederman, and Norman Loayza, “Inequality and Violent Crime,” The Journal of Law and Economics 45, no. 1 (2002): pp. 1-39, https://doi.org/10.1086/338347. pp. 17
4. Ibid.
5. Jordan B. Peterson, “Jordan Peterson - Poverty Causes Crime? Wrong! - The Gini Coefficient,” YouTube (YouTube, March 6, 2017), https://www.youtube.com/watch?v=M3XYHPAwBzE&ab_channel=Bite-sizedPhilosophy.
6. Josh Bivens et al., “Raising America's Pay: Why It's Our Central Economic Policy Challenge,” Economic Policy Institute, June 4, 2014, https://www.epi.org/publication/raising-americas-pay/.
7. Ray Dalio, “Why and How Capitalism Needs to Be Reformed (Parts 1 & 2),” LinkedIn, April 5, 2019, https://www.linkedin.com/pulse/why-how-capitalism-needs-reformed-parts-1-2-ray-dalio?trk=portfolio_article-card_title.
8. Ibid.
9. Neil Howe, “How Generational Forces Have Set the Stage for a Retirement Crisis (w/ Neil Howe),” YouTube (YouTube, February 27, 2020), https://www.youtube.com/watch?v=K2sCO1pPyoM&t=1656s&ab_channel=RealVisionFinance.
10. Neil Howe, “Hedgeye Risk Management: A Big Wealth Gap Between America's Boomers, Gen-Xers & Millennials,” Hedgeye, December 20, 2019, https://app.hedgeye.com/insights/79936-trendspotting-stark-wealth-gap-between-older-and-younger-generations?type=macro%2Cmobile.
11. Ray Dalio, “Why and How Capitalism Needs to Be Reformed (Parts 1 & 2),” LinkedIn, April 5, 2019, https://www.linkedin.com/pulse/why-how-capitalism-needs-reformed-parts-1-2-ray-dalio?trk=portfolio_article-card_title.
12. Ibid.
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