Inequality and Capitalism. Part 1

1. Why inequality is inevitable

Nowadays, inequality is being discussed with great intensity and frequency everywhere. The most important problem is that the term means different things to different people. There is no consensus about the definitions. Studies cover different periods and regions. As a result, much of the empirical work remains incomparable. Some speak about global inequality and the success of developing countries in catching up or about poverty reductions. Other are outraged about increasing relative poverty in the rich countries. Others still address the inequalities that are inherent in a capitalist system in principle.

In this three part series, I will try to explain the proper relationships at issue. The aim of the reflections is to bring order and objectivity into the debate. This has to happen by systematically questioning which forms of inequality are inevitable in a capitalist system and which actions can reduce it.

As I have already clarified in several contributions, to me the choice of words relating to the system is not that important. One can call it our economic system or the market economy or capitalism. What is really important is to gain the fullest possible understanding of how this system functions.

In the search for criteria for equality or inequality among mankind, the fervent defenders of liberalism and neoliberalism have very quickly discovered the concept of the “natural inequality of men.” Because we are not equal by nature, they say, we cannot and must not force humans into personal or even substantive social equality. In fact, trying to achieve such equality would completely destroy human freedom and creativity.

That there are natural differences between people in ability and anything else is of course trivial. People have different talents and skills. Genetics play an important role. But everything that starts happening immediately after birth can hardly be called ‘natural.’ Even the food intake during the first days of life co-determines, to some extent, whether a child will achieve its full potential or not. Social relations, income and the family structure constitute major factors during the first years of life and, again, co-determine whether the individual later on will be able to take full advantage of the possibilities that society provides her or him with or not.

2. Natural inequality?

Consequently, ‘natural inequality’ can hardly serve as a justification for the inequality between human beings. At the beginning of school age, the material conditions of the parents massively decide whether a child will be successful in finding her or his way through life or not, whether she or he will do well, whether there will be social mobility, etc. Everybody knows this, but few – and progressively ever less – are ready to reach and act upon the logical conclusion, namely that a society that proclaims that its children must have the same starting conditions and opportunities in life, must intervene in the material distribution and support poorer families more than well to do families.

However, even if there are, as intelligent liberals concede, effective policies that try to ensure that the life-chances of all children are similar at the outset, the problem still remains that material inequality and personal inequality in any society and in any economy cannot be prevented from occurring and work through generations. Here factors come into play that are commonly called luck, coincidence or fate. We all know this. One is at the right place at the right time. Someone is out of luck, because she or he suffers from bad health early in life and cannot use its full potential. Someone has a brilliant idea, but he cannot realise it because he is ahead of its time. Someone else had a very simple idea which connects to the Zeitgeist and becomes incredible successful. One can be the best athlete in the world, but what is the use if there is little interest for her or his discipline? Another athlete becomes an idol or a modern hero and makes enormous amounts of money. That is how it goes.

All of this, and much more, is happening constantly in our complex societies and hardly anyone doubts that these processes lead to inequality. These simple examples make abundantly clear that the simple neoliberal ideology that ‘you get from life what you make of it’ is incorrect. There is no institution which distributes ‘fairness’ in society. The neoliberal credo would not be correct, even if there was no biology, no epidemiology, no class structure, no discrimination, no educational gaps no culture, no networks – there would still be chance and skewed compensation, etc.

In fact, everything that follows immediately after birth is to a very large degree determined by the social conditions of the parents. This is certainly not anything that the newborn ‘gets because she or he made it.’ Starting conditions are fundamentally unequal. Later in life, what a person accrues in terms of goodness of life chances is not directly related to her or his individual ‘merit’ or ‘power.’ For the most part, social conditions structure and define ‘abilities.’ No one uses her or his abilities in isolation. Everybody needs networks and be part of a social world which sees her or his abilities in a positive light, so that income can be derived from it. The more the division of labour permeates our society, the less of its social product can be attributed to autonomic individual performance.

The division of labour means, in effect, that individuals are only the impetus to something or, perhaps, they sell their labour power. The result in our societies is always the combination of many tasks of many individuals. The ever increasing division of labour consequently reduces the ability of many to obtain a desired social position or income level, while those who succeed subsequently fight the state tooth to nail in order to prevent redistributive policies.

At this point, the liberals turn to a simple trick in order to escape from the unpleasant discussion that must logically follow. They say that the world is so complex that it is impossible to do justice to people. No country in the world can ensure that all people are being fairly rewarded according to their efforts and capabilities. This is in effect saying that, in the real world, no material equity (or close to it) or material justice is possible. Hence, we should not even try. The only function of government is to act as some sort of night watchers state that assures that formal justice prevails, so that people are being treated equally before the law. There are of course big problems with that too.

Why should the state confine itself to this? All modern societies agree upon the same measures of success and failures, so this allows direct comparisons. The measure is very simple: the amount of income that an individual receives. This is, of course, also highly problematic. The income of individuals depends on several complex processes (see above). No individual can make the argument that her or his income is directly related – or is a rational reflection of her or his contribution to society. Income always has to be seen in conjunction with the organisation of society at large, with the power relations that are inherent in it and with the division of labour in its economy.

3. Which kind of taxes?

The key issue then becomes to which degree the income of individuals should be taxed by the state. What speaks for formal justice and what speaks for material justice? Formal justice would obviously be served if the state would require from each citizen an absolutely equal amount in order to make society work in terms contributions to public services and so on. A tax ‘per head’ would be appropriate because people, in a quantitative sense (i.e. in absolute terms), use services that the state provides more or less equally. But which reasonable person would consider this appropriate? Once one goes beyond the idea of ​​market based remuneration as a way of ‘organising’ society, solidarity and the ability to play comes in and one has to set up proportional taxation. The idea is very simple – and it is essential for fairness and justice. The contribution of people to their society has to depend on their income. Reasonable and fair distributions need to be worked out. This does not contradict the principle of equal treatment at all. Citizens are being treated fully equally in terms of their ability to contribute.

Society can of course go a step further and decide upon progressive taxation. The state, as an expression of the democratic will of its citizens, fully has the right to ‘discriminate’ against high income groups if this is to the advantage of the common good. A state can – we should say has to – raise progressive taxes and make some services more expensive for those who have no problem paying for it if this means that others, who have difficulty paying or find it impossible, can then also gain access to such services.

Similarly, society can also argue that inequality is a threat to an economy which is based on a division of labour. This is another argument to justify that wealthy citizens contribute more than those who are less fortunate. There are many factors in play here. Excessive inequality destroys the motivation and the opportunity of those who are being left behind to contribute to the social product. This certainly has negative economic consequences. The question which taxation and which progressive income tax or a combination of those together with inheritance taxes and property taxes is ultimately not decisive, even if there are good reasons for implementing them (i.e. an inheritance or wealth tax). They are only a small part of the approach to create equal starting conditions.

How far society can proceed with such types of progressive taxations is difficult to say. “Far, measured at the present modest level of taxation in most developed countries,” is certainly a good answer. Many do not see this, because during the last decades they have been persuaded that it is exactly “high taxes” that form the biggest obstacle to growth and progress. As we know today, this is certainly not true. It is, as always, not a matter of rational argumentation. Anyone who has witnessed the efforts of the lobbies, the organisations of the employers and the conservatives in Germany in the 1980s and 1990s fighting any substantial redistribution realises that in view of such a tsunami hardly a democratic flower can grow.

The massive demands for tax cuts from the captains of industry and the lobbies were explicitly justified by the ‘willingness of elites’ to stand up for the economy, what they, once they got what they wanted, refused to do. To see how true this is, it suffices to look at the rate of investment. This is, in effect, the great scandal of our time. Furthermore, not one indicator in the world shows that cutting taxes for the rich helps the economy. It just gives more power to the wealthy, which then skews the system even more and creates more inequality. Apparently, policy-makers did (and do) not reckon with the economic negative consequences of increasing inequality and the ever increasing concentration of power of the very rich.

Presumably, there are a lot of other reasons for the grandiose failure of supply-side policies, i.e. the attempt to revive the economy by relieving the elites and the corporations of social responsibility. Presumably, the role of redistribution by government is grossly overestimated, because what can the state do if it accepts the never ending howling of the lobbyists as an indication of real pain, although it is a phantom pain. The real pain, which has been caused by the elites, lies somewhere else completely.

However, and this is very important, this means that the state has a broad discretion to manage the secondary distribution – the results of the market. The state has the capacity to correct this distribution. It all depends on power. This is not to say that the state can redistribute virtually limitless. No one is saying that. But it is certain that today we are very far from this limit.

In the second part, I will deal with the global disparity between countries and show that there are exist many seemingly simple rules of global coexistence which have, in effect, become completely outdated and must be questioned and changed.