Why is massive income inequality allowed? Does inequality contribute anything positive to the economy or society? Why do more equal societies have better economies? Is this a cultural issue? Is it an ethical one?
This summary is interpreted from notes taken during the second debate on this topic and may contain errors. It is not a definitive text and should be used a means of sharing and developing ideas. Edits have been made to make this summary easy to read therefore it does not reflect the actual flow of conversation.
If you wish to correct mistakes, be attributed to or contribute content, please contact me or post a comment.
More summaries can be found in the Summary Index.
Edit 27/09/2014: Correction to statistics about global and Australian median income. Grammatical error corrected in the questions section.
Statements from the introduction:
“In terms of the extent to which we should be concerned about income inequality, the OECD has noted that simply shifting large amounts of money from high income earners to low income earners through the tax and transfer system is ‘neither an effective or sustainable way in which to lower income inequality over the long term’. (OECD 2011).
The OECD’s conclusion in Divided We Stand was that ensuring equal access for all of the population to high quality public services such as education, health and family care will help to reduce inequality and provide equal opportunities of personal and professional development for all citizens.” [OECD (Organization for Economic Cooperation and Development) 2011, Divided We Stand: Why Inequality Keeps Rising, OECD Publishing, Paris.]
“Employment growth has helped to reduce wage income inequality, while growth in investment income (at least up until the GFC) has tended to increase income inequality (particularly for groups such as retirees where investment income can be significant).
In recent years, Australia has experienced a sustained period of solid real income growth across the distribution, along with a modest increase in income inequality.” [Australian Government Treasury Report 2013]
“The richest seven individuals in Australia hold more wealth than 1.73 million households in the bottom 20 per cent. Senior executive pay is now 150 times greater than average weekly earnings.
While people earning less than $20,000 per year think an average Australian earns around $23,000 per year, people earning more than $150,000 per year think that an average Australian earns more than $120,000 per year.” [Income and wealth inequality in Australia. Policy Brief No. 64 July 2014 David Richardson and Richard Denniss, The Australian Institute]
Income inequality is tolerated because of poorly examined assumptions and ideological justifications. Examples of these assumptions include “hard work will lead to success” and “homeless people get themselves into that state”.
Inequality may arise from several factors contributing towards it and it may be ignorance and biases that cause people to attribute singular causes.
We don’t know or understand how economies work. We assume politicians and economists know how they work. Economics appears to be a field where the majority of the work involves retrospective analysis.
If you design an economy with inequality in mind, that’s what you get.
Inequality tends to be synonymous with quality of life in the vernacular. Is this simply an assumption? Are we misinterpreting inequality? Do we mean quality of life when we say inequality? Is it income inequality that we care about, or quality of life?
There is a small percentage of the population who are farmers. As members of Western countries, we don’t have to grow our own food. We don’t all need to work so is this belief that we do an outdated assumption?
Why is income inequality allowed? A member suggested that this may be a spiritual issue. It ties in with how people work and how their self interests drive their need to work. Spirituality in this instance is a way of describing psychological predilections or character flaws.
A person may have an “I’m the centre of the universe” mentality, seek to have a better life than others and desire owning lots of objects. A member commented that science would provide us with a much better way of measuring and analysing these traits than using anecdotal evidence.
The French Revolution is an example where a society couldn’t handle mass income inequality and the Occupy movement suggests that we don’t in contemporary times.
How the Australian median income stacks up to formal economies from around the world may give you some food for thought. [Editor’s note: Unfortunately I don’t have the time to source and confirm these figures so I can’t cite this as 100% accurate. Please assume these are rough guides for reflective purposes.]
The global median annual salary is approximately $36, 000 whereas the Australian median annual salary is approximately $44, 000. The Australian dole is approximately $250 per week. The average weekly global salary or welfare payment may be about $360 per week.
Based on these numbers, if we can earn more than $36, 000 annually then we are in the global top 1% of income earners. Or we may be in the middle based on where your figures are sourced.
After earning $20, 000 happiness plateaus and we are just earning “tokens”.
Until we are prepared to challenge ourselves and our cultural norms on how we work and the desire for money, we are just being self interested. Some people choose to live below the poverty line to highlight the disparity between incomes. E.g. $2 a day challenge
Income inequality is multi-faceted; it’s market driven and encompassing.
Taxation levels may reflect how income inequality is allowed in our society.
One member commented that income inequality is not a stigma as everyone wants recognition of their efforts. Equal income offers no incentive to work and income inequality promotes incentives towards work and rewards ingenuity. Income inequality may be a way of providing hope to incite people to work harder.
For some members, the problem is not an issue of income inequality. It is an issue about social mobility. Everyone has equal opportunities to succeed and some people who don’t want to succeed because they are lazy.
Some people can and do move up the social ladder disproving assumptions that they wouldn’t amount to anything due to their backgrounds. There has to be upward and downward mobility to keep economies moving. Most people focus on social mobility only in terms of the incentive of moving up, but there has to be the threat of moving down as well.
The top 10% of income earners understands how to use money and take risks to earn it. For some people, these are role models who do generate employment for their communities. Some of these elites are perfectly happy to contribute to society. Bill and Melinda Gates, Elon Musk, and Warren Buffet are examples.
Regulation of businesses needs to be strict. [Editor’s note: Sadly we didn’t get beyond this statement at this debate.]
Based on our cultural values and the economic systems we have, we may not be able to get an equal wage nor should we expect to. We need to reward ambition and work and a difference in income may achieve this. Equal income may result in us being unable to achieve career satisfaction.
“Some people are more equal than others” – A reference to George Orwell’s Animal Farm
Status should be the only equal denominator – Is this a (Western) cultural assumption?
Income inequality could stem from inequality of opportunity or wealth. For most of us, our choices are limited to “work and survive” or “be unemployed and starve”. Most of us don’t really get much choice about exactly how much we earn.
What are measures of inequality? Can these be measured scientifically? One member suggested that the median wage may be a good way of measuring this.
If we can’t have total equality then why does it have to be wealth that defines status? Some members have suggested power and education as other indicators of status.
Money is the power to get people to do what you want.
Rules of the (economic) system allow for small and large levels inequality.
An example of how we allow income inequality paraphrased by a member and sourced from Robert Nozick:
A celebrity athlete comes to town and everyone coming to his game pays a certain low amount of money to see him (say $1). By the end of the night, he has been paid a million dollars – all voluntarily – and everyone in the crowd goes away very happy. In fact, it is the happiest they could feel for the amount of money they have spent. However, he has just earned a million dollars – and the members of the crowd have an average annual wage of $50,000.
In this example as the attendees gave their money voluntary, and they and the sports star gained mutual benefits. This is a morally permissible act and therefore large income inequality is permissible.
If you find anything wrong with this example, you will find problems with income inequality. Why did this sport star charge $1 per person, he could have charged far less to generate a similar response? Why didn’t he charge less? What is the cost of charging less?
We allow people to win lotteries and by doing so we allow income inequality. Lotteries are voluntary and the people who participate don’t understand statistics. They don’t understand or seem to care that their chances of winning are next to zero.
The history of the Golden Casket – The first Golden Casket draw lottery was conceived to raise funds for veterans of World War One. The Golden Casket has raised funds for many public hospitals but most of us remain unaware of this. [Website] Why don’t we use lotteries as a taxation method especially given its history?
Lottery winners and athletes form a very small percentage of the population but most people don’t appear to object to the differences between a major lottery win or an athlete’s salary.
We may have to accept that there are certain commodities and items in our society that people can’t afford.
What are the problems of inequality? Some members have suggested social mobility and practical problems.
Another member suggested that there are two major problems with income inequality – poverty and politics. When people are starving and are unable to afford shelter, clothing, healthcare, or education, then we have a problem.
When people have the financial power to manipulate politics to entrench their financial power, then we have a problem. Financially powerful people may not be the best people to lead.
Minimum wage and maximum wage are strategies to combat these two problems of poverty and politics.
In Australia we may be blind or tolerant of income inequality because we have social security, relative living standards or quality of life and aren’t faced with abject poverty.
Disproportionate rewards and income inequality are not such a problem if people can live because of universal healthcare, welfare, and education. As long as people are taken care of (e.g. the “living wage” policy), the entire issue of income inequality is greatly reduced.
The differences between incomes may be attributed to moral luck and not ethical behaviour.
Rent seeking (in contemporary economies) is where an individual or group purchases the political and economic conditions to get what they want. This is abuse of economic systems.
For illustrative purposes we may be focusing on the extreme cases, the people who manipulate the system for their own benefit and those who are starving and make the decisions to transgress the law in order to live.
The poverty of an individual could be caused by them having addiction, mental illness and no life skills. People in these circumstances don’t understand how money works and get into debt. We need financial literacy to avoid this and it is not a skill taught in schools.
Most money in the world is made or earned from investments. This money is made out of “nothing”.
It takes a generation to create a billionaire. – A comment on why Australia has a small population of extremely rich people in comparison to other countries.
A person may ask “how are my efforts reciprocated in the community” as a means of justifying their income and the amount of work they do.
Incentives may not work as some people may be inherently lazy regardless of the incentives provided.
The Gini coefficient is a way of measuring and representing the distribution of income (income inequality) among a nation’s residents. Australia’s Gini coefficient is approximately 0.32 or 32%. Norway’s is considered the best at approximately 0.07 or 7%.
It’s easy to lie with statistics because people don’t have a basic understanding of it. Journalists abuse this lack of general statistics knowledge by not providing sources with their articles.
Marketers abuse and appeal to human nature – A comment on how we may be easily influenced and manipulated to inject capital into the economy.
Most people don’t know how to save their money. They don’t understand how to invest their money. Common investments include real estate, cash and the stock market.
Communal investments could be good in public floats – A comment on how communities could make better investments than an individual.
Kiva the micro transaction company was suggested as an alternative to donating to a “charity” by investing in low income entrepreneurs and students.
Some people invest because the higher risk of investing is offset by the higher returns that could happen.
The tax legislation system used by the ATO is extremely complex.
We wouldn’t object to inheritance tax if it was a culturally accepted norm.
People seem to want their offspring to have better lives and that compels them to work hard and leave a sizeable inheritance behind.
Gross Domestic Product (GDP) should be about efficiency. People don’t associate efficiency with economic growth.
There are many different measures that determine what we think and make.
Interesting question posed by the group
What is the exact statistic of the number of people involved in growing food?
How is income inequality allowed?
Do we have means to move beyond the social and economic boundaries placed by society?
Would a Capital Gains Tax prevent mass income inequality?
Do humans have a natural tendency to stand out and show off? Is it a personality trait to be ostentatious? Does a consumer society encourage this?
Are we brainwashed to buy more? Are we driven to perfection? Are we conscious that we are doing this?
Does the desire for pre-eminence drive the economy?
Is there a way other than money to flaunt status?
Has the social value of education been superseded for wealth?
Communism is a different economic model to capitalism. How do they compare?
Russia could become a super power again despite its roots in Communism. The USA (in its capitalistic hey days) certainly saw it as a threat. Would Russia have a different place in the world if it had adopted capitalism instead of communism?
For some the top 10% of income earners generate employment and take risks to do so while fuelling the economy. How did they get to this position? Should these people contribute (positively) to society? How can we get them contribute? If we didn’t support these people, would we be worse off? Would we be better off?
What is income inequality? Is income equitable? Is income inequality mass exploitation?
In economic systems is there a natural level of income inequality?
Does everyone “abuse power” or are we following the rules to achieve fairness?
Are we naturally inclined to better ourselves?
Should people who live off welfare payments lose their right to vote?
Could the government change the system to reduce inequality? Should they do this? What would their motivation be?
Growth has several definitions and what we mean by economic growth may vary. What is economic growth? Is economic growth a good thing?
What is the reasoning behind the government to set minimum wages and other similar payments? Are they trying to incite people to work harder?
Should we inflate wages?
What is economic balance? How do we maintain economic balance?
Do incentives work? Do they work if we look at them through the lenses of psychology, society and economics?
Are most lottery winners worse off after winning because they make bad decisions with their money? Are they less happy because people keep asking for a share of the prize or because they spend money on making others happy?
Does money make people happy?
Is Australia an unequal society?
How is a nation’s Gini coefficient calculated?
Should the government provide education and health services as welfare?
Would we be better off focusing on providing better health care and free education?
The Netherlands tax its citizens at a higher tax rate to provide free education and health care. Would a system like this work in Australia?
What do people mean by using terms like human nature, philosophy and spirituality? Are they trying to distance themselves from science? People seem very fond of using terms like “human nature”, “philosophy” and “spirituality” to avoid having to abide by the rigours of science, thereby giving them free reign to make stuff up or just state their opinions.
Why do people try to hoard money?
If you have more money than you could ever hope to spend, why do you invest in risky ventures but not things that are known to be safe or that could benefit society?
Could communities spend large amounts of money better than an individual?
Do entrepreneurs risk everything to take on new ventures?
How many CEOS make meaningful contributions to society?
Do we assume investors have specialised knowledge to make their decisions and the ones on the behalf of others?
Do we feel rewarded or entitled to earning from shares and investments? What about bank account interest?
Should we reward people for making well considered decisions rather than self interested or stupid ones even if these benefit themselves and others?
Are we throwing money into charity? Is charity money for jam?
Is there was no inequality, there would be no charity. Would this be detrimental to human society and to the psychology of humans? What would we fill the gap with? A member suggested that mental health might be the focus in lieu of charity.
Do we already live in a world without charity because we have a tendency to forget about the needy?
Are there people who are living in poverty? What is the percentage?
Is there something wrong with those who are poor? Do they deserve their poverty? Are there some people who refuse to accept the help given?
Do we think we are earning the average income? [Editor’s note: A paper quoted in the introduction suggests that we do think the average income as being quite similar to our annual salary.]
Does our welfare system push people out of poverty? Is it a failsafe system?
Is inheritance tax class warfare? Are there better ways of managing and taxing inherited income?
Could we generate government revenue in better ways than our current systems?
Would Tobin taxes be a better way of levelling the playing field? What about land taxes?
How do we design taxes?
Is high frequency shore trading parasitic?
Is income tax bad? Does it punish effort? Should we instead tax consumption? Could high income earners get out of a consumption tax?
Would a consumption tax lead to less consumption of commodities and resources, and would it improve society? Would reduction of consumption inhibit productivity? Would we become more efficient?
Do we look to the Arts in times of tragedy? Should we invest in them rather than charity?
Are artists still being patroned by rich people? Does the rich still see this as a symbol of prestige?
Would the arts industry be able to support itself without government grants?
Should the government continue funding the Arts?
Would we get better art by incentivising its creation? It’s highly doubtful based on how this model operates in the games and film industries.
Should organ donation be compulsory?
Is philanthropy a cultural difference? Are there differences in the totals of philanthropists between Australia and the United States?
Could we choose how our inheritance tax was used? Would that make it an acceptable form of taxation?
How do we stop generational wealth? Would we want to stop it?
Do we have too many millionaires? What is a millionaire as its current meaning is different from its original meaning?
Do we have a problem with wealth?
Do we only tolerate small income inequality? Is this why we dislike and allow mass income inequality? Could we support mass income inequality? Why hasn’t America revolted?
Is economic growth sustainable?
What determines quality of life?
Ethical robots [New Scientist Article]
Probability stats – chances aren’t normally what you expect. See the Monty Hall problem.
Deregulation of the market
Public sector and management of it
Luxury cars as a signs of affluence
Ambition and ego
Ayn Rand’s Atlas Shrugged [Wikipedia Article]
Nietzsche’s concept of “will to power” [Wikipedia Article]
Robert Nozick’s “Anarchy, State and Utopia” and John Rawl’s “A Theory of Justice” [YouTube video – An Introduction to the Philosophy of Politics and Economics]
How to Lie with Statistics (Book)
Warren Buffet [Wikipedia Article]
The time value of money
Just world effect/phenomenon
Wicked problems [Wikipedia Article]
Social Realism [Wikipedia Article]
High and low culture
Solar power and the need to develop a battery so we can store this energy
Beattie’s Smart State
Degrowth movement [Wikipedia Article]
Zero growth economies