Inequality: the cause and consequence of a broken economic system

28 Feb 2019

 

Wealth inequality is reaching heights that were unimaginable a generation ago. New evidence is constantly being discovered that highlights how grave this crisis is. Last year, the wealth owned by billionaires increased by 12% (almost 2 billion pounds a day). At the same time, the wealth owned by the poorest half of the world’s population decreased by 11%. The scales are reaching a tipping point and a study by the House of Commons library last year suggested that by 2030 the richest 1% in Britain will own up to 2/3 of all the wealth. 

 

Unsurprisingly, the wealthy have little interest in resolving this problem. For the best evidence of this, we should look at the recent example of the World Economic Forum in Davos, Switzerland. This year in January, billionaires were lampooned by the historian Rutger Bregman for continuing to pay lip-service to issues of inequality while refusing to pay their taxes. He said “it feels like I’m at a firefighter’s convention and no ones allowed to talk about water”. 

 

Inequality is generally an issue discussed by the left-wing. In fact, the term ‘left-wing’ comes from the French National Assembly in the 18th century. Those who sat on the left side of the room were the representatives of the people and those who sat on the right were supporters of the king. We could quote any number of left-wing figures from Karl Marx to Martin Luther King Jr. on inequality. But the disappointing and simple truth is that our economic system is failing to meet even the most modest of goals.  

 

One of the most significant thinkers in the Western democratic tradition is John Stuart Mill. His idea, called the ‘Harm Principle’ suggested that people should be free to do as they like unless they are harming someone else. Society should only intervene against individuals when their actions are harming other people. This has represented an ideal of freedom since it was written in the 19th century. Mill’s ideas remain important in government policy-making today.

 

Similarly, other influential thinkers have attempted balance the issue of personal freedoms with the public good. John Rawls is one of them, and he provided huge inspiration for centrist movements such as Clinton’s ‘New Democrats’ and the Social Democratic Party that split from the Labour Party in 1980. He argued that inequality was justified as long as it was for the mutual benefit of everyone. This means that, according to him, we should support systems that produce inequality so long as the people who are poorer are still better off than they would have been without that system. This was an attempt at justifying and shaping our institutions and Rawls has been considered the most influential thinker of the 20th century.

 

The problem is that inequality has reached a level where it is harming the public good. In an article to the World Economic Forum, Oxfam highlighted shocking levels of global inequality. They also estimated that simply taxing 0.5% of the wealth from the top 1% of people would provide enough money to educate all the children that are out of school globally and provide enough healthcare to save 3.3 million lives. This is therefore not an issue of asking the rich to subsidise the poor, but tackling a flawed economic system that has the poor subsidising the rich, losing out on their own rights in the process. This issue is both moral and practical.

 

For example, we should look at the marginal propensity to save of people with different incomes. The marginal propensity to save is the proportion of extra income that an individual will save rather than spend. We know that the rich have a much higher propensity to save. If they have extra income, they are more likely to save it because they already have all their necessities. They tend to leave higher and higher amounts of money in savings, rather than having it circulating in the economy.

 

Lower income people tend to have a much lower propensity to save. The extra money that they gain is spent on necessities. The effect of this is that money going to working and middle-class people is much more likely to be spent and strengthen the economy. If we want a strong and varied economy with high consumer spending then we need to make sure the money is not concentrated in the hands of a small minority. 

 

Far from promoting individualism, our current economic model means that levels of inequality are stifling the development of the most vulnerable in society. If we allow a wealthy minority to hoard wealth, our economic prosperity will start to slow down. Consider also that high levels of inequality also undermine democracy, and this will make the problem yet harder to solve. 

 

Increasingly, the needs of society are becoming completely inverted, so the poorest are paying to subsidise the richest. The effective tax rate for the poorest 10% of British people is 49%. While the tax for the richest 10% is only 34%. This is largely due to a hesitance from successive governments to be seen increasing taxes. Therefore, they raise revenues in more discreet ways such as by raising VAT, which disproportionately hits lower-income earners.

 

An economic system that produces colossal levels of inequality is the reality today. The natural consequence of this is that inequality will continue to snowball, undermining living standards and democracy. Regardless of our political standpoints, we should recognise that this is a problem. Tackling inequality is an urgent issue which cannot afford to wait another few decades. These statistics, among others, expose the stark reality that our economic systems are not working for the collective good.  They should be.  

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