Today’s complex social systems seem to be intertwined with social disparities. This might be considered an issue that regards only those who have less, but quite the opposite, it regards mostly those at the top. They are the ones who get the larger share of the economic pie and thus the ones to bear most of the responsibility for economic well-being.
“The top 1% own 45% of all global personal wealth; 10% own 82%; the bottom 50% own less than 1%.”
Which raises the most basic question: why can’t we share the economic pie more evenly? Better still, why can’t we all contribute to make the pie bigger?
The Psychological Roots of Inequality
According to the study, ‘Unpacking the Roots of Inequality Paradox: The Psychological Roots of Inequality and Social Class’, people openly express a preference for a more equal society (e.g. The Occupy Wall Street Movement). Nevertheless, class divisions seem to persist more and more over time… Professors Paul K. Piff, Michael W. Kraus, and Dacher Keltner provided two main reasons for this paradox:
- Most human societies have a stratified structure with fewer people at the top than at the bottom.
- Hierarchies are self-perpetuating due to several factors, such as inequality of opportunity, and social class bias within private and public institutions.
Notice how they stated ‘most’, not ‘all’ human societies, have a stratified structure. That’s because equality did exist in early human societies. Let’s go back in time to understand the evolution of inequality.
Social Complexity Brought Social Inequality
Our hunter-gatherer ancestors spent most of their time hunting and foraging for food. The ‘richest’ member of such a society might be a chief, they might live in a slightly larger hut, they even might be exempted from hunting, but that was the maximum of privilege. In this type of society, there was no room for wealth inequality; people had to focus on how to survive, and they had to do it collectively.
What turned society upside down was farming, this simple yet amazing step up in technological prowess was quickly followed by so many innovations, such as steel, weapons and architecture. It is in the mere beginning of these technologies that inequality started to take shape; agriculture and architecture gave rise to the noble class, the same way the information age has given rise to the modern global upper class.
An Inequality Maintenance Model of Social Class
The study mentioned at the beginning of the article proposes a very interesting model which examines the psychological processes by which individuals create and perpetuate social class hierarchies. According to this model, there are prevailing structural barriers that separate upper-class people from those below: social class determines people’s access to desirable goods, services, opportunities, and valued social networks. These structural barriers combined with ideologies of merit make upward social mobility impossible for lower-class people.
As people’s position in society rises, so, too, will their tendency to endorse merit-based explanations of economic inequality and privilege.
This hypothesis was supported by several studies: Americans with higher incomes are more likely to say that wealth and poverty are the results of individual characteristics like hard work, talent, and motivation, and less likely to say these outcomes were the result of structural forces.
Those at the top believe that they deserve it because they made it on their own, but the truth is no one makes it on their own; we all depend on a functioning society to get things done.
The Trickle-down Theory
There is a number of myths that have persisted about wealth inequality, including the trickle-down theory which deluded us into thinking that ‘everyone benefits’. If it were true, we would all be doing very well, but that’s not the case.
“Inventors and innovators who become billionaires tend to stimulate economic growth, while individuals who obtain wealth and often also monopoly power through political connections tend to hinder competition and hurt economic growth.”- Jan Svejnar. March 2015. Do Billionaires Help or Hurt the Economy?
Billionaires like Warren Buffett of Berkshire Hathaway didn’t invent anything; they made their fortune by investing in monopolies. Others like Mark Zuckerberg of Facebook and Sergey Brin of Google, created addictive online platforms that control more than half of all online advertising, without adding anything special of their own — not to mention the immense amount of data they have on us for free.
It is not the people at the top who really contributed to our society and transformed it, these people are simply rank seekers. They’ve been good at seizing a larger share of the pie rather than making the pie bigger.
A Misguided Market: Global Saving Glut
Economists look at people’s marginal propensity to consume and marginal propensity to save; i.e. for every extra dollar, how much do people spend and save? These calculations are important to estimate the total impact of a prospective increase in incomes to determine the optimal production level — and thus increase economic growth.
While average people spend the majority of the money they make because living is expensive, the super-rich tends to spend a lower portion of their income; they spend more overall, but less in relative terms. In short, the wealthy save more money than they spend.
“Over the past 35 years, the substantial rise in savings by the top 1% has been associated with dissaving by the government and the bottom 90%, as investment actually fell.”- Atif Mian. Ludwig Straub. Amir Sufi. October 2020. The Saving Glut of the Rich.
When desired saving exceeds desired investment, the economy witnesses the so-called ‘global saving glut’ phenomenon: dead cash due to bad investments. Poor investments are one of the main causes of economic recession, a period of declining investment because of an increase in interest rates and a fall in consumer confidence.
Saving gluts are less of a problem if it is from the lower or middle-class; for one, lower earners don’t have the capacity to hoard quite as much capital as the truly wealthy elites. And two, they have more ability to invest in smaller — and more promising — ventures.
How Policies Can Reduce Economic Inequality
It is true that social complexity makes it harder for wealth to be more equally distributed, but there is so much that can be done. For instance, public policy can help significantly to reduce inequality and address poverty.
Haas Institute Director John A. Powell discusses how a series of evidence-based policy solutions can minimize the rising economic inequality (prevalent in the United States):
- Increase the Minimum Wage: Research shows that a minimum wage increase for the lowest-paid workers can help nearly 4.6 million people out of poverty and add approximately $2 billion to the nation’s overall real income.
- End Residential Segregation: Geographic separation by class in neighborhoods and cities ensures that resource -and opportunity-rich social networks, as found in neighborhood spaces, schools, social gatherings, internships, and gateway career opportunities, are concentrated among people from upper-class backgrounds.
And lastly, my own personal observation, effective regulation policies concerning monopolies: Large corporations are keeping many products’ prices high and quality low. But politicians don’t seem to oppose it. Monopoly isn’t just about market concentration, it is about politics too; it provides much of the funds and connections the wealthy use to distort American policies.
Tax System: An Engine of Inequality
The federal tax system seems to be ineffective as it fails to raise sufficient revenue to finance government spending; it is complex, it creates outcomes that are unfair, and it retards economic efficiency. This is why I decided to learn about different types of tax systems. Interestingly, one particular system, the Islamic taxation system does not tax income but taxes surplus wealth instead — the accumulated wealth by the end of the one-year period. The Muslim wealth tax Zakat is set up at 2.5% regardless of the wealth accumulated.
“It is unjust that the whole of society should contribute towards an expense of which the benefit is confined to a part of the society.”- Adam Smith
The economist Siddiqi argues that Zakat satisfies the four famous principles of a fair taxation system as set up by Adam Smith; fairness, certainty, simplicity, and convenience. These four principles are all met by this simple, low, fixed tax rate. It doesn’t have any significant effect on upper or middle-class lifestyles, nor does it apply to people who live paycheck to paycheck; therefore, it eases the tax burden and reduces inequality.
To conclude, a wealth tax is fairer than an income tax. And we should focus on what’s fair and what isn’t. It is the first step toward creating a better, wealthier, and more equal society.
