The Trouble with Economic Inequality.

Economic inequality is an issue that seems to be everywhere these days. It is an explosivepolitical topic and almost everybody has an opinion about it – mostly in the negative, i.e. that inequality is too high which is too bad and something should be done about it. Much of the critique of inequality focuses on the plight of the poorest of the poor but at the same time a lot of attention (and anger) is also directed at the untold wealth of the super-rich. The thing is, however, inequality comes in many different shapes and a principled critique of inequality is therefore not as straightforward as all that.

Let me illustrate this with a simple question. Which of the following statements offends your sense of justice and fairness most intensely?

(i) While the average Russian family lives in an apartment of less than 60m2, President Putin built himself a palace on the Black Sea worth more than $1 billion.

(ii) While many musicians are reduced by the gig economy to playing “for exposure”, Paul McCartney’s net worth is $1.2 billion.

(iii) While in, say, 1910 the average worker in Standard Oil could expect to earn less than 25 cents per hour, the Standard Oil’s owner J. D. Rockefeller was the world’s and history’s first dollar billionaire.

(iv) While most of the 130 million inhabitants of the 17th century Mughal Empire teetered on the brink of famine, their ruler Shah Jahan had precious resources to spare on building the Taj Mahal, a marble tomb for one of his wives, on a 17-hectare burial site.

(If you want, you can anonymously post your ranking of these statements at this mentimeter poll and have a look at how others have voted here.)

Now, we could surely quibble about the accuracy of this or that number in those four statements but their basic structure and gist are the same: they each describe a case of jarring economic inequality – with some variation in context. Two of the statements mention the wealth of private individuals; the other two the wealth of public figures. Two of them are from the current era and two are historical examples. Two of them involve a rich individual wielding direct political power over his poorer counterparts, whereas one statement involves a boss having no more than the hiring-and-firing power over his employees and one does not involve any direct power relationship at all. Which of these instances of inequality is causing us particular qualms and why?

There are, of course, some people who will be incensed by all four. Yet, I’d argue, some of the four statements describe inequalities that seem less unfair to us than others. My perfectly unrepresentative impression is that when people criticize economic inequality around the world, the image that they have in mind most often corresponds to statement (iii): a situation where a fat-cat boss out-earns a lowly employee by such an obscene factor! This is somewhat strange because the most egregious instances of economic inequality do not actually occur in private business settings but rather in the context of rapacious governments. It is true that the likes of Belarus’ Lukashenka, North Korea’s Kim Jong Eun and Zimbabwe’s Robert Mugabe rarely show up on the Forbes billionaire list – partly because Forbes is interested primarily in business people but partly also because dictators usually make a point of keeping their actual net worth shrouded in mystery by way of anonymous Swiss bank accounts. But there is no doubt that, for all the strivings of entrepreneurs like Bill Gates and Mark Zuckerberg to make their billions in business, there is no more effective path to controlling an exorbitant sum of assets than dominating a whole country and grazing everything that’s in it to the hilt.

That is the point I was trying to make by including the two potentates in the four statements above. President Putin catches lot of flak these days, although most of it focuses on his repressive politics. This is understandable: after all, systematic violation of civil and human rights is by far a more serious matter than his pilfered billions (damnable though they are). But there is also no denying that the two things – his authoritarianism and his ill-gotten wealth – are joint vessels. Putin did not get rich because he had done something of huge benefit to humankind. Oh no. He got rich because he can and does abuse the sinews of power for personal enrichment. When we are incensed by the chasm in wealth between him and the average Russian, the criminal origin of his wealth in theft and corruption is surely a big part of the reason.

On that score, however, it is remarkable that past offenders of the same kind, such as the Emperor Shah Jahan, usually get off the hook rather lightly, even though his fabulous wealth was no less ill-gotten than Putin’s: the spoils of merciless extraction visited on ordinary people by a brutal despot. I wonder if any of the annual 8 million modern-day visitors to the Taj Mahal ever stop to think that the monument is, among other things, a screaming indictment of the extreme exploitation, characteristic of most pre-modern societies. Just think about it: at a time when the bulk of his empire’s population struggled more than we could ever imagine to eke out a basic subsistence, Shah Jahan was wasting the country’s wealth on an obscenely over-the-top tomb! It was not even supposed to benefit anyone living; it is a corpse storage facility!

One might argue that the reason why we do not lose any sleep over the inequality represented by the Taj Mahal is that there is no point in getting angry about a past that cannot be changed: that’s just the way it was back then, you see? But then again, many a modern critic of economic inequality makes the point of linking the contemporary cases of Jeff Bezos, Elon Musk and Warren Buffett with the long-dead J. D. Rockefeller (and Henry Ford and Andrew Carnegie) in what they see as the same fundamental pattern of unconscionable disparity in living standards. Far from being hand-waved away, then, in some circumstances the unequal past joins present-day inequality on the pillory of public opinion. I’d say it is a safe bet that, whether today or hundred years ago, most of the criticism of inequality targets the yawning gap between the low-paid factory-floor worker and the outrageously overpaid CEO.

To complicate things further, in contrast to the fat-cat CEOs with their seven-figure bonuses, Sir Paul’s wealth rarely comes in for criticism: everyone can see that if you write more than 30 #1 hits and they get played on the radio for sixty years to billions of people, then, yes, that will probably add up to a lot of money in royalties. It does not seem as unfair as the Rockefeller case. After all, McCartney did not get rich by exploiting Ringo (although some of that may have taken place, too). Most people understand that his riches come from his exceptional musical talent that he has shared throughout his life with the rest of the world. So, if he is rich, good for him, right?

The trouble with economic inequality, in short, is that, while it receives much justified criticism in everyday discussion, it is not always all bad (or not equally bad) and that we are not always very consistent in which kind of inequality we condemn and for which reasons. On the one hand, economic inequality too often goes hand in hand with abuse of power that has been the root cause of much human suffering. Unequal wealth is both a product of that power abuse as well as its enabler and motivator. It is not hard to spot which of the four statements above fit this bill. On the other hand, most of us have some tolerance for some inequality in some circumstances. Economic inequality is, after all, deeply embedded in many of our institutions, shaping the incentives that we face in everyday life. And for good reasons: in almost every field, we lavish fame and fortune and everything that goes with it on the champions in their fields, whether it is arts or sports or science or business, the idea being that the prospect of outlandishly high rewards will bring out extra effort in all. It does seem to do the trick, by and large (see: Paul McCartney).

A principled critique of inequality is surely necessary but it takes some careful thinking to figure out what those sensible principles of critique should really be.

Written by Dr. Tomáš Cvrček

Tomáš Cvrček is an Associate Professor in Economics at UCL SSEES. His research interests focus on economic history of Central and Eastern Europe, especially issues connected with the rise of modern schooling, the demographic transition, technological change and the accompanying change in living standards.