Capitalism

How Capitalism Actually Generates More Inequality

Why extending markets or increasing competition won’t reduce inequality

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By Geoffrey M. Hodgson

At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality. Typically there is freedom to trade and equality under the law, meaning that most adults – rich or poor – are formally subject to the same legal rules. But with its inequalities of power and wealth, capitalism nurtures economic inequality alongside equality under the law.

Today, in the USA, the richest 1 per cent own 34 per cent of the wealth and the richest 10 per cent own 74 per cent of the wealth. In the UK, the richest 1 per cent own 12 per cent of the wealth and the richest 10 per cent own 44 per cent of the wealth. In France the figures are 24 cent and 62 per cent respectively. The richest 1 percent own 35 percent of the wealth in Switzerland, 24 per cent in Sweden and 15 percent in Canada. Although there are important variations, other developed countries show similar patterns of inequality within this range.[1]

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In their book The Spirit Level, Richard Wilkinson and Kate Pickett showed multiple deleterious effects of inequalities of income and wealth. Using data from twenty-three developed countries and from the separate states of the United States, they observed negative correlations between inequality, on the one hand, and physical health, mental health, education, child well-being, social mobility, trust and community life, on the other hand. They also found positive correlations between inequality and drug abuse, imprisonment, obesity, violence, and teenage pregnancies. They suggested that inequality creates adverse outcomes through psycho-social stresses generated through interactions in an unequal society.

Although economic inequality is endemic to capitalism, data gathered by Thomas Piketty in his Capital in the Twentieth Century, and in my book entitled Conceptualizing Capitalism, show that there are large variations in measures of inequality in different major capitalist countries, and through time. The existence of such variety within capitalism suggests that it possible to alleviate inequality, to a significant degree, within capitalism itself.

But first we must be clear about the drivers of inequality within the system. What are the mechanisms within capitalism that exacerbate inequalities of income or wealth?

Some inequality results from individual differences in talent or skill. But this cannot explain the huge gaps between rich and poor in many capitalist countries. Much of the inequality of wealth found within capitalist societies results from inequalities of inheritance. The process is cumulative: inequalities of wealth often lead to differences in education, economic power, and further inequalities in income.[2]

Do markets create inequality?

To what extent can inequalities of income or wealth be attributed to the fundamental institutions of capitalism, rather than a residual landed aristocracy, or other surviving elites from the pre-capitalist past? A familiar mantra is that markets are the source of inequality under capitalism. Can markets be blamed for inequality?

In real-world markets different sellers or buyers vary hugely in their capacities to influence prices and other outcomes. When a seller has sufficient saleable assets to affect market prices, then strategic market behaviour is possible to drive out competitors.

Would more competition, with greater numbers of market participants, fix this problem? If markets per se are to be blamed for inequality, then it has to be shown that competitive markets also have this outcome. Unless we can demonstrate their culpability, blaming competitive markets for inequalities of success or failure might be like blaming the water for drowning a weak swimmer.

To demonstrate that competitive markets are a source of inequality we would have to start from an imagined world where there was initial equality in the distribution of income and wealth, and then show how markets led to inequality. I know of no such theoretical explanation.

Markets involve voluntary exchange, where both parties to an exchange expect benefits. One party to the exchange may benefit more than the other; but there is no reason to assume that individuals who benefit more, or benefit less (in one exchange) will generally do so. And if some traders become more powerful in the market than others, then its competitiveness is reduced.

There is another reason why it is a mistake to focus on markets. In the sense of organized arenas of exchange, markets have existed for thousands of years. We need to look at new institutional drivers of inequality that became prominent in the last 400 years or so. These new institutional changes were additional to markets.

The sources of inequality within capitalism

So if markets per se are not the root cause of inequality under capitalism, then what is? A clear answer to this question is vital if effective policies to counter inequality are to be developed. Capitalism builds on historically-inherited inequalities of class, ethnicity, and gender. By affording more opportunities for the generation of profits, it may also exaggerate differences due to location or ability. Partly through the operation of markets, it can also enhance positive feedbacks that further magnify these differences. But its core sources of inequality lie elsewhere.

Because waged employees are not slaves, they cannot use their lifetime capacity for work as collateral to obtain money loans. The very commercial freedom of workers denies them the possibility to use their labour assets or skills as collateral. By contrast, capitalists may use their property to make profits, and as collateral to borrow money, invest and make still more money. Differences become cumulative, between those with and without collateralizable assets, and between different amounts of collateralizable wealth. Even when workers become home-owners with mortgages, the wealthier can still race ahead.

Unlike owned capital, free labour power cannot be used as collateral to obtain loans for investment. At least in this respect, capital and labour do not meet on a level playing field, this asymmetry is a major driver of inequality.

The foremost generator of inequality under capitalism is not markets but capital. This may sound Marxist, but it is not. In my Conceptualizing Capitalism I define capital differently from Marx and from most other economists and sociologists. My definition of capital corresponds to its enduring and commonplace business meaning. (Piketty’s definition is also similar to mine.) Capital is money, or the realizable money-value of collateralizable property. Unlike labour, capital can be used as collateral and the loan obtained can help generate further wealth.

Because workers are free to change jobs, employers have diminished incentives to invest in the skills of their workforce. Especially as capitalism becomes more knowledge-intensive, this can create an unskilled and low-paid underclass and further exacerbate inequality, unless compensatory measures are put in place. A socially-excluded underclass is observable in several developed capitalist countries.

Another source of inequality results from the inseparability of the worker from the work itself. By contrast, the owners of other factors of production are free to trade and seek other opportunities while their property makes money or yields other rewards. This puts workers at a disadvantage. Through positive feedbacks, even slight disadvantages can have cumulative effects.

None of these core drivers of inequality can be diminished by extending markets or increasing competition. These drivers are congenital to capitalism and its system of wage labour. If capitalism is to be retained, then the compensatory arrangements that are needed to counter inequality cannot simply be extensions of markets or private property rights.

These ineradicable asymmetries between labour and capital mean that ultra-individualist arguments against trade unions are misconceived. In a system that is biased against them, workers have a right to organize and defend their rights, even if it reduces competition in labour markets.

Reducing inequality – within capitalism

The twentieth-century socialist experiments in Russia and China undermined human rights in their efforts to reduce inequality. This is not a road that we should attempt to follow.

Instead, we have to look at ways of reducing inequality within capitalism, and which do not undermine capitalism’s unparalleled capacity to increase productivity and generate wealth.

Long ago, Thomas Paine (1737-1809) argued for an inheritance tax, but balanced this by a grant to each adult at reaching the age of maturity. In this way, wealth would be recycled from the dead to the young, providing greater equality of opportunity across the board. Paine also advocated welfare provision and a guaranteed pension for those over 50.

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Bruce Ackerman and Anne Alstott took up Paine’s agenda in their proposal for a ‘stakeholder society.’ They argued that ‘property is so important to the free development of individual personality that everybody ought to have some’. They echoed Francis Bacon: ‘Wealth is like muck. It is not good but if it be spread.’

Ackerman and Alstott stressed progressive taxes on wealth rather than on income. Echoing Paine, they proposed a large cash grant to all citizens when they reach the age of majority, around the benchmark cost of taking a bachelor’s degree at private university in the United States. This grant would be repaid into the national treasury at death. To further advance redistribution, they argued for the gradual implementation of an annual wealth tax of two percent on a person’s net worth above a threshold of $80,000. Like Paine, they argued that every citizen has the right to share in the wealth accumulated by preceding generations. A redistribution of wealth, they proposed, would bolster the sense of community and common citizenship.

Increased wealth or inheritance taxes are likely to be unpopular because they are perceived as an attack on the wealth that we have built up and wish to pass on to our children or others of our choice. But the brilliance of Paine’s 1797 proposal for a cash grant at the age of majority is that it offers a quid-pro-quo for wealth or inheritance taxes at later life.

People will be more ready to accept wealth taxation if they have earlier benefitted from a large cash grant in their youth. Wealth would by recycled to younger generations rather than syphoned away. The more fortunate or successful can be persuaded to give up some of their advantages if they see the benefits for society as a whole.

In the economy, there are many ways of spreading power and influence more broadly. The idea of extending employee shareholding is growing in popularity. This is a flexible strategy for extending ownership of revenue-producing assets in society. In the USA alone, over ten thousand enterprises, employing over ten million workers, are part of employee-ownership, stock bonus, or profit-sharing schemes. Employee ownership can increase incentives, personal identification with the enterprise, and job satisfaction for workers.

As modern capitalist economies become more knowledge-intensive, access to education to develop skills becomes all the more important. Those deprived of such education suffer a degree of social exclusion, and, unless it is addressed, this problem is likely to get worse. Widespread skill-development policies are needed, alongside integrated measures to deal with job displacement and unemployment.

A key challenge for modern capitalist societies, alongside the needs to protect the natural environment and enhance the quality of life, is to retain the dynamic of innovation and investment while ensuring that the rewards of the global system are not returned largely to the richer owners of capital. As Paine put it in 1797:

All accumulation, therefore, of personal property, beyond what a man’s own hands produce, is derived to him by living in society; and he owes on every principle of justice, of gratitude, and of civilization, a part of that accumulation from whence the whole came.

We need to update Paine’s approach to dealing with inequality, to suit modern times.

[1] Data are for 2010 and from the Credit Suisse Research Institute (2012). See also Piketty (2014) for extensive data on inequality.

[2] See Bowles and Gindis (2002) and Credit Suisse Research Institute (2012). See Ackerman and Alstott, (1999) and Atkinson (2015) on policies to reduce inequality.

2016 August 11


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  • As with many articles on this site, the article begins with an appeal to authority based on another work (“The Spirit Level, Richard Wilkinson and Kate Pickett”) and follows it up with extremely questionable assertions (e.g. “By contrast, the owners of other factors of production are free to trade and seek other opportunities while their property makes money or yields other rewards. This puts workers at a disadvantage.”).

    Maybe these are true (although I have my doubts), but we can’t really tell (from this article anyway( because they are only assertions. Why not at least provide links? Or make explicit assumptions and then argue that something else interesting is also true?

    BTW, here is both a better example of how to present an argument and one that goes to the truth of the headline: Nozick’s Wilt Chamberlain example: http://www.iep.utm.edu/nozick/#SH2c

  • Can you tell me where Paine wrote these ideas?
    A decent article, but what you are calling capital is really just access to credit. The guy with the most credit wins because he can grow through merger and acquisition and survive any busts, often using the bust to maximum advantage.

    Also, you are too quick to dismiss the role of marketplace forces in creating inequality. It’s as significant as access to credit. Kids, by the way, do have access. One trillion in college debt, etc. of course, the idea that knowledge is valuable in terms of long term equality/advantage may be flawed, but our discussions/disagreements are at a higher level.
    Lastly, with death the wealth must go to the next generation. While too little too late generally, structurally speeding up the process doesn’t change the system. Your analysis has some flaws, but it is pretty good. You might find my book useful. It’s a free download at behappyandfree.com

  • The first line of argument simply couldn’t be any more false.
    “At least nominally, capitalism embodies and sustains an Enlightenment agenda of freedom and equality”

    Freedom, if it is to have any real meaning, involves the presence of actual, real choices.
    In a market based system, anyone committed to universality, either as an ethical or a religious principle, or as the most powerful survival strategy available, rapidly finds that market based systems value universal anything at zero.
    Anything based in markets is antithetical to anything being universal.
    So anyone actually committed to freedom, applied universally, is forced to conclude that universal freedom, is not compatible with a market based system.

    As for equality.
    Anything equally distributed has no market value either.
    Again, markets require difference to function.
    In one sense markets can be thought of as flows of goods and services from areas of high concentration to areas of low concentration (capital can accumulate due to asymmetries at every step in such flows).
    There is an aspect of markets that do the same in the realms of information and strategy, but that is far more complex, many levels more complex, and already has well developed technologies and strategies to deliver universal abundance.

    The article goes on to suggest in respect of Wilkinson and Picket “They suggested that inequality creates adverse outcomes through psycho-social stresses generated through interactions in an unequal society.” Which is a part of the picture.
    Another part of the picture is that at the bottom of the distribution curve, you are getting the lowest quality of everything available – information, food, housing, environment, education, …..
    Individual people are not stupid. They may be ignorant at some levels, and everyone has a highly intuitive aspect.
    Crowds can be stupid. Crowds can be wise about things that are within the common domain (like weight, or time), but truly foolish about more complex domains like abstract strategy.
    Wisdom of the crowd depend very much upon the knowledge base of that specific crowd. The more abstract the conceptual system, the less likely the crowd is to display competence.

    Inequality isn’t simply “endemic” to capitalism, it is the foundation upon which capitalism is built.
    Without unequal distribution, markets cannot function.
    Historically, that wasn’t a significant issue, because the inequalities of distribution were structural to reality, and markets were tending to smooth those out. In that context, it could clearly be argued that markets worked towards equality – and they did.
    What has changed is that we now have the power to automate a large and expanding set of such systems such that, at the functional level of human experience, it can no longer be argued that such inequality is necessarily structural to reality.
    We now have the technology to remove such inequality, universally.

    What is now at issue, is that many of the dominant strategic sets that underlie that major systems in our society are based in the notion of structural inequality – markets being the most obvious one.

    No one, who is truly committed to freedom, or who is really interested in their own long term survival probabilities, can any longer support the notion of markets as being a reasonable dominant tool in our tool-set, in an age of automation, except through wilful ignorance (the defence of a notion that is logically indefensible in our current context).

    The article asks:
    “What are the mechanisms within capitalism that exacerbate inequalities of income or wealth?”

    Then he misses the “core driver” completely.
    Sure the tendencies he identifies exist, and are a part of the picture.

    And the “core driver” is simply a statistical one. In any system subject to variations, in parameters that determine survival, then the ultimate driver of survival will, periodically, force those without sufficient reserves to devalue all their other values simply to survive. Recessions invoke something of a “feeding frenzy” amongst the top end of the capitalist strategic set of predatory strategies. Same can be said at all levels of the system, right down to the personal, where banks foreclose on individuals who lose their jobs (even if those very same banks funded the corporate raid that led to the job losses).
    In one sense, all such strategies mean the bigger players tend to win, just as a house limit on a Crown and Anchor table ensures that the house will win, as it limits the strategic sets available to other players.

    Agree completely that the removal of liberty in the name of communism is to be resisted, every bit as much as the removal of liberty in the name of capitalism is to be resisted.

    What does liberty mean?
    Capitalism seems to say that everyone is free to play the game of capitalism, but no one is supposed to mention that for some to win, the vast majority must lose.
    Under capitalism, no one can survive unless they play the capitalism game.

    I say, we now have sufficient technological capacity to automate processes that we can now, at no real cost to any individual, ensure that every individual on the planet has all the resources and real freedom of information and travel and technology, to do whatever they responsibly choose.
    And responsibility in this context is a deeply recursive set of complex domains that seem to be potentially infinite – so no clear certainty, only balances of probabilities – sets of individual judgements.

    Respect for individual life, and individual liberty, universally applied, must be at the core of any strategic set that has longevity as a desired outcome – if Wolfram has shown us anything, he has demonstrated that.

    • John M Legge

      I think that you should study some social history of the eighteenth century and read Adam Smith with a degree of care. You will find that Smith (and therefore early capitalists) believed that the Statute of Apprentices and the legal privileges of the various guilds were an intrusion on the freedom of both consumers and workers.

      Smith was very much a creature of the Enlightenment and considered that he was proposing an Enlightenment agenda. Hodgson’s statement including his qualification has a sound historic basis. You are proposing a different definition of freedom; but yours is no the one that the Enlightenment adopted.

      • I am very aware that I am using a different definition of freedom.
        As I am aware that I am using different conceptions of “evolution” and “complexity” and “strategy”, and a fundamentally different conception of “knowledge” (one based purely in probability).

        So yes – your criticism is valid in that limited context, and that is not the context of my argument as a whole.

        And yes – I acknowledge that this is a very complex realm, and it is very easy for misunderstandings to occur (far more probable than not).

        I am definitely not restricted to the enlightenment conceptions of freedom.
        Those concepts are over 200 years old.
        Since then we have had general relativity, Heisenberg uncertainty, quantum probability, Turing computation, Wolfram and general algorithm and logic spaces, and the recursive nature of evolution in the deepest of strategic senses.

        So I am a very long way from the conceptual spaces of the “Enlightenment”, and the very many errors of fundamental assumptions they implicitly adopted.

        I am concerned with freedom in the context of the spaces we are dealing with here and now – in the context of emerging Artificial General Intelligence, chaos, maximal computational complexity and the possibility of indefinite life.

        If this paper were concerning itself only as a historical document relating to the enlightenment, then your criticism would be completely valid.

        But that is not what this paper claims to be.
        This paper claims to be relevant to our present.
        As such, it _must_ be relevant to all the contexts I have outlined above.

        All of my pointing to trains of abstraction and realms of logic are in that context of contexts.

        • John M Legge

          I am afraid that you drifted off topic and strayed further as you went along. Hodgson referred to the enlightenment concept of freedom in passing: you have a different concept of freedom, which is your right; but expanding on it doesn’t do anything for anyone’s understanding of Hodgson or the topic of his current article.

          • I promise, that within my own conceptual understanding of the relevance of Hodgson’s assertions to our modern context I stayed very much on topic – and I fully understand that not many people may have understood that.

            Freedom is a complex topic. We could spend a long time on it. I don’t want to right now.

            Hodgson claims that capitalism embodies a concept of freedom.

            In the context of the 200 years ago, when most things were genuinely scarce, one could make a reasonable case to support such a proposition.

            In the intellectual and technological context of today, when we can fully automate the production of a large and exponentially expanding set of goods and services (potentially making them universally available), then a claim that capitalism embodies freedom cannot be substantiated (in today’s context).

            Trying to give some weight to such a claim, by using conceptual sets that are 200 years old is kind of like trying to teach thermodynamics using the caloric model of heat.
            There is a place for talking of the caloric model of heat – in works like John Gribbin’s History of Science, but not in a modern understanding of physical processes involving heat.

            The idea that capitalism embodies freedom in today’s context of exponentially expanding automation has about as much intellectual validity as the caloric model of heat in modern science.

            It is, beyond any shadow of reasonable doubt, falsified.

            Similarly, most of the enlightenment concepts of freedom (and there was no one concept, but a whole ecosystem of concepts) owed much to a set of assumptions which have now been clearly falsified, and worked (in as far as they did) in contexts that are no longer relevant.

            So it is a very complex picture, and taking a broad brush to that very complex picture – I stand by the original assertion I painted.

  • carmiturchick

    Yet another evonomics article by someone who could not begin to apply evolution to economics if you put a gun to their head.

    “To demonstrate that competitive markets are a source of inequality we would have to start from an imagined world where there was initial equality in the distribution of income and wealth, and then show how markets led to inequality. I know of no such theoretical explanation.”

    No. The theory of evolution assumes an unequal distribution of resources, an initial inequality in distribution of wealth. So we might at least PRETEND while writing for evonomics that we understand the first thing about evolution. And this is a wrong and simplistic binary construction you suggest here, competitive compared to what? A monopoly creates large amounts of inequality, right? State controlled economies result in extreme concentrations of wealth for a few. Is it just possible that increased competition, for example caused by enforcing our anti-trust laws, reduces inequality? That more competition leads to less inequality? Yes, more than just possible.

    http://theroadtopeace.blogspot.com/

    • John M Legge

      A different quote from Hodgson:

      A host of misunderstandings surround the question of Darwinism and its relation with the social sciences. Contrary to widespread suppositions, Darwinism does not support any form of racism, sexism, nationalism, or imperialism or provide any moral justification for “the survival of the fittest.” Furthermore, Darwinism does not imply that militant conflict is inevitable, that human inequalities or power or wealth are inevitable, that cooperation or altruism are unimportant or unnatural, that evolution always leads neo-Schumpeterian economics to optimization or progress, that social phenomena can or should be explained in terms of biology alone, that organisms can or should be explained in terms of their genes alone, that human intention is unimportant, or that human agency is blind or mechanistic. (Hodgson 2003)

      and:

      In post-Darwinian biology, evolution requires three essential components. First, there must be sustained variation among the members of a species or population. Variations may be blind, random or purposive in character, but without them, as Darwin insisted, natural selection cannot operate. Second, there must be some principle of heredity or continuity through which offspring have to resemble their parents more than they resemble other members of their species. In other words, there has to be some mechanism through which individual characteristics are passed on through the generations. Third, natural selection itself operates either because better-adapted organisms leave increased numbers of offspring, or because the variations or gene combinations that are preserved are those bestowing advantage in struggling to survive. This is the principle of the struggle for existence. (Hodgson 1995)

      In attacking Hodgson’s credibility you only expose your own lack of it.

      • carmiturchick

        Uhm…and does he APPLY evolution to economics anywhere? Nope. Not in his evonomics article, which would be where to do it if he could, or anywhere else, right?

        This first paragraph is fine, he is ahead of many or most in the social sciences. Good for him. This second paragraph…how does what he calls “post-Darwinian biology” differ from Darwinian biology? If he knew he probably would have mentioned it, right? But he knows the post-Darwinian buzzword….Look, any sixth grade child should be able to tell you those basics of the theory of evolution just like Hodgson did. It gets a lot more complicated if you want to actually understand evolution and economics enough to attempt to use the former to gain insights into the later.

        I do not give a fuck about “credibility.” That is just another way of saying that you are committing the argument by authority fallacy. Click on the link I posted, read my paper where I actually apply evolution to economics. That is my credibility; it is called knowledge.

        • John M Legge

          Here are four references to Hodgson: read them before you make any further derogatory comments about him.
          Hodgson, Geoffrey M & Knudsen, Thorbjørn (2004) “The Firm as an Interactor: Firms as Vehicles for Habits and Routines”, Journal of Evolutionary Economics 14, pp. 281–307.

          Hodgson, Geoffrey M (1995) “The Evolution of Evolutionary Economics”, Scottish Journal of Political Economy 42 (4), pp. 469–488.

          Hodgson, Geoffrey M (1998) “Competence and Contract in the Theory of the Firm”, Journal of Economic Behavior & Organization 35, pp. 179–201.

          Hodgson, Geoffrey M (2003) “Darwinism and Institutional Economics”, Journal of Economic Issues XXXVII (1, March), pp. 86–97.

  • robertmkadar

    Carmi,

    1. If you continue the ad-hominem non-constructive attacks on the author and the site you will be banned. Have some respect. Act like a scholar.

    2. Geoffrey Hodgson is a widely respected evolutionary economist. Learn more about the author before you critique his credentials.

    Robert

    • carmiturchick

      I just am failing to see any application of evolution to economics in the vast majority of the articles posted here. There is none in this article. I believe applying evolution to economics would be a good and productive thing to do. I also know that it is very difficult, it is quite a bit harder than simply talking about competition and cooperation a little bit. David Sloan Wilson makes an effort at least, but in my opinion even he vastly underestimates the complexity of the models needed.

      My scholarly responses are ignored completely. No one apparently cares if they are making huge errors. At best someone comes along and scoffs at the idea that I might know something. I am trying to wave a huge sign out for you folks to head this way:

      “Competition for fitness-limiting resources is a primary force of selection in evolution. For viruses and parasites, a host body is the resource they compete over. For selfish individuals, groups of altruists are the resource. Recent work indicates that if there are multiple poorly-related viruses (Chao et al., 2000), parasites (Johnson & Hoverman, 2012), or selfish (Eldakar, Farrell, & Wilson, 2008) infecting a host, then the competition between these exacts a cost which can reduce their effect and/or virulence in the host. In viruses, for example, it has been shown that such competition can select for lower virulence (Chao et al., 2000). My conjecture is that similar processes may occur with sub-groups infecting national “superorganisms” (Hölldobler, & Wilson 2008). Evidence suggests that the more diverse and numerous political parties, interest groups, religions, industries, and corporations are in a nation, the less harm they usually cause the host population and the more symbiotic they become. A robust national immune system of laws and regulations may also influence virulence. If my conjecture is correct, it may provide fertile ground for new insights in Economics, Political Science, and other fields. I will also suggest ways in which my conjecture may be falsified.”

      I judge scholars by what they produce, not by their credentials. I judge Evonomics by its contents as well. Take the task seriously. Please. It takes more than understanding the insights from evolutionary psychology when it comes to human behavior, it takes more than some simple bromides about cooperation and competition. The simplistic assumptions made by your respected evolutionary economist are the opposite of what real scientists are showing empirically and with their models of ecosystems such as our gut microbiota to be the case, and I believe that ignoring what evolutionary biologists publish in peer reviewed journals while claiming to be applying evolution to economics is not really acceptable practice. Competition bad, cooperation good is not just simplistic, it is not what evolution tells us.

  • antonw

    Wellbeing not inequality is the question. How well are the bottom third living not the distance between the top 1% and the bottom. It is even less important in our flat world now that the top 1/10 of one-one percent get so much? Worry more about how Bill Gates uses his name to get students visas to lower his salary expense. Worry that L. Summers and others say there are few jobs for the well educated not that many of our psychology majors are well educated. Worry about 1,3 trillion in student debt. Worry neither candidate considers the debt a problem because the voters have forgotten Worry that economist have not been able to predict and get society to listen to Black Swan data. WORRY!!! See the debt. http://www.textbooksfree.org/income%20inequality%20Analysis%20and%20Cures.htm

  • Duncan Cairncross

    Excellent article
    The major issue with labour in the market place is a massive unbalance in power between the employers who are “risking” a small fraction of their additional worth and the worker who is risking the well-being of his family
    I like the idea of a Universal Basic Income just to help balance the risks
    This would enable labour to extract a larger share of the pie

  • Jeff

    “The Spirit Level” is not the last word on the subject of the effects of inequality. I suggest also reading “The Spirit Level Delusion”.

  • Sue Holmberg

    A question that continues to arise for me is: if we dramatically redistribute capital either through taxes or at the business-level (cooperatives or ESOPs), does capitalism still exist as our economic system? It seems we conflate markets with capitalism too often, but we don’t actually need the latter to employ the former.

  • Sue Holmberg

    A question that continues to arise for me is: if we dramatically
    redistribute capital either through taxes or at the business-level
    (cooperatives or ESOPs), does capitalism still exist as our economic
    system? Can we still call it capitalism? It seems we conflate markets with capitalism too often, but we don’t actually need the latter to employ the former. As the author notes, the key functionality here is capital, not markets.

    • A couple of responses:

      1. Any type of redistribution is “redistributing capital.” Progressive taxes + means-tested programs transfer money from richer people’s balance sheets to poorer people’s. Public schools funded by property taxes reduce property-owners’ assets/net worth, while A. delivering valuable human capital to poorer people and/or B. relieving them of the need to spend down their own (often ephemeral) assets/net worth. All of this “redistributes capital.”

      2. If the legal system allows people to own things, to buy and sell things in private markets, to own businesses and garner the profits personally (and buy and sell those businesses), to hire employees for wages, it’s hard to see that as anything but “capitalism.” Geoffrey offers a far more carefully thought-out discussion in Conceptualizing Capitalism, but I think the above remains true even if you adopt his thinking.

      3. “Redistributing capital either through taxes or at the business-level” is not nearly the same as government or workers “owning the means of production.” These are frequently confused in discussions of “socialism.” Scandanavia and the former USSR are not even vaguely comparable in either respect. But the failure of the USSR is used by many to vilify (and even predict the imminent demise of) the Scandanavian system. (Germany — deeply capitalistic and deeply socialist — is generally just ignored but those making these arguments.)

      4. If capitalism is just a system as described in #2, and socialism is just a system with redistribution, public works, and government-run financial programs (eg health insurance, retirement funds), the two combined are A. completely compatible, and B. actually necessary to the development and maintenance of a thriving and prosperous society:

      http://evonomics.com/whats-the-secret-to-joining-the-rich-country-club/

      Advocating for the eradication of either of these (as they’re defined here) is, IMO, just silly.

      • Geoffrey M Hodgson

        I agree with most of what you say, Steve.
        But “socialism” has become a highly imprecise term, lacking much clear meaning. In the USA, some people describe anyone who believes in ANY state intervention in the economy is a “socialist”.
        By contrast, when the term was originally adopted in English by the Owenites, it meant COMPLETE common ownership, plus the abolition of ALL private property and markets. Marx adopted this same extreme meaning of the term.
        I would describe Scandinavian and other countries that have reduced inequality as “redistributive capitalist” or “welfare capitalist”.
        Germany’s biggest Left party is not “Socialist” it is “Social Democratic”. It abandoned classical socialism at its Bad Godesberg congress in 1959.

        • “Social” does seem avoid “socialism’s” bad baggage. And social democratic is generally understood to mean what I’ve described here, but for clarity I wish there was a term comprehensive of capitalism as described here — but less unwieldy than, for instance, social democratic capitalism. (Capitalistic social democracy? Democratic social capitalism… ??) Cheers.

          • Geoffrey M Hodgson

            “Social democracy” is marginally better. But its meaning too is vague and changeable. Originally Marxists were in “Social Democratic” parties. Since 1950 “social democracy” has acquired different but mutable meanings.

  • Lexi Mize

    Thank you for posting this where one of the proletariat could find it. I have examined this issue at length myself.

    Our re-entry into a rentier society correlates well with your theory that labor and capital (property) are unequal competitors in a market economy. The more you own, the more you can make (charge, borrow).

    The solution to such a situation is actually quite simple, yet impossible to enact, as our country now stands.

    To reduce inequality people must share.

    However, the 1% are not the 1% because they are a philanthropic lot. On the contrary, they are at the top of the wealth pyramid precisely because the do NOT share. Convincing them to do otherwise is impossible. Humans are greedy. That’s just the way it is. It is the rare oligarch who repents and returns to society that which he forcefully wrought from the worker that raised him to his wealth.

    There are ways though, which we blue collars, and white collars and brown collars can fight back. We can doggedly fight for leaders in Congress who will enact laws that limit the leverage of the most powerful tool of the aristocrats — the corporation.

    Corporations rule our land. Corporations are controlled, primarily, by the rich. Corporations, in turn, control our government. Corporations have been given rights that no human possesses. It is corporations that, if we can rein them in, restrict their power, reduce their leverage in our lobbying halls and political campaigns, we can reduce inequality by ensuring that the wealth created by these massively profitable entities — is shared by all.

    Link to follow — Employee Income Inequality Tax
    https://anonymole.wordpress.com/2016/01/16/employee-income-inequality-tax/

  • Lev Shakhmundes

    How does capitalism actually generate more inequality? Here is a train of reasoning in approaching this question.

    To be successful, a business enterprise must possess competencies not only in the sphere of its productive activities, but also, as applicable to all of them collectively, in management and finances. This places business in an advantageous position relatively to all other entities in a society. The financial might and management artistry of large business enterprises results in excessive political business influence.

    This reasoning was presented and expounded on in my A Better Organization of 2006. I would suggest it digs deep into the roots of the chronically increasing inequality.

    The subject of “the compensatory arrangements” is very complex. If one ventures to delve into it, a careful review of this article would be a good start.

    Geoffrey, may I have your feedback, please.

  • jothwu

    I think Piketty has shown, somewhat conclusively, capitalism left unattended produces income and wealth inequality. That is the basis for his now famous formula, r > g. What is generally overlooked, is capitalism is a different thing to different people. Capitalism is not one thing. It is what we make it. The fact that we don’t like its current iteration is more a critique of ourselves than of capitalism. Complaining that capitalism does not perform up to expectations is like parents complaining they have lousy kids. Maybe it’s our own fault. We need to find a way to make capitalism work for everyone. By making it work for everyone, we make it sustainable which helps even the one percenters.

    For additional thoughts along these lines visit my blog at:

    http://jothwu.blogspot.com/2016/09/saving-parity-road-to-sufficiently.html