Thinking About Income Inequality, Properly

August 14, 2012 by Ahmad Fuad Rahmat

In a recent issue of The Edge, Lim Ewe Ghee wrote a defence of income inequality.  Going against the increasingly prevalent claim that inequality is problematic, he argues instead that it is in fact a good thing.

This, he explains, is because inequality is merely the fair outcome of a meritocratic “market economy based on individual liberty” whereby whatever disparity we find is really just a “monotonic function” of how well the rich has served humanity.

He uses Bill Gates and Steve Jobs as examples, “because Jobs and Gates create / innovate goods that the average person wants. Since no one forces us to buy an iPhone or iPad or Windows computer, these voluntary purchases with our head-earned money must make us better off … The better their products, the more people will buy them, the better off these people will be and the higher their earnings. Win-win.”

Lim Ewe Ghee then added: “The harder one works, the more innovative one is and the better one serves the people, the richer one will be. The rich and successful in a market economy do not owe us anything. They have already served us.”

On serving humanity

One can begin to unpack Lim Ewe Ghee’s logic by questioning if the hard earned innovations that triumph in a market economy, by virtue of the wealth they generate, do in fact serve us better.

For one, there are a lot of things a free market economy would welcome that is profitable without necessarily improving society as a whole. Cigarettes are widely purchased and consumed without leading to improvements in anyone’s health or finance. Whatever virtues there may be of having, among other things, pornography, prostitution or firearms in the open market cannot be confirmed purely on the basis of their potentially high demand. How and why such things can be said to “serve humanity” must take into consideration a host of other factors, above and beyond what market forces or individual whims suggest.

One can extend that line of thinking to even more basic goods. The genetic modification that now routinely goes into the manufacturing of our everyday meats and vegetables has all to do with the necessity of rapid production in a competitive profit driven food economy. The motivation in such cases is not the happiness, well-being or health of others, but the size of the product and the speed and quantity of production. So by that logic, it does not matter that the meat we eat is injected with cancer causing chemicals so long as an edge is gained by the producer to triumph in a rapidly competitive market.

Furthermore, the profitability of an item or service can often reflect the symptoms of a problem more than the solution. Private security, steering locks and pepper sprays are profitable in a climate of crime. Many people would be in need of these products and the increased sales will even add to the nation’s GDP, but they are not indicators of well-being. True, those who profit from these are providing “services” but the services also reflect the presence of deeper structural and more systemic problems that the market cannot solve, let alone reveal.

Hard work and success

Lim Ewe Ghee’s confidence in a free market meritocracy explains the direct connection he draws between hard work and wealth. The problem is that this reasoning leaves out an important consideration: if material inequality is the natural outcome of a free market economy, how can this still secure a circumstance of fairness, whereby whatever competition therein would be properly regarded as just?

Lim Ewe Ghee believes that hard work determines who would emerge victorious in a free market, but we know that matters are more complex than that. How far we end up has a lot to do with factors beyond how hard we work.

For one, the on-going prevalence of non-institutionalized racism and sexism even within close-to-free market societies reveal the extent to which minorities are more exposed to discrimination in the competitive process.

Furthermore, one’s class background determines a great deal of what’s possible. Personal or familial wealth in a free market economy is much more likely to be inherited rather than distributed. Thus, the connections that one would be presented with in the course of one’s life depend greatly on the opportunities available within one’s social setting, which is influenced by where one works and how much one makes.

The implication here is that unequal wealth translates to unequal power: the more wealth one has, the more advantages, sway and influence one can afford in society. This, needless to say, is a threat to the democratic process, not to mention the actual hard work done by those who are of lesser social standing.

Jobs and workers

One common, alternate, strategy to defend the free market is to discard all talks of fairness altogether (since that would require some assumption that equality is morally desirable) while pointing to how corporations create jobs. This is supposed to mitigate the problem of inequality somewhat, since the wealth gap is compensated by the fact that the average person is presented with work opportunities instead. This is also the reason often given to argue why big businesses should not be taxed.

Lim Ewe Ghee somehow did not evoke this rationale, but let us for the sake of argument address it briefly to see the extent to which successful entrepreneurship in a free market really serves humanity.

The problem is that while big businesses need workers, they are not always invested in caring for them. Coca-Cola, Nestle and Nike are the most commonly cited corporations against which reports of gross labour abuses are made, with deplorable details that would take far more space than this article to list. To take a more current example, consider the allegations Samsung is facing for labour abuses in their factories in China.

The point is that profits cannot be maximized if workers are paid well, or if cost is taken up to maintain their welfare. The solution is to hire as little as possible. A report by the Institute of Policy Studies in 2000 found that “while the sales of the Top 200 [corporations] are the equivalent of 27.5 per cent of world economic activity, they employ only 0.78 per cent of the world’s workforce.”

A society whereby everyone is employed is not desirable for corporations anyway, as cheap labour – and the willingness to do them – depends on employment opportunities being scarce.

Is profit the only motive for innovation?

Lim Ewe Ghee’s claim that the key virtue of a free market is that it produces innovative goods is also questionable. There is a wide range of free sophisticated operating systems that one can choose from beyond the simple Mac / PC dichotomy that’s gripped the market.

Talent and innovation has little to do with how much one is paid anyway. Anyone with an informed familiarity with music, film or aesthetics can attest to how what is most often marketed or consumed, is not the product reflecting the best state of innovation, creativity or originality out there.

The limits of free market idealism

Lim Ewe Ghee ended his article with a reminder that a free market must be made distinct from the kind of crony capitalism that we as Malaysians are all too familiar with. Thus, he insists that free market capitalism should be judged under its own terms and ideals, based on what it aims to achieve: “you may again object correctly that the perfect market system does not exist. However understanding these principles empowers us to strive for the best.”

This idealism is furthermore apparent in how he keeps emphasizing that “a priori”, that is to say, prior to experience, there is nothing inherently wrong with income inequality.

This appeal to an a priori scenario is curious considering that Lim Ewe Ghee’s defence of inequality makes not even the slightest reference to the current global economic crisis, whose culprits are to be found not in Iran, Venezuela, Cuba or Bolivia but in the highest echelons of Western finance and the political elite it closely works with to ensure pro-capital policies are passed. This collusion between politicians, bankers and corporations in fact is currently flourishing in the U.S., the country Lim Ewe Ghee singled out as the existing example of a great market based meritocratic system.

Consider how the American economic crisis of 2008 was caused not by workers toiling away at factories, restaurants or hotels to provide the public with real products and services, but by speculators selling complex financial instruments while making millions in the process. When things went under, the government sped to the rescue of the bankers while leaving millions of Americans’ homes foreclosed.

This is a grim image of a free market meritocracy, to say the least. Lim Ewe Ghee could argue that the governments should not have bailed out the banks but that does cannot distract us from the fact that the crisis seriously puts into question the supposition that the rich in a meritocratic society are rich because they worked hard, or because their profitable innovations serve humanity.

A consideration of this reality, that banks and corporations do not always have the best interests of humanity in mind, raises a crucial point. A better way to understand the problem of inequality is not through an a priori, “individual liberty + free market vs. big government” perspective. Rather, it is through seeing how in any market society, the lives and well-being of its hard working ordinary citizens – and the democratic space they deserve – will always be at the mercy of those who own the wealth, resources and means of production, all of whom are not necessarily in government.