Seesaw inequality

The most common misconception about economic inequality is based on the pie fallacy: that the rich always get rich by taking money from the poor. No one can claim that Mark Zuckerberg or Steve Jobs became rich by refusing to pay employees wages or festival bonus. People like Satya Nadella, Sundar Pichai or Hosain Rahman - CEOs of Microsoft, Google and Jawbone respectively - came by their wealth through excellence and hard work, rather than via force, fraud or inheritance.

Everyone is not Jobs and doesn't have to be. Even a basket maker in this country creates wealth without robbing others of the fruits of their industry. A trader, on the other hand, does not. He or she makes money only when someone on the other end of a trade loses money. If a basket maker makes 10 baskets and another makes one, the latter will have less money - but not because anyone took anything away from him.

And then there is the division of labour, considered to be a major force for economic growth. But it can foster inequality, as explained by David Schmidtz, joint Professor of Philosophy and Economics at University of Arizona in his essay When Inequality Matters: A pin maker contracts with a partner to make pins. He is an egalitarian and splits equally the profits. Eventually, he contracts with ten more partners and establishes a similarly egalitarian relationship with each. Now the pinmaker's income is ten times the income of the partners. Even if he starts taking less than an equal share, he ends up with a lot more than them.

Thus creating wealth without harming anyone can be a source of inequality. But it is morally and practically different and therefore harder to eradicate. One reason is that variation in productivity is accelerating, depending largely on the technology available to them, and that's growing exponentially.

Social safety nets encourage wealth creation which requires taking risks. People need to be sure that they won't starve even if their ideas didn't materialise. Perhaps that's why countries like Sweden - high tax and low inequality - are highly innovative and home to many business start-ups. 

It is important to tease apart these components if we want to fix economic inequality. The important issue, as Amrtya Sen has insisted over many years, is not whether we are in favour of equality, but rather equality of what? He has argued that the aphorism "all men are created equal" serves largely to deflect attention from the fact that we differ in age, gender, talent, physical abilities as well as in material advantages and social background. Sen makes a convincing case for concentrating on higher and more basic values: individual capabilities and freedom to achieve objectives.

Similarly, economist Paul Krugman has identified three models of where extreme inequality might come from: differences in the productivity of individuals, luck - not just the luck of being the first to stumble on a highly profitable idea, but also the luck of being born to the right parents - and power.

Krugman suggests collecting some of that wealth in taxes and redistributing it to make society as a whole stronger, as long as it doesn't destroy the incentive to keep creating more wealth. It works. For example, the United States achieved its most rapid growth and technological progress ever during the 1950s and 60s, despite much higher top tax rates. And more recently, when President Obama pushed through a substantial rise in top tax rates, conservatives shouted disaster, just as they did when Bill Clinton raised taxes on the top 1 percent. Obama has ended up presiding over the best job growth since the 1990s.

Unfortunately, redistribution remains a dirty word for many policymakers around the globe. But a book called Capital in the Twenty-First Century (2014) that has taken the world by storm may change that. Based on years of research, Thomas Piketty, a French economist derives a grand theory of capital and inequality. As a general rule, wealth grows faster than economic output, he explains. Other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it. But there is no reason to think that capitalism will "naturally" reverse rising inequality, he believes. His recommendations?  Governments step in now, by adopting a global tax on wealth, to prevent soaring inequality contributing to economic or political instability down the road.

That's unlikely to happen any time soon in most countries. What can be done in the mean time? In The End of Poverty (2005), Columbia University Professor Jeffrey Sachs calculates that it would take an additional $124 billion a year in aid to lift the 1.1 billion people living under the World Bank's poverty line. Given that the income of the 22 wealthy nations that make up the OECD's Development Assistance Committee is around $20 trillion, that's a very modest contribution - only 60 cents for every $100 earned.

124 billion dollars to end poverty?  That's barely more than some countries spend on alcoholic beverages each year.

The writer is a member of the editorial team at The Daily Star.