The Relationship Between Capitalism and Inequality: An Elusive Balance to Achieve or a Natural Outcome to Accept?

The rapid rise in technology, finance and international trade have caused the new waves and forms of insecurity for many capitalist economies where the life has become increasingly unequal for not only the lower and working classes but also for the middle class as well.

The Relationship Between Capitalism and Inequality: An Elusive Balance to Achieve or a Natural Outcome to Accept?

A growing recognition of increasing inequality within the industrial societies has naturally led to discussions of what can be done about rising inequality.

Saint-Augustine considered inequality to be the most serious threat to God’s world. Jean-Jacque Rousseau wrote extensively about the evils of inequality and how it could threaten the social contract. Most recently, Amartya Sen, a Harvard economist, in his most recent book on the Indian political and economic landscape, details India’s rising inequality and how it could danger India’s economic, political and social fabric. It seems, inequality has made a comeback. But why now? Why inequality has become subject du jour?

Before the beginning of the economic crisis in 2008, the focus on inequality in the US and elsewhere within the modern capitalist economies was subdued and under the political and economic radar. This was because of the following: as long as your income is growing – even if not nearly as quickly as financiers on Wall Street – it’s not hard to foolishly convince yourself that you have a same shot at those riches as the millionaire next door. But when the music stops, the story changes. Inequality is a problem, politically and economically, precisely because of a secular stagnation. In that sense, the intensity and longevity of this great economic recession has brought the issue of inequality within the public forum with the renewed interest and analysis from all ideological corners.

Obviously, much of the analysis and commentary on inequality circles around the dogma of the left and right - less or more government intervention type of discussion that seriously undermines this serious social and economic issue. This ideologically obsessed analysis on inequality, within the print and electronic media, does not really offer any thought provoking discussion on this crucial matter of public and economic policy. What is really needed is an open and strategic discourse that discusses this serious economic and social matter without any ideological bend that is capable of analysing inequality from all possible venues. In a world of hyper partisanship, I understand it is a tall order but the attempt must be made for the sake of a stable political and economic order across all modern capitalist economies.

As an economic system, the rise, success and challenges, of the capitalism are one of the most sought after subjects in the History of Economic Thought. According to universally acknowledged definition, capitalism is a system of economic and social relations marked by private property, the exchange of goods and services by free individuals, and the use of market mechanisms to control the production and distribution of those goods and services. Some of its elements have existed in human societies for ages, but it was only in the seventeenth and eighteenth centuries, in parts of Europe and its offshoots in North America, that all elements came together in a more cohesive fashion. The triumph of the capitalist economic order unleashed a burst of innovation, technology and new ideas in many societies – regardless of their geographical destiny.

Yet, there is another side to this economic triumph. Capitalism’s intrinsic dynamism, also, produces insecurity among societies, so its advance has always met with suspicion and resistance. Much of the political and economic history of capitalist societies revolved around the record attempts to ease or cushion those insecurities mostly through state interventions. In that manner, it was only the creation of the modern welfare state in the middle of the twentieth century that finally enabled capitalism and democracy to reconcile in relative harmony. But that harmony between capitalism and democracy, as we have seen, has been under serious strain as the costs of the welfare state have risen dramatically. The ongoing recession has compounded the tension between capitalism and democracy in modern economies as the growth rates have remained low and the rate of unemployment remains stubbornly high.

The rapid rise in technology, finance and international trade have caused the new waves and forms of insecurity for many capitalist economies where the life has become increasingly unequal for not only the lower and working classes but also for the middle class as well. It should not surprise anyone that the percentage share of worker’s wages as a proportion of total national income is sinking throughout the developed world. In the developing world, especially in China and India, the situation regarding inequality is also similar. Latin America is also on the same boat. The African situation regarding inequality is well documented.

The political response to inequality goes like this: the right, in many modern capitalist societies, believe that less, not more regulation and let-the-market-decide-approach is the suitable way to tame inequality; while the left has sought to minimize it through government action, regardless of the costs. Neither approach is viable in the long run. The contemporary capitalist societies need to accept that inequality and insecurity will continue to be the inevitable result of market operations and find ways to shield citizens from their consequences - while somehow still preserving the dynamism that produces capitalism's vast economic and social benefits in the first place.

A growing recognition of increasing inequality within the industrial societies has naturally led to discussions of what can be done about rising inequality. What must be acknowledged right from the start is that there is not one magic formula which can reduce inequality. If the society is serious about reducing rising inequality, all options must be a part of an ambitious and achievable solution. Yes, education must be reformed where the vocational training and trade school must be a part of an overall reform strategy.

There is no harm to reassess the tax code. Fiscal instruments such as the transfer of payments should not be out of question. Yes, economic growth must remain the priority but if that growth does not translate into creating jobs with decent salaries, the inequality issue will persist. But the economic growth alone is not sufficient, either. It is interesting that some relatively equal countries suffer from extremely high unemployment (Portugal) while some relatively unequal countries are seeing fast growth and low unemployment (Singapore). What I am trying to suggest is that all policy options must be a part of an overall strategy to tame this social and economic malaise.

I once wrote: Inequality is the biggest social shame. Unemployment is the other. A stable social order is only possible when the citizens are confident that they have an access to equal economic opportunities to thrive and prosper. Rising inequality and decreasing upward mobility are threats to stable social order. Within this context, the real challenge for government policy in the advanced capitalist world and, also in the emerging economies, can be summarized in the following fashion: how to maintain a rate of economic dynamism that will provide increasing benefits for all while still managing to pay for the social welfare programs required to make citizens' lives bearable under conditions of increasing inequality and insecurity.

There is no doubt that different countries will approach this challenge in different ways, since their priorities, traditions, size, and demographic and economic characteristics vary. But a useful starting point might be the rejection of both the politics of privilege and the politics of resentment and the adoption of a clear-eyed view of what capitalism actually involves, as opposed to the idealization of its worshipers and the demonization of its critics.