Why inequality arises under capitalism and how we fix it

By the time the reader of this article reaches the last sentence, it is likely that Jeff Bezos will have made well over a million dollars. Bezos currently has a net worth of 201 billion dollars meaning that it would take the average American worker over 3.5 million years to become as rich as he is now. While Bezos is admittedly only one example, and an extreme one at this, the outlandish amount of wealth that he has been able to accumulate is the the result of a deep injustice that underlies the economic systemic under which we live. This injustice has defined global capitalism since its inception over 200 years ago. In order to create an economy that distributes wealth in a fair and equitable manner, and ensure that democracies around the world thrive, its essential that first understand the current state of economic inequality under capitalism and its causes, then understand why inequality naturally arises under capitalism, and finally explore potential solutions to inequality.

 

Economic inequality has existed since the dawn of capitalism, and has steadily risen over the past century to reach the unprecedented levels it is at now. According to the Credit Suisse’s Global Wealth Report, the top 1% of the global population own almost half of all wealth while the top 10% own close to 80%, and the bottom 50% of people in the world only held 1.4 percent of all wealth. To reiterate that’s half of the planet currently living off close to 1% of the wealth. What the report classifies as “high net worth individuals” people with a net worth of over 30 million dollars, hold close to ten percent of all wealth while comprising only 0.002% of the population. The current level of global economic inequality is worse than at any time in history for which data is available. The human consequences of this have been dire. Anthropologist Jason Hickel’s latest report on global poverty showed that the number of people living on less than 5 dollars a day has increased by over one billion in the last thirty years alone, Another academic paper recently published by the London School of Economics found over 4 billion people remain in poverty today, 2 billion of which are currently going hungry, more than at any other time in history. Aside from the severity of poverty and hunger in the world, this inequality also has an extremely adverse effect on the functioning of democracies, the United States itself being an excellent example of this. According to a study published by Cambridge University in which the effect of various groups upon public policy was weighed, they found that there was “little or no correlation between the policy positions of the average American and public policy” while they found a quote “consistent and direct correlation between the policy positions of economic elites and public policy”. This study points to how the beneficiaries of the grotesque inequality are using their wealth and influence in order to manipulate government officials and undermine democracy itself through campaign funding and lobbying. But, in order to understand how we got to this point, we must examine the works of two major economists, one who sought to reveal how wealth is created under capitalism and one who recently sought to reveal how inequality occurs under capitalism.

 

Adam Smith, who wrote during the first industrial revolution and the onset of capitalism in Europe, emphasized how the practice of division of labor allowed productivity to increase by making workers more adept at performing tasks, saving time by removing the necessity of switching between tasks, and how the introductions of new technologies allowed workers to perform tasks faster. Smith was also not afraid to confront the drawbacks of the division of labor either. In his book the Wealth of Nations, he stated, “In the progress of the division of labor, the employment of the great body of the people comes to be confined to a very few simple operations. The man whose whole life is spent performing a few simple operations generally becomes as stupid and ignorant as it is possible for a human being to be. His dexterity at his own particular trade seems to be inquired at the expense of his intellectual, social, and martial virtues.” Economist Stephen Marglin pointed out that Adam Smith’s account of the division of labor, while descriptively correct, was nevertheless incomplete as it did not take the role of the capitalist in organization into consideration. Marglin highlights numerous examples where the methods of production in independent cottage industries were at least as productive as in factories, which led European governments to impose a variety of legal restrictions that forced people to work for capitalists in order to meet their basic needs. Smith’s writings, with the addition of Marglin’s expansion on the role of capitalists in organization gives us an insight into how wealth is created in a capitalist economy. The appropriation of surplus by capitalists and their continuous investment into new technology, has led to increasing levels of economic growth. Smith’s insights on production allow us to understand wealth creation as a collective process that is taken up by a number of different groups all contributing to production. Why then, do some people benefit so immensely from these economic activities while others do not?

 

In his best selling 2014 book Capital in the 21st Century, French Economist Thomas Piketty sought to explain how economic inequality under capitalism arises and the social problems that arise because of this. Since the division of labor and the expansion of markets took hold during the industrial revolution and have continued ever since, most rich countries now have incomes that dwarf their incomes in the past. Piketty demonstrates that the average person’s quality of life has not increased at the rate that economic growth has, which he attributes to capital ownership. Because ownership of capital is so highly concentrated amoung the wealthy, most people don’t experience the benefits to economic growth because most of the money generated is funneled into a few pockets. This is the inequality to which this entire paper has been dedicated to fully explaining. The concentration of capital in a tiny portion of the population leads the wealth that we all create collectively to be unfairly and disproportionately distributed to certain participants in the wealth creation process, namely to capitalists. Piketty’s data explains why wealth inequality is getting worse, and provides evidence that it will continue to worsen as time goes on if something isn’t done. But, in order to understand how inequality can be alleviated, we must understand the nature of capital itself. British economist Josh Mason explain that by viewing capital not as merely a the quantity of stuff, but as a political claim that people make on a share of the wealth that we all collectively produce that is backed up by the government. Tenants strikes are a modern example of this. During the COVID-19 pandemic, many tenants struggled to pay rent, but if someone decides not to pay rent they will be forcibly evicted and if they and their fellow tenants organize to protest, you face off against the police. This is because ownership of your apartment is claimed by a landlord, who’s claim is recognized by the government who will violently enforce that claim if you try to claim that you or your neighbors have a right to shelter during a global pandemic. This is what capital is: the power to make a claim over resources.

This perspective on capital allows us to formulate policies that would be more effective at curtailing economic inequality and its pernicious effects on society as a whole. If inequality is the result of a the power of capital to lay claim to a share of collectively produced wealth, then the solution is to legislate policy that reduces the claims of capital and instead recognizes the claims of labor. Mandating corporations to make their employees stakeholders in the company itself could similarly reduce inequality by giving workers a voice in the operations of the companies in which they work. Abolishing existing property rights such as patent, intellectual property, and financial asset laws would also make the general public more able reap the rewards of economic growth. A wide array of other egalitarian policies such as amending labor laws that strengthen existing unions and encourage the development of unions, higher taxes, increased welfare and social provisions, and wealth taxes would be beneficial as well. As economic inequality under capitalism is the result of capital owners absorbing the gains of economic growth, where capital can be understood as political power to claim resources, the antidote to this system of self-generating injustice is the formulation of policies that reconfigure rights of ownership to favor other groups.