Democracy, Capitalism, and Inequality
Inequality is inherent in the capitalist system, where those who are smarter or were born into the right family or work harder or take more risks can accumulate wealth and enjoy its benefits. This seems fair and most people accept that individuals who have greater responsibility or perform at a higher level or are more valuable to society should receive more compensation than their peers. Yet there are limits to how much inequality is reasonable in any society. This is particularly so if some of the acquisition of wealth is perceived to have been accomplished in an inappropriate or immoral fashion. Included in this are dishonest practices, bending or breaking the rules, or even inheriting riches because of parental achievement rather than one’s own efforts. Some of the most affluent may also use their money to buy political power, corrupting elected officials.
During Colonial times and the first half of the nineteenth century, the gap between the wealthy (mostly large landowners and successful merchants) and the average citizen (mainly farmers, tradesmen, and hired laborers) was much smaller than is true today. The industrial revolution and growth of the railroads were responsible for a widening gulf between the rich and middle class during the era of the robber barons in the Gilded Age (late 19th century) and again in the Roaring Twenties. The Depression along with the estate tax and progressive income tax reduced the disparity in wealth between the affluent and the working classes. Over the last quarter-century however, with marginal tax rates lowered, the disparity has again been increasing, the magnitude of difference greater than it has ever been.
Financial rewards from the performance of the American economy have not been dispersed through every level of society. The most affluent have benefited excessively, while little in the way of higher earnings has filtered down to the middle- and lower-income strata. In fact, these groups are falling further behind as real wages have stagnated, and they have little disposable income. Interestingly, Americans have no concept of the degree of inequality in their society, believing there is a much more equitable distribution of wealth than there actually is and preferring that wealth be spread more evenly still.
Capitalism as it is perceived today really did not begin until the Industrial Revolution in Great Britain in the late 18th and 19th centuries, eventually becoming a world-wide phenomenon. Though capitalism was able to spread its roots in any soil, it found democratic states to be exceedingly fertile for a number of reasons. Freedom and free markets were at the top of the list, followed by the rule of law, social harmony, and the respect for private property. Democracy also applauded the individual’s pursuit of his or her own goals, including economic self-interest and the accumulation of wealth.
The continued growth of inequality, however, is one of democracy’s most significant flaws, accelerating since the recovery from the recession of 2007-2008. To some degree, uninformed citizens voting against their own interests have played a role, electing officials who promoted government policies favoring the rich. Globalization and loss of well-paying manufacturing jobs has also contributed greatly. As noted in the Harvard Business Review, the huge rise in economic inequality has been the result of technological changes and political decisions including financial market deregulation, free trade, tax code changes, and various other policy choices. Though businesspeople pushed for the political changes to heighten economic growth, it appears that the politicians went too far, as too much inequality is not good for business. However, businesspeople now are reluctant to support policies that could reverse the trend to more inequality, as that would call into question some of their profound beliefs.
Another factor often overlooked in burgeoning inequality has been assortive mating- the tendency for successful men and women to marry one another. Lawyers are more likely to marry other lawyers or other high-income professionals, as are physicians, business executives, and so forth. Thus, these families earn more, and greater wealth is concentrated in their hands.
Currently, a small number of individuals control inordinate amounts of the wealth in most democracies. In the United States, the ultra-rich 0.01% of the populace was reported to have 11.1% of the nation’s wealth in 2014, with the top 1% having 39.8%, an astounding $32.6 trillion. These statistics do not consider assets held in offshore accounts which would skew the percentages even further. The upper 1 percent earns nearly a quarter of the nation’s income annually.
According to Forbes, the richest four hundred Americans alone were worth an unbelievable $2.29 trillion in 2013, increased by $270 billion from the previous year, while the middle class has stagnated financially and poverty appears to be intractable. Income inequality in the U.S. is greater than in any other nation in the developed world by a large percentage. Economist and Nobel Prize winner Joseph Stiglitz has said that “America’s inequality distorts our society in every conceivable way.”
And wealth creates wealth. The more disposable income and excess capital an individual possesses that is not required for living expenses, the more extra money he or she can accrue through investments. Then, that additional surplus can be reinvested along with the original sums, creating greater and greater wealth for that person and his or her family. This is not necessarily bad for society, creating more businesses, jobs and so forth. But reasonable limits must somehow be set as wealth can be transferred from generation to generation, continuing to grow with each cycle, assuming the heirs are reasonably intelligent and attentive. To a certain degree in democracies, many of the ultra-rich have achieved the same status the nobility were accorded in feudal societies, living in castles with servants and bodyguards, their every desire gratified.
Thomas Piketty in his book Capital in the 21st Century noted- “When the rate of return on capital exceeds the rate of growth of output and income, as it did in the 19th century and seems quite likely to do again in the 21st, capitalism generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based. There are nevertheless ways democracy can regain control over capitalism and insure that the general interest takes precedence over private interests, while preserving economic openness and avoiding protectionist and nationalist reactions.”
Thus, one of the major objectives of democratic societies must be discovering how to lessen the concentration of wealth in only a few hands with continuous generational transfer, and achieving this end in a rational fashion. Whether it will happen remains an open question.
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