"Imagine a ten-mile race in which contestants have different starting lines based on parental education, income, and wealth. The economically privileged athletes start several hundred yards ahead of the disadvantaged runners. Each contestant begins with ten one-pound leg weights. The race begins, and the advantaged competitors pull ahead quickly. At each half-mile mark, according to the rules, the first twenty runners shed two pounds of weights while those in the last half of the field take on two additional pounds. After several miles, lead racers have no weights, while the slower runners carry twenty additional pounds. By midrace, an alarming gap has opened up in the field, and by the finish line, the last half of the field finishes more than two miles behind the winners." (Chuck Collins, 2014)
Social inequality, political inequality, economic inequality, inequality has always been part of our human society. The free dictionary states "inequality is the state or quality of being unequal". Inequality doesn't feel right to many of us but on the other side inequality might be a good thing too. If everyone is equal, no one will be exceptional. And I mean, why work hard if you know everyone ends up equal in the end? Inequality has been a subject of discussion and for decades people have demonstrated in order to achieve equity. But is inequality actually a bad thing after all?
Current state of inequality
After years of studying Development Studies, I realized some interesting aspects of inequality. At first, there are some facts you need to know about out world's current state of inequality.
1. There's more than enough food in the world, but still one in nine people worldwide haven't got enough food to lead healthy active lives.
2. Nearly 75% of the world's adults own under $10,000,- wealth, an amount that equals the value of a successful Steemit post.... Source: click here
3. 1% of the world population now owns more than 50% of world's wealth (see figure 1 below)
Figure 1: the black curve indicated the cumulative relationship between the proportion of households generating a certain proportion of world income.
Development
Before studying, I never thought about the complex definiton of 'development'. At first, I thought it meant to improve a situation by improving technology, infrastructure and food provision. 'Development' and its definition is actually a quite vague and even a psychological term. I mean, what are we exactly aiming for in life? What wants a government to achieve? The Human Development Index is the most common measure of development. It's based on: 1. Literacy level, 2. Happiness, 3. Income per capita. But if certain 'developments' lead to unhappiness, should we still call it development? A country may be wealthy, but people might still be unhappy. The income per capita can be high, but unequally distributed. These situations should also be taken into account.
Fact 1: Income generates happiness
Previous research has shown an interesting positive happiness/income relationship between different countries.
Figure 2: the relationship between national average happiness and income per capita
Fact 2: Marginal utility of income diminishes
Another thing we should take into account is the diminishing marginal utility of income. The first few hundred dollars of income helps us to provide ourselves in our primary needs. We can buy food, shelter and we are able to live a proper life.
Figure 3: the relationship between personal happiness and income
Why we should combat financial inequality
If we assume these three statements:
1. Income differences generate happiness differences between countries (figure 2)
2. Diminishing marginal returns of income: money generates happiness to a certain extent (figure 3)
3. Happiness is the main goal and indicator of development
The Utilitarian Social Welfare Theory states that we should generate the highest amount of national utility by focusing on all individuals in the society. This means that inequality must be battled to a certain extent. Assume the following situation:
There's 20 people in a society. There's 1 high-class man ($1000,- per month, happiness=50), 2 middle-class men ($250,- per month, happiness=45) and 17 low-class ($50,- per month, happiness=25).
Total income: $2350,- and total happiness: 520
This situation is actually comparable to the world nowadays (see figure 1). If we look at figure 3, this situation is very inefficient. The $1000,- generated and spent by one man results into way less total utility than if it would be divided over the poorer people in the society. An extra dollar earned by poor people generates more increase of total utility than if that same dollar would be spend by the rich man.
But there's two sides on the coin..
Sweden has had a good reputation as the global exemplar for income, gender and social equity. The country is driven largely by tax and welfare systems that modulate the extremes of economic success and failure.
"Having spent generations idealizing equality and punishing high-skilled, high-income earners with punitive tax rates, it’s entirely plausible that Swedish kids and their parents would finally realize education, ability and work ethic are irrelevant to success in adulthood." (Source: click here)
Over the past years, the performance of Sweden has dropped and according to OECD investigators, high taxes to equalize incomes across high- and low-skilled occuptations might result into low incentive to learn and work hard. There should always be a certain reward to effort and quality. Otherwise we wouldn't achieve the potential wealth and the country will end up way under its capacity.
So... what does this mean for us?
Money generates happiness to a certain extent but once you're fulfilled in your basic needs, it barely increases any further. This means that an appropriate distribution of money could optimize total utility. Inequality is good in a way because rewards are a main trigger to optimize effort and input in the society. This means we should distribute income, but not too much. We all contribute to that, so next time think about how you spend your wealth!
