by Ralph T. Niemeyer
The extreme inequality that global capitalism creates is not only morally and socially wrong. It also is a major obstacle to productivity and innovation. Economic dynamism is at stake.
The theory that inequality let’s people stretch to the ceiling is a myth that has been dismantled by tycoon John P. Morgan who investigated where the differences between the more and the less successful companies of his empire lay. In the company of the ‘Mal-Performers’ the differences between wages paid at certain levels were bigger than in the company with the best performers. In the latter the income-difference was never greater than 30%.
Kate Picket and Richard Wilkinson empirically prove in their book “Equality lays in Happiness” that in very unequal societies negative symptoms overwhelm the entire society: Alcohol and other drug addiction, obesity, psychotic conditions and diseases much more often are to be found than in more equal societies. Also birth and fertility rates are subject to the level of equality. An unequal society doesn’t reproduce. But, also education and achievements in science are by far less good in unequal societies.
Last but not least, an unequal society has many more prisons than a more equal one.
In the US, the number of prison inmates has quadrupled between 1977 and 2002. Under President William J. Clinton another sharp increase can be noticed.
He had limited social security to five years, one time per life. And, while the dotcom bubble laid the ground for the real estate bubble, ultimately the financial crisis that cost the US its global leadership, the income concentration in the upper quintile led to over-indebtedness of 4/5th of Americans whose wages today are (clear of inflation) on the level of the 1970s.
Whoever believes in a free market society has to admit that markets can only reflect real demand when there is a more or less balanced income distribution in a society. What markets in a capitalistic model respond to, is not the actual demand, but the ability to pay for such. Only if social purchasing power is sufficiently covered will the market mechanisms create a production responding to demand.
The opposite extreme of capitalism shows us every day that markets can be saturated while human beings are starving to death.
A high level of inequality also means polarisation of demand. Both, luxury brands as well as discounters, grow steadily but the latter not because people prefer cheap trash goods instead of high quality products but simply because they can’t afford them.
As a result, lower quality products are being produced which actually harms SMEs especially. Economic capacity that could provide for a higher standard of living for everyone is wiped out from the market.
In essence, one has to note that income concentration in the upper quintile of society while wages, pensions and social subsistence at best stagnate or even decline then also consumption declines. Parallel to this, a dreadful money spinning cycle replaces the real economy. More and more funds are not invested into production but put onto the casino tables of the financial market. That has been so before 1929 and that is also so today.
The only way the capitalistic system can counter the income disparity is by debts. But, it is not only the state that gets indebted, it is the citizens themselves who pile up debts. This kind of privatized Keynesianism now collapses like a house of cards.
Germany tried to level these imbalances out by an aggressive export strategy that created huge surpluses which destabilized the entire Euro-zone. There is only one alternative: the inequality has to be reduced drastically or the economic substance will be destroyed and all will become poor.
The growing inequality has not only been the result of the wrong economic policy, but foremost. the predicament created by the distribution of wealth and power. Ownership cements an economic order that is totally undemocratic and mathematically unsustainable.
The free-market ideology produces oligopolies that dominate public life and that manage to bribe and blackmail elected politicians, who surrender the democratic state to a profit maximization principle that can not sustain itself because it only produces for profit and not for actual demand. Socialism got crippled by centralisation, Capitalism chokes because of concentration.