Ineffective Inequality - The Great Disruption: Why the Climate Crisis Will Bring On the End of Shopping and the Birth of a New World - Paul Gilding

The Great Disruption: Why the Climate Crisis Will Bring On the End of Shopping and the Birth of a New World - Paul Gilding (2011)

Chapter 18. Ineffective Inequality

I remember as a teenage activist in the 1970s reading about the works of Karl Marx, I came across the quote “From each according to his ability; to each according to his needs.” It struck me then as an eminently sensible, simple idea, and I couldn’t understand how any other approach could possibly be a better way to organize our society.

Then and since, we have had the real-world experience of communism, both as a totalitarian oppressive state and in its failure to deliver good economic outcomes while trashing the environment and human rights in the Soviet Union. It seems life is a little more complicated than I thought as a teenager. China’s Communist regime has delivered some very considerable gains for its people economically, though at great cost to the local and global environment. Realistically, even those outcomes are due mainly to their adoption of many aspects of Western capitalism, though in their case without the democracy.

So we can safely conclude at this stage that the basic Marxist ideals of the benevolent state and the absence of private ownership are not suited to the reality of human behavior and tendencies.

Does that mean that capitalism instead is the answer to our political and social needs? Do we just let the market rip? That depends on how you define it. There is clear evidence that private ownership and reward for effort are powerful forces for economic and social development, and various applications of them have delivered over the millennia. They clearly tap into some deeply ingrained human tendencies. They are not the only motivators of human activity, but they certainly have significant and often positive impact.

Based on this historical experience, I have confidence that some aspects of market principles and approaches can make a significant contribution to social progress. However, given that market forces as we currently apply them are driving us to the brink of societal collapse, one has to conclude that we have some fundamental redesign work to do if we want to take this approach forward. Our current approach is certainly not working well. Even the avowedly pro-market economist Sir Nicholas Stern argued this when he described climate change as “the greatest and widest-ranging market failure ever seen.”

Markets don’t work if left alone. They never have and they never will. They need guidance from government on behalf of the people markets serve, as we covered in chapter 11. We appreciate the raw energy of the market tiger, but it needs to be caged and directed. We covered earlier many of the design characteristics for this cage if markets are to play a significant role going forward, like caps on resource use and pollution.

One we haven’t yet covered is inequality. As we have seen in recent decades, vibrant markets can create wealth, but they don’t distribute it very well; in fact, they tend to concentrate it firmly in the hands of those who already have it.

Don’t get me wrong—I’m not advocating that we impose equality for everyone by decree. There are differentials in people’s contributions, whether they are driven by skills, character, or effort, and there is nothing wrong with differences in rewards for this, particularly for effort. This difference in reward is part of what drives people to work harder, to make an effort to make life better for themselves and their family and, in doing so, often for society as a whole. But to what extent does this motivate the outcomes we desire, how much reward is needed for it to be effective, and what are the side effects of the resulting inequality?

This is a markedly different type of moral question from extreme poverty, which most people believe is just wrong. The morality of inequality, while present, is much grayer. It is a constantly shifting judgment we make as to what’s reasonable and fair. At one end, almost everyone would agree that complete equality is unfair and an ineffective way to organize society and motivate people. Likewise, almost everyone would agree there shouldn’t be unlimited inequality—that is, there is some point where everyone would say, No, that’s too much difference and not fair.

So one side of the issue is what is the right level of differentiated reward to motivate individuals to make an effort and to innovate. The other side is how much inequality is too much to be fair and socially effective. At what point does inequality offend our sense of fairness—a moral or ethical issue—and at what point does it create social and political instability—a quality-of-life and economic issue.

Professor Herman Daly points out that the military, civil service, and universities manage to keep ratios between the top and bottom salaries in their organizations within a range of 15/20 to 1 and seem to do okay with no lack of highly skilled, motivated, and competent leaders, yet the corporate spread in the United States is now up to 500 to 1.1 There appears to be no evidence that such ratios actually encourage performance across the economy. The process of all sides boosting top salaries because the others are is more akin to an arms race among companies, bringing no net benefit to the system as a whole. Such situations clearly won’t right themselves and are good examples of where government intervention is required. Yet when restrictions in this area are proposed, senior business figures argue strongly against them, on the grounds that government shouldn’t intervene in the market.

This is where we come across one of the paradoxes in our cultural and political attitudes to these issues. This paradox is around the issue of limits.

On the one hand, many of the serious challenges we have been discussing throughout this book are the result of the lack of limits—we have come to accept that all growth is good, that there is no limit to what is reasonable for personal wealth, and that we can dominate nature because our technology will always find ways around the limits we would otherwise face. This belief in the lack of limits has a positive side, perhaps best understood by comparing it with our desire for our children to believe in themselves and their limitless potential. A belief in potential is powerful and important, for societies and for individuals. However, unrestrained it also has a dangerous side, an arrogance and inability to judge risks, with consequences we can clearly see. That’s why we impose limits.

While the imposition of some limits remains politically contentious, the paradox is that we do impose limits all the time to make our society “civilized” and have done so throughout history—limits like making non-state-sanctioned violence illegal, imposing contract law to put accountability and enforcement around assumptions of trust, and imposing standards on food safety to protect public health. Despite this, we then sometimes object to other limits as “constraints on our freedom” or “interference in the market”—such as the arguments against capping executive pay or limits on product availability, like what cars we can drive, what guns we can buy, or where we can smoke cigarettes.

What this all means is that there is no credible, central argument against the need to impose some limits or constraints on human behavior. There is no freedom defense for unrestricted violence, and there is no free market defense for selling dangerous food. We accept limits, and we work with them every day. This means the debate is what new limits we now need to consider imposing, in the context of the Great Disruption, to continue to make our society stable and civilized and enable its citizens to improve their quality of life. In other words, what areas will the system not self-correct unless we intervene?

We have throughout this book raised many examples where new limits need to be put in place: limits to pollution of our air and water, limits to quantitative economic growth, limits to the consumption of natural resources. These were mostly about environmental constraints and their economic impacts. We are now considering directly social questions—what limits might be needed to make a more stable and effective society in which everyone can flourish.

Is there an argument for greater limits on inequality? What would lead us to impose them? Or should the market in this area be allowed to self-organize, to find a natural level of “effective inequality”?

We currently accept levels of inequality that are off the chart. Do we really believe that CEOs deserve to earn five hundred times as much as their lowest-paid workers? Do we believe our top investment bankers are delivering value to society twenty times as much as our top military commanders? Few actually agree with the current situation, yet we find ourselves in a system we are all part of that is delivering just those results.

Historically, the debate in this area has been framed around relative fairness. High levels of inequality, such as the examples just given, are widely considered unfair. And it’s not just the poor that don’t like it. Opinion polls in the United Kingdom and the United States show a strong majority—around 80 percent—believe that income inequalities are too large. This means some very financially comfortable people are not personally comfortable with such high levels of inequality. There is an intuitive sense that such extremes are not right.

Well, like many things we currently accept as normal and find hard to imagine shifting, this is another one that’s going to see dramatic change with the Great Disruption. There are two reasons we will accept this change, even though it seems hard to imagine in today’s political context.

The first reason is the shift we discussed in the last chapter in relation to poverty—the loss of the pressure relief valve that growth provides. Even though we don’t like inequality, we accept it based partly on what is effectively a social contract. We believe each individual has the right to get ahead. In a growing economy, everyone can support this because the pie is getting bigger, so as one person gets ahead it doesn’t mean another is forced backward. This makes growth the pressure relief valve for inequality, as argued by Henry Wallich, former governor of the Federal Reserve and Yale economics professor: “Growth is a substitute for equality of income. So long as there is growth there is hope, and that makes large income differentials tolerable.”

Without economic growth this contract can’t be fulfilled. If the earth is full, someone can have more only if someone else has less. Without the pressure relief valve, reducing inequality becomes a social imperative in order to reduce social friction. But could this happen? Is it even remotely conceivable that, even in a full world, those who have greater material wealth would, in a democratic society, accept having less to enable others to rise up the wealth ladder?

This is certainly hard to imagine in today’s political debates. But what if addressing inequality actually increased the quality of life for everyone, even for those we currently see as being at the top of society? Hard to imagine?

Here we come to the second reason we will shift away from such high levels of inequality. This comes from one of the most important pieces of research I’ve seen in several years, one that has substantially changed my view of how all this will unfold. Up until this point, I thought we were going to have to address poverty and inequality by a combination of moral persuasion and social imperative (to avoid local and global political instability). It appears there is another reason we should do so, one that is likely to be far more influential than moral persuasion.

This new research was presented in the book The Spirit Level by Richard Wilkinson and Kate Pickett and was the result of comprehensive analysis by its authors over many years into the impact of inequality on a huge range of social indicators of progress. Its conclusions are startling.

It turns out that the greatest predictor of social ills, across an incredible range of phenomena, is not the absolute level of poverty or disadvantage. It is instead the degree of inequality or income difference among people. This is profoundly significant, because we have mostly assumed that actual poverty—lack of wealth—was the cause of social problems. We therefore thought that because economic growth increases wealth, even if unequally, poverty would be reduced and along with it many social problems. This has been one of the key reasons government is so obsessively focused on economic growth as its central objective.

But it seems that absolute wealth is a poor indicator of social progress, whereas relative inequality within our society is a strong indicator. The fascinating thing is how comprehensive this is, impacting life expectancy, obesity, imprisonment rates, teenage pregnancy, mental health, levels of trust in the community, educational performance, status of women, and so on. The differences were not marginal, with most of the indicators being three to ten times worse in more unequal societies. This applied even when none of the subjects in the group being researched were anywhere near what could be considered poor. So, for example, among U.K. civil servants in Whitehall, all well paid by global standards, the bottom of the group had a death rate three times as high as the top of the group, of which only a third could be explained by other causes like obesity and smoking (and some of those were perhaps driven by inequality anyway).

Before you think, “Oh well, then, in whatever society I am in, I better get to and stay at the top of the pile,” consider this. The evidence demonstrates that even those at the top are better off if their society is more equal, regardless of their relative level of actual wealth. Studies typically divide society into four income groups—those in the bottom 25 percent, those in the two middle groups, and those in the top 25 percent in terms of income. The studies consistently show that greater equality improves wellbeing even for those in the top 25 percent. It might seem strange at first, but the best way for the wealthiest group to improve their own lives is to improve the lives of those earning less than them!

So here we have the killer blow to economic growth and the solution to many of our social issues. First, the killer blow. Inequality, it seems, is an issue with extraordinary leverage on the whole system, and pulling that lever would have substantial social and economic impacts. It will reduce our obsessive focus on economic growth and therefore pave the way for acceptance of its now inevitable demise. Here’s why.

We support growth and drive it hard through the political process based on the incorrect assumption most of us hold that having more money and stuff will make us happier—that wealth is the key indicator of our personal success and that more wealth enhances our quality of life.

This is more than a casual connection. In the current model, we are firmly addicted at the personal level to more stuff. The problem is that the process of acquiring it, rather than actually satisfying our needs, drives a self-replicating cycle of dissatisfaction and greater want. We believe more wealth will satisfy us, but what actually happens is that the process actually drives inequality, which increases dissatisfaction, which we try to satisfy with more of the same!

Research in The Spirit Level explains this with new data, confirming what has been argued by many others, like Professor Tim Kasser. It seems inequality is one of the greatest drivers to consume. Status competition drives consumption, and inequality exacerbates status competition as we try anxiously to keep up, driven by marketers who exploit our state of anxiety.

On the topic of limits, marketers’ attempts to get inside our heads seem to have no boundaries. We have advertisements blaring at us in elevators, one of the few places left in a big city for a moment of quiet reflection on our way to or from a meeting or work. We have radio announcers who transition seamlessly from commentary to advertising in the same voice, tricking us into listening without realizing it’s one more push to buy.

Where does all this stop? Maybe they’d like us to rent out our foreheads so they can tattoo their brand there, turning every conversation and walk down the street into a marketing opportunity?

Given what we now know about the environmental impact of consumption and the anxiety that drives it, maybe we should see advertising as pollution, with damaging health impacts like cigarettes, and tax it accordingly, as argued by Professor Tim Kasser. Professor Herman Daly says at least we should disallow it as a cost of production and therefore remove its tax deductibility as a business expense.

While there is much to blame advertising and marketers for in all this, the underlying drivers are not a phenomena of the modern world. The classical economist Adam Smith back in 1776 emphasized our need to live a life without shame. In other words, much of our personal behavior and aspirations are driven by the desire to feel like a respectable and successful member of our community. It’s just that of late, we have come to define that by the possession of ever more material goods.

This latter point is what creates the opportunity for marketers. While we cannot argue they are the cause of it, marketers exploit our tendency with very negative results, as argued in The Spirit Level, referring to Tim Kasser’s work:

Young adults who focus on money, image and fame tend to be more depressed, have less enthusiasm for life and suffer more physical symptoms such as headaches and sore throats than others (The High Price of Materialism, MIT Press, 2002). Kasser believes that people tend to embrace material values when they are feeling insecure (retail therapy, anyone?).

“Advertisements have become more sophisticated,” says Kasser. “They try to tie their message to people’s psychological needs. But it is a false link. It is toxic.”

So as we circle all these issues, the noose begins to close around the neck of economic growth. While it is clear that more stuff doesn’t make us happy, most of us don’t believe this. We are caught up in the belief that it does, reinforced by all the signals around us in marketing and the media. People with more money than we have appear more popular, more attractive, and more respected. So we consume more because we want to be more like them.

This cycle is driven harder when levels of inequality are higher, and here’s the crux of the problem as well as the solution. When we consume, we drive economic growth because we increase the throughput of the quantitative economy. Economic growth tends to increase inequality, which in turn creates a stronger social craving for more, driving us to consume. No amount of consumption can satisfy this craving because the process of growth creates more inequality, which drives the desire more. Therefore we need more income to pursue it further.

We work harder to get more income. As is logical, given the drivers we just described, the more unequal our society is, the more hours we work. This gives us less time for the things that genuinely make us happy, like friendships, community, and meaning. This increases our stress and insecurity and thus increases our desire for more material forms of satisfaction.

To feed this process, governments, at our demand, drive more economic growth to create more jobs with more income, for us and our growing population. To do this, they put in place economic settings that encourage us to consume, reinforcing our anxiety-driven tendency to do so. Marketers then leap to exploit these anxieties and desires and drive consumption harder, convincing us the source of the problem can be satisfied with their product. The more growth we have, the more inequality there is and the more anxiety we feel. Then the cycle starts again.

Did I mention that economic growth is destroying the planet on which the economy and our quality of life depend? But note how we don’t even need to use that argument to make the case against economic growth.

So economic growth is dead. It’s dead because the planet will not support it. But it’s also dead because it’s economically and socially irrational—it isn’t delivering improvements to the quality of life for the billion or so of us at the top of the global economic tree; in fact, even worse, it’s actually now degrading it because of all the social problems inequality is causing. So it appears not only that the old saying that you can’t buy happiness is true, but that we’ve spent a hundred years buying sustained misery, not quite the outcome the advertisers mentioned.

So once more now, economic growth is dead. It will kick and struggle for a while, but it is all over.

That leaves us with some work to do. One key task is to deal with the failure of growth to improve the quality of life for those who’ve met their basic needs—this means humanity overall has stopped developing. As the authors noted in opening The Spirit Level:

It is a remarkable paradox that, at the pinnacle of human material and technical achievement, we find ourselves anxiety-ridden, prone to depression, worried about how others see us, unsure of our friendships, driven to consume and with little or no community life.

So we need to get ourselves back on the path of human development, we need to get back on the path our grandparents put us on, of improving our quality of life. (Sorry, Grandma, thanks for the foundation you laid, and yes, we squandered that opportunity, but we’ll try to sort it out now.)

How will we do this?

Not with more stuff. The barriers to a better life for people who aren’t in poverty are now social and psychological, not material. To address this, we need to create, consciously and deliberately, a more equal society. This is the next logical, self-interested step to improve our quality of life. Here’s why.

We now know that inequality is the greatest predictor of social ills, across an incredible range of phenomena. What’s really interesting in the earlier analysis of the problem is that it indicates we can start to reverse the downward spiral of growth, inequality, and stressful lives into an upward spiral just as simply, with one lever. While consumerism drives growth, which drives inequality, which drives consumerism, if we increase equality, we decrease consumerism, which decreases growth, which increases equality. Given that doing so would also reduce the political push for growth, it will reduce the negative political response to the Great Disruption as well, thus reducing the risk of social instability a failed growth economy could cause.

Can it really be this simple? Surely we can’t just rely on theoretical data for such a profound shift? The data is so strong and so consistent, we can, actually. Besides, it’s not theory, it’s measurement of how things are across the world. But if you need more evidence, consider this.

World War II in England was a real-world example of putting these ideas into practice. Over the years of World War II we saw rapidly decreasing inequality, decreasing individual consumption, decreasing material living standards, and yet rapidly increasing public health, and all with a huge degree of public support. Life expectancy during World War II for civilians increased at more than twice the rate of any other years in the twentieth century even as so much death surrounded them. Nor was this just to do with increasing nutritional standards from rationing, because the same thing happened in World War I, when nutritional standards declined. World War I was the only other time in the twentieth century when life expectancy increases matched those of World War II, again more than twice the rate of any other decades. At the end of both the decades of 1911-1921 and 1940-1951, men and women could expect to live at least 6.5 years longer than they could at the beginning.2

While material living standards took a hit as civilian production was diverted to war production, and residents of London and other big cities literally had their homes blown apart by German bombing, equality had never had it better. For the duration of both wars, employment skyrocketed and concrete efforts were made to reduce inequality. Part of the implicit “social contract” forged in the war was that in return for the people’s sacrifices, the bottom had to be lifted up and minimum standards of welfare had to be guaranteed—the so-called “nation fit for heroes.” Under these conditions, real income of the working class rose by more than 9 percent, while the real income of the middle class dropped by 7 percent. In addition to the greater sense of wartime unity that such equality brought with it, we now understand that a familiar process was at work. That process is that increases in equality bring improvements in health—and a whole raft of other indicators—for the great majority of people.

So that’s sorted. Really, it is that simple. We just need to decide to do it, and if we do, we’ll all be better off.

How do we do this? For a start we could put in place, through a series of policy measures, a shift away from extreme inequality. Herman Daly asks the question “What is the proper range of inequality—one that rewards real differences and contributions rather than just multiplying privilege?”

Writing elsewhere, he gives his answer and sums up the issues as follows:

Without aggregate growth, poverty reduction requires redistribution. Complete equality is unfair; unlimited inequality is unfair. So we need to seek fair limits to the range of inequality: a minimum income and a maximum income. The civil service, the military, and the university manage with a range of inequality that stays within a factor of 15 or 20. Corporate America has a range of 500 or more. Many industrial nations are below 25. Could we not limit the range to, say, 100, and see how it works?

People who have reached the limit could either work for nothing at the margin if they enjoy their work or devote their extra time to hobbies or public service. The demand left unmet by those at the top will be filled by those who are below the maximum. A sense of community, necessary for democracy, is hard to maintain across the vast income differences in the U.S. When rich and poor are separated by a factor of 500, they become almost different species.

The main justification for such differences has been that they stimulate growth, which will one day make everyone rich. This may have had superficial plausibility in an empty world, but in our full world, it is a fairy tale.3

So one key thing we need to do is to recognize that in terms of motivating people, we don’t need to pay them five hundred times as much as the lower end of those they are leading. We don’t even need to pay them fifty times as much. It’s not really a motivation anyway at that level. I’ve had countless conversations with the seriously rich, and they say it’s not the money; that’s just the scorecard of progress. So we need to find new scoring systems and ways to celebrate and acknowledge success.

How about contribution to society for a start? And how about we pay our military officers more and our investment bankers less? I know who contributes more to my quality of life.

It’s interesting to note that most of us actually want it to be this way. But we’ve become so caught up with our belief in the system we’ve been told drives us, we think others don’t. In their research for The Spirit Level, Wilkinson and Pickett found that most Americans want to “move away from greed and excess toward a way of life more centred on values, community, and family.” However, people feel isolated and see their fellow citizens as different from them, as the ones who are greedy and excessive. So it appears we all secretly want this to happen!

So who does support inequality? Not economists, who by a margin of four to one support governments taking action in this area.4 Not even the top “go for growth” economists like former Fed chairman Alan Greenspan want it. He called increasing inequality a “very disturbing trend.”

It appears there is a clear and in some cases overwhelming majority of people and experts who think we need to have significantly greater equality in our society. Given that the data clearly demonstrates we’ll pretty much all be better off down that path, it’s time to get to work on making that happen.

Given the global context of having to share wealth in our own self-interest, this direction aligns well at the national and global levels.

It seems the answer to the future of human development, to making ourselves happier, and to solving a wide range of social ills including the elimination of poverty is to consciously and deliberately put in place policies and attitudes that make our society more equal.