Thursday 10 November 2011

Is greater income equality desirable?

You earn £150,000 a week.  I earn £200 a week.  Why such a gulf?  You, by virtue of being the beneficiary of the natural lottery of genetics, are a world-class footballer.  If some income inequality is caused by those who succeed because they are the ones who are the most talented, then this is unfair.  A natural lottery, because of its sheer arbitary nature, should not decide who becomes the most prosperous in society.  Greater income equality is necessary to minimise nature's crapshoot.

This argument is severely weakened because it assumes that individuals have no bearing on how well they do in life.  Yes, a world-class footballer may have been talented to begin with - but the reason he made it to the top ahead of the thousands of other equally talented footballers who did not is because he worked hard.  We cannot deny that hard work has led to the success of many high earners.  Thus, although talent may be seen as a necessary condition to become a footballer - it is not sufficient (it requires hard work, too).

So, greater income equality may not be desirable in terms of fairness.  But, it may be desirable from a macroeconomic outlook.  By redistributing income from the richest to the poorest, we may be able to stimulate large economic growth.  Lower income groups tend to have a higher marginal propensity to spend.  This extra consumption in the economy will increase aggregate demand, and hence, stimulate economic growth.

In terms of maximising the overall happiness of society, greater income equality may be the path too.  As you earn more and more, the marginal utility of income diminishes.  If I give £10 to Bill Gates, his overall happiness will not be increased much (if anything).  But if I gave that £10 to a homeless child, his happiness is drastically improved - he can have a hot dinner that evening.

There is also a political case for greater income equality.  Democracies are intended to give each person an equal opportunity to influence the governing of their country.  Income inequality vitiates this democratic goal - those who are richer are able to "buy influence."  We have seen this illustrated by numerous scandals - the 'Cash for Honours' scandal to name one.  High income earners also exert disproportionate influence in another indirect way: the rich can afford an expensive private education which gives them the best employment prospects.  They then become the elite of that country - and run the country that way.  Income equality would remove this dent in so-called democracies.

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