Inequality Part 2

Joe Craig

2 August 2008

As we reported in our last article ‘New report records Ireland’s wealth and a ‘Golden Age’, wealth inequality is huge in Ireland; but some defenders of such inequality claim that real inequality is much less.  This stems from the fact that income inequality is less than wealth inequality, which stands to reason since wealth is unspent or unconsumed income and the poorer you are the more that will be consumed rather than saved or used to accumulate more wealth.  For this very reason it is also claimed that inequality in consumption is even less than income inequality.  The rich do not consume as much of their income as those less well off and it is consumption that determines living standards.  Thus living standards at the top are not so different from those at the bottom, at least not as much as wealth or income disparities might suggest.

What inequality?

This has recently been asserted on the ‘Economist’ web site and it quotes a recent article from ‘The New York Times’ as support.  This article acknowledges the growing income inequality in the US  - ‘It’s true that the share of national income going to the richest 20 percent of households rose from 43.6 percent in 1975 to 49.6 percent in 2006, the most recent year for which the Bureau of Labor Statistics has complete data. Meanwhile, families in the lowest fifth saw their piece of the pie fall from 4.3 percent to 3.3 percent.’  They maintain that ‘income statistics, however, don’t tell the whole story of Americans’ living standards.  Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.’

Let’s leave aside the stupid description of poverty being measured by income as ‘abstract’ – I’m sure the authors wouldn’t be first in the queue to have a reduction in their own purely abstract income.  We will also ignore the exact quantification of the consumption gap that they identify – ‘so, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. A similar narrowing takes place throughout all levels of income distribution. The middle 20 percent of families had incomes more than four times the bottom fifth. Yet their edge in consumption fell to about 2 to 1.’

The exact difference is very much a source of debate: for example how does one measure the difference between a meal eaten by the rich at a Michelin star restaurant with one by a working class family at an inferior restaurant?  How does one measure the differences between driving a second hand Ford Focus and a Bentley?  In fact inequality cannot be measured simply in money terms  and the inequality on display in Ireland and elsewhere has enormous consequences for the health and well being of the majority.  For example the authors claim that since richer families have more children the consumption gap per person is.even less than that measured by family group.  They don’t hesitate for one second to consider whether poorer people might want to have more children if they had more money – in fact they don’t consider that this appears from their own argument to be precisely the case!

The problem is not just one of measuring consumption, nor of the categories that they employ – the division of the population into fifths or tenths that correspond to nothing outside of arithmetical constructs.  Even within the top 20 per cent, the wealth, income and consumption of the top 1 per cent will vary much more in relation to that of the rest of society than those in the 20th group from the top.  The averaging of the top 20 per cent itself minimises the inequalities between the real capitalist class and the working class. 

The authors fail to mention the lack of security which dependence on selling your labour power for a living introduces into life, the loss of your job is always a possibility and with it one’s whole life prospects.  Arithmetical constructs like this also ignore the fact that working class people often consume more than they earn by going into debt and that this generates its own stresses and strains with real consequences on health.  These constructs hide such phenomena as working class pensioners who get by on their pension and run down their savings to nothing, so increasing the difference between income and consumption inequality and reducing the relative consumption differences between the rich and everyone else.  Finally lack of income creates inequalities in social and political power that are impossible to measure but are all so obvuiously real.

Purpose

The view that it is consumption that matters sits neatly with the assertion in mainstream economic theory that the purpose of production is consumption.  In this construction the consumer is king and we have a theory of consumer sovereignty, in which individuals free from government interference can assert their wants through effective demand (spending money), which prompts the most efficient production to meet these demands.  Through competition the most efficient firms produce to meet consumption needs so that supply exactly meets demand and the economy reaches a perfect equilibrium.

The problems with this view are well known (when was the last time a market was in equilibrium?) but the ideas which are spread by it are so useful to society’s rulers that it continues to be taught, asserted and assumed in schools, universities, in the press and in almost all public discussion about these issues. 

The assumptions behind this theory are now thoroughly discredited:  there is no ‘perfect’ competition’ and certainly no perfect information allowing consumers to make perfectly rational and optimising consumption choices.  Advertising and marketing have long been exposed as means of exploiting buyers and often as means of impelling over-consumption and purchase of useless or faulty products, even when the latter are the latest ‘must-have’ items.  Of the latter one only has to think of ipods which have broken after one year or less.  The food industry, the most basic of purchases, has been exposed as selling harmful products yet none of this will ever be measured in the economists’ calculations.

In fact these economists will stand by theories that assume perfect competition and therefore perfect information when the advertising industry exists only because the latter doesn’t.  Far from the vast majority of people, even when classified as consumers, demanding the latest products it is production itself which generates consumption by creating that which needs to be sold; the income that will contribute towards its purchase and often the ‘need’ to purchase it in the first place.  Far from the consumer demanding production we have long reached the point under advanced capitalism where it is production that engenders consumption, often by promoting unnecessary or positively harmful wants.  It is now well understood that in these societies this expansion of productive capacity has not led to any greater growth in happiness although this is presented in the academic literature by commentators as something of a puzzle.

It is not that hard to begin solving this puzzle.  We are often not any happier because rising expenditure requires rising production to create the objects of consumption.  More and more of the working class is required to work and to work longer and harder in order to generate the objects of consumption that make us no happier.  Inequality feeds this because purely basic and necessary wants, such as enough to eat etc is, for the majority, normally assured, but what becomes socially acceptable and marks our social position in society is always set by those at the top.  As inequality rises it becomes less and less possible to reach this level of socially determined consumption no matter how hard we try.  Changing fashions allow those with money to continually display their social position even when they wear clothes that are ripped or discoloured.  We all know that to simply rip or fail to wash your old jeans won’t achieve the necessary results.

Clothes are a good example of social requirements met by consumption that go beyond simple material satisfaction.  They are a statement of what we like and therefore of our taste, and the latter is very much a social construct in which the choices of the rich are always superior.  The working class either ignores this and leads separate lives, not socialising in the same venues, or it attempts continually to catch up, which it can only do temporarily, only in part, and at greater cost.

Inequality in consumption is therefore very real and goes beyond monetary expression.  Social identity, status, worth and self-respect are fundamental to everyone and capitalism has created a system where extravagant consumption is a major means of expressing, and therefore of others accepting and recognising, our identity and worth.  For the economist cheap clothes made in China for the poor may increase workers’ standard of living but for a society bombarded with fashion advertising, lifestyle ‘choices’ and glossy mags full of the lives and loves of celebrities, cheap clothes are for cheap people.

It is clear that consumption is not the purpose of economic activity since the rich don’t spend as much of their income on consumption, relatively speaking, as do the poor (allowing economists to declare inequality not so striking).  Yet the demands for further sacrifices for economic growth, always from the rich, grow shriller.

An obvious question therefore arises.  If consumption is not the purpose of economic activity what is?  Why has greater and greater economic growth taken place over the Celtic Tiger years – allowing the rich to amass greater and greater wealth – if they spend less and less of it?  Why is not more and more of this unspent income not put into health and education services?  Why are we not looking to reduce the time spent working if we, or even some of us, do not have to earn all that we do to fund consumption?

Answer

It should now be obvious that the economics profession, the apologists for inequality, cannot honestly answer these questions.  The consumer is not ‘king’ and production is not for need.  Production runs ahead while we consume less and less of what we earn from it.  Much of it is wasteful and harmful.  The obvious answer is that production is not for need but for profit and if it is for profit then truly the gap between those at the top, who reap gains from profits, and everyone else, who don’t, cannot be bridged.  If the purpose of production is for something the vast majority can not avail of, profit from ownership of capital, then inequality cannot be abolished.

Inequality is therefore not a question of degree, of arithmetical differences, but a qualitative one that no amount of redistribution can erase.

This ownership of the means of making money mean that capitalists get what they spend – after they purchase raw materials etc they own the products and services that are sold and thus they get their money back plus some – while workers spend what they get – they get paid and then spend it on consumption.  The economists tell us that this is what we do after all.  Since there is no limit to the amount of money anyone can have, in contrast to the amount anyone can consume, there is no limit to the demand for increased production and economic growth, which is also what we see.

Those at the top who rule society seek to accumulate more and more yet consume less and less of what they accumulate yet this does not serve to bridle their desire for accumulation.  How could consumption be the point of production in this situation?  How could a society built on such principles not be unequal, not be suffused with greed, self-indulgence and lack of compassion?  Why then would it be so surprising that the rich, wedded to this pathological compulsion to accumulate, not sometimes also display strong signs of alienation and disaffection?  Even they cannot separate themselves totally from the rest of society.  So, as one small example, it has been observed that much of the ultra-expensive, designer label, luxury goods they purchase is costly crap.

The apologists for capitalism are wrong – inequality matters and consumption is not the purpose of capitalism.  Its true purpose explains why we have inequality in the first place and why it has not disappeared.  Consumption can be the purpose of production but this is called socialism.