Equality in Inequality!

A world where all men are equal, where there is no hassle of making ‘more’ money, where Nehru and Gandhi’s vision of an egalitarian society is achieved, counter-intuitively enough first, cannot exist and second, should not exist.

First, consider an economy, free from the artificial control of pure socialism or communism, as is the case in almost every country today. Can now, equality be achieved in such a quasi free-market economy, which is regulated and taxed progressively, is the question. The answer to this can be understood by the PARETO EFFECT which states that 80% of the outcomes can be attributed to only 20% of the causes for a given event. As a corollary to this, 80% of the world’s wealth will always be in the hands of 20% of all the people of the world, as is seen in status quo.

This is because money begets money. As soon as someone earns ‘more’ money, it become increasingly easier for him to make further more and more money as compared to others. Take a hypothetical example: There are two farmers, A and B, each hoping to produce the same initial quantity of output, say 10kgs of wheat. The two of them directly compete in maximising their profits. Now because of whatever reason, say more initial effort by A or merely by sheer luck, at the end of the harvest season A and B have produced 10 and 8 kilograms respectively. Now, when they sell their output in the market, assuming at the same price, A is left with more revenue than B. This translates into A’s ability to buy better or more inputs and improve the quantity and/or quality of his output relative to B for the next harvest. This further means that A can be more competitive by lowering his prices because of a lowered cost of production or can simply sell more at the same price. Anyhow, he will end up being better off than B, even without the re-occurrence of the random factor that got him more than B initially. Through a number of such cycles, the gap between the welfare of both keeps increasing constantly at an increasing rate and A ends up being richer ultimately. Dig deeper, watch this video for more on the Pareto Effect: Video

Now, there are rags-to-riches stories and unprecedented failures among other capricious possibilities, but by extending this example to the macro-level, such peculiarities get averaged out. At the end you have an economy where 20% of the populace owns 80% of the total wealth, thereby ensuring that inequality will necessarily exist.

Second, since equality cannot be achieved in the above economy, should it then be imposed using constraints and establishment of socialist moulds? Again, no. Rational individuals seek to maximise their utility by using their income and minimise the effort required to get this income and utility. Consider an example: There are three students: X, Y and Z. In a test out of 10, they get 3,6 and 9 marks respectively. It is assumed that marks are directly proportional to the amount of effort put in- Z has put in maximum effort studying, and X, the least. After the test, their teacher tells them that to ensure that there is equality in the classroom, the average of the total scores of the three, will be awarded to each. So, in this case, X, Y and Z, all get 6 marks each. Is this fair? Further, in the next test, X is complacent with this free-ride, and does not put in any more effort than last time, since he will anyway get better marks than proportionate. Now even Y and Z do not want to put in the extra effort compared to X. They will still get the same marks as they will by putting in effort worth only 3 marks. In the next test, they score 3,3,3 respectively, getting 3 marks each. Therefore, the utility (marks) that each person now gets is reduced, even though they are now all equal. In essence, everyone loses. Similarly, in an economy, every worker will be worse off eventually and the economy will weaken.

In contrast to this, a sense of competition does a lot to augment the total utility generation. If in this example, it was told that whoever scores the lowest will fail,  all three will work harder and harder since there is no predetermined pass-mark. They are not aiming to reach a particular level of utility, they are trying to outdo each other and thereby pushing the highest and total marks considerably higher. Also, is it not equality to treat everyone by the same yardstick? Would it have been fair for Z to get less marks than what he should have gotten, and for X to get more than what he should have gotten?

Lastly, it might be argued that some people are in fact, born with a silver spoon in their mouth, so their utility generated (income) is always going to be more than proportionate to the effort put in, since money begets money. While this is true, it raises an important moral question: Should parents be allowed to pass on the benefits of their lives’ toil, to their children?  In fact, a major incentive for any parent to put this toil in the first place is to help their children attain certain benefits. If you remove this incentive, the parent wouldn’t want to toil as much as he would right now (again lowering the productivity of the economy) Also, a parent may take undertake effort and take his child to watch a film (utility) for instance. Can you mandate this parent to also take along a poor child from the street to watch this film, so that both the child and the poor kid are equal? No. Similarly, this parent also undertakes effort so as to leave a fortune for this child behind so that he can enjoy the utility off it. Can you now mandate this parent to part with this wealth equally for a poor kid from the street, so that both his child and the poor kid are equal. Again, no.

Equality as a notion has been glorified to be Utopian. In reality, it seems that inequality offers a more just, equal and productive trajectory. For the sake of equality, lets profess inequality!

(originally published in the ‘Magnum Opus’ section of Artha– The annual, Economics Society-SRCC’s magazine)

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8 thoughts on “Equality in Inequality!

  1. Pingback: Quora
  2. Nice article here are my thoughts.
    I think the wealth divide is fast becoming a huge problem. In many countries it has become so diverse that the top 1% own about 50% of the wealth. Part of the problem lies in the policies of the governments. Equality should be the ultimate aim of every society. However the question is how do you define equality. If the definition means every one should have equal wealth then the country is doomed for failure for reasons you have already mentioned. But I define equality as equality of oppurtunity. Every human being on this planet should have access to the barest minimum(healthcare, similar access to education to both rich and poor) and I would like to think that as a species we are moving towards just that. That would be a truly egalitarian society. In response to your point regarding government regulation I believe there should be a balance. Communist countries are over regulated however in many capitalistic countries I feel there are not enough regulations. There are so many tax loopholes available to the big companies that they are LEGALLY allowed to stash their money in cayman islands, leichtenstein, swiss banks and thus end up paying FAR FAR less than they ethically should.
    Rest I agree with. Keep it up.

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    1. A purely capitalist or a purely socialist model of governance has neither ever worked nor can it work. ‘Mixed economies’ have been adopted by most countries of today; but within this balance (as you talk about) countries tend to either be more socialistic or more capitalistic. I think a country’s growth and progress has to be directly correspond with gradual removal of regulations and loosening of controls.

      I agree that equality of opportunity is essential and the government must try to maintain it. But as I have mentioned in the first part of this piece, putting the Pareto Effect into consideration, such inequality of opportunity becomes inherent amongst competitors (read, citizens). In a long term scenario this may lead to the rise of cartels and monopolies and situations where extremely wide income inequalities may persist. How moral is then, the government, to ask those sitting atop the cash piles to part away with their money for the benefit of the poor, and to what extent is the question.

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  3. Pareto principle can explain a lot of events, but it can’t be used to draw conclusion. To say, ‘because of Pareto principle such and such will happen’ is a wrong implication . If a principle is used to draw a conclusion, it should also be able to explain why it would happen? In your article, you answer the why as ‘This is because money begets money……. followed by an example’. What if, the next season due to some reason B produces 15 kg and A produces just 5 kg. There is a lot of ambiguity. Pareto can’t answer why such distribution will take place? The world is full of stories of ‘rags to riches.’ In this modern world, ‘making money from money’ has no initial floor to begin with. While riches like ‘Kingfishers’ can go bankrupt, and at the same time there can be emergence of new riches. What i mean to say is one can’t predict the distribution of resources or money.

    Further, ‘equality in the eyes of law, right to vote’ were examples to show how have we moved ahead in achieving social and political equality. So economic equality could also be a possibility. In fact, it has been shown that high income inequality can hinder long term growth. And other forms of equality can be fully realized only when economic equality is attained.

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    1. Well if you read the sentences right after I’ve explained the Pareto principle, I’ve said that there are bound to be exceptions of the kind you have mentioned. But it establishes a general trend. And when you look at income distribution from the macro view, from an aggregated or averaged out view, you’ll find that the these exceptions get evened out and the general trend emerges. At an individual level Farmer B might produce 15 and A 5 in the next round, but as long as it has been established that it becomes easier for A to produce more than B in the next round, you can multiply the number of A’s by a thousand and see that only a small proportion of them will not end up doing better than a thousand Bs.
      And this is a very basic example. Think of someone who starts off with large inherited wealth vs a person from a poor family. Now you can say that there is after all a possibility that the poor person might be the next rags to riches story and the rich guy be the next Kingfisher, so that the poor persons ends up better off than the rich guy eventually; but that would be a one off situation. In general it is safe to state that such persons with inherited wealth are going to be better off than such poor persons, not in 100% of the cases, but enough to cause inequalities and prove that money begets money.

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  4. Economic equality leads to other forms of equality is an interesting perspective to look at. Though I would ask you to state the reasons for the same instead of simply asserting that it has been proved to that effect! I can think of why social inequality would stem from it. Also why due to the existence of corruption, the inability to pay bribes might lead to political and legal inequalities. But in a notional discussion like the one my article presented, I would want to keep such external factors out. Though it’s still an interesting way to look at it.

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