In this section I will explore whether inequality is unavoidable in a capitalist economy. It turns out, for me anyway, that concluding inequality is somehow an inevitable outcome in a capitalist society is quite challenging. It is difficult because the exchange of goods and services for money doesn’t operate outside of public policy and societal influences. So how do we determine that inequality is not merely a result of human nature? As traditional science tells us, we are selfish beings acting in ways to maximize our own self interests. Therefore, income inequality merely reflects our natural state, competing for limited resources to maximize our economic self-interest and thus increasing the chances of our own survival.
If this is the accepted understanding of human nature then inequality seems inevitable, not because of any economic system, but because we seek to out-compete each other. If I have more money or luxuries than another, it’s because I worked harder than they did. It all comes down to survival of the fittest and while humanity continues to evolve, the poorest people can merely hope to leave behind artifacts as evidence of their existence.
I know, this is not a very flattering story of humanity. It doesn’t fit what I know to be true in my heart, and it doesn’t seem to be logical to me either. If the poor are just some lesser evolved people unable to compete in the world today, wouldn’t the number of poor people be shrinking- natural selection or something like that, right? But that is not the case, is it? The poor population is actually growing. And although the wealthiest among us have more than ever, the number of ‘wealthy’ individuals is shrinking. What’s going on then? An inconsistency between the fundamentals of capitalism and human nature?
Let’s shift the focus from theories of evolution and overarching ideals on what capitalism is, and let’s talk about money. If we want to understand inequality today, we need to understand money.
For the most part, money functions as a medium of exchange or store of value. But more than that, it is an agreement. I can accept a twenty dollar bill from someone for a service, because I know that that twenty dollar bill will allow me to give it to someone else, in exchange for a service or an item that I may need down the road. All parties agree that that twenty dollar bill is valuable, and therefore it can be used to facilitate the exchange of goods and services.
How is money created then? Money is created by interest bearing debt. Let’s start from scratch to illustrate what this means. I think the best way to do this is to share this parable entitled “The Eleventh Round” that I was introduced to by Charles Eisenstein in his book Sacred Economics: Money, Gift & Society in the Age of Transition, who shared it by way of Bernard Lietaer from his book The Future of Money.
– Once upon a time, in a small village in the Outback, people used barter for all their transactions. On every market day, people walked around with chickens, eggs, hams, and breads, and engaged in prolonged negotiations among themselves to exchange what they needed. At key periods of the year, like harvests or whenever someone’s barn needed big repairs after a storm, people recalled the tradition of helping each other out that they had brought from the old country. They knew that if they had a problem someday, others would aid them in return.
One market day, a stranger with shiny black shoes and an elegant white hat came by and observed the whole process with a sardonic smile. When he saw one farmer running around to corral the six chickens he wanted to exchange for a big ham, he could not refrain from laughing. “Poor people,” he said, “so primitive.” The farmer’s wife overheard him and challenged the stranger, “Do you think you can do a better job handling chickens?” “Chickens, no,” responded the stranger. “But there is a much better way to eliminate all that hassle.” “Oh yes, how so?” asked the woman. “See that tree there?” the stranger replied. “Well, I will go wait there for one of you to bring me one large cowhide. Then have every family visit me. I’ll explain the better way.”
And so it happened. He took the cowhide, and cut perfect leather rounds in it, and put an elaborate and graceful little stamp on each round. Then he gave to each family 10 rounds, and explained that each represented the value of one chicken. “Now you can trade and bargain with the rounds instead of the unwieldy chickens,” he explained.
It made sense. Everybody was impressed with the man with the shiny shoes and inspiring hat.
“Oh by the way,” he added after every family had received there 10 rounds, “in a year’s time, I will come back and sit under that same tree. I want you to each bring me back 11 rounds. That 11th round is a token of appreciation for the technological improvement I just made possible in your lives.” “But where will the 11th round come from?” asked the farmer with the six chickens. “You’ll see,” said the man with a reassuring smile.
Assuming that the population and its annual production remain exactly the same during that next year, what do you think had to happen? Remember, that the 11th round was never created. Therefore, bottom line, one of each 11 families will have to lose all its rounds, even if everybody managed their affairs well, in order to provide the 11th round to 10 others.
So when a storm threatened the crop of one of the families, people became less generous with their time to help bring it in before disaster struck. While it was much more convenient to exchange the rounds instead of the chickens on market days, the new game also had the unintended side effect of actively discouraging the spontaneous cooperation that was traditional in the village. Instead, the new money game was generating a systemic undertow of competition among all participants. –
The important point that I take away from that story is that that there is always more money owed than does exist. But, how does the fact that there is always more money owed than is actually floating in existence lead to inequality? I will play off of the above story to try and illustrate this point.
Just as before, imagine there was a small village functioning without any type of formal currency to facilitate their exchanges. But just ten miles away from this village was a thriving town with a growing economy, and as a way to continue that growth a businessman from the thriving village offered to introduce the villagers to the town’s modern ways. After some promises of increased efficiency leading to more leisure time, and a more vibrant culture with more expansive social networks, the leaders of the small village agreed to become part of the neighboring town’s economy.
This was great news for the businessman and he excitedly laid out the details of the arrangement. He said, “Since you have no currency, I will lend every adult member of the village 100 coins, and with these coins, rather than going out and hunting for hours for food, you can simply go to the market in town and buy food there.”
“But how do we get to the market?” one villager asked.
“Do not worry. Although you have no transportation currently, you can buy a mode of transportation with the money that I have lent you and easily travel back and forth for supplies. The money is yours to do with as you please,” said the business man. “There is only one requirement, and that is that by next year each member of the village will have to pay back 110 coins. Any additional coins you acquire are yours to keep.”
So the villagers accepted the coins and began their new lives. At first the hunters held onto their tradition of going out and killing the food themselves and would accept the coins from the villagers as payment for their food. But that was until another villager used his coins and bought a mode of transportation to buy food from the market. With this purchase, he was able to take food orders from the villagers and provide a greater variety and quantity of food to them, for an additional service fee. He soon had received enough coins from the villagers to pay himself back for the transportation and was well on his way to having more than 110 coins to pay the businessman back.
As the hunters began to see their way of life becoming obsolete, they began to think of new ways they could acquire coins. One did this by charging for carpentry services. Another partnered with the villager with the transportation and made all of the market runs. Because of this his new partner could run his own market right in the village.
And so on and so forth, the economy grew as more and more exchanges were paid for by the coins. Laundry services started as people were finding it harder to find time to perform their household chores, people began charging to look after other people’s children rather than just looking after them for the community’s sake, and they even became accepting of being charged for their entertainment.
The year went by and the businessman, thrilled to see the town’s transformation and all of the new businesses that were created, came to collect his coins. Some people gave him the full 110 coins they owed, others gave back the initial hundred they received, while the rest gave every coin they had but still did not have enough to pay the man back.
So far from this anecdote we can see a couple of things. The first is the conversion of everyday life into money. The second is the extreme competition that arises by a financial system where the money supply is created by interest bearing debt. It also makes clear that not everyone can be without debt in this system because there is literally not enough money in existence to pay back all of the money owed. As Charles Eisenstein elaborates much better than I do, because of how money is created, it is inherently scarce, and therefore any good, service, or natural resource that is converted into money is also scarce. That we are selfish beings competing for a limited amount of resources to maximize our own economic self-interest may only be true because survival and a high quality of life are only made possible by how well we operate in a financial system that thrives on competition and infinite growth, despite a finite amount of resources.
If we take the story above one step further we can start to see inequality as an unavoidable outcome. The businessman can create more money by offering bigger loans to the people that fully paid their debt back, and he can even offer the people who didn’t pay him back in full another loan to pay off their debt. For example, say one of the villagers could only pay back 80 coins. The business man can lend the 30 coin difference, plus another 100 coins for the villager to use for the next year. Except now the interest rate is higher and applied to 130 coins instead of 100 coins, requiring this villager to be even more competitive in the upcoming year to come up with more coins just to break even. Whereas the villagers who collected more coins than they owed can get the same 100 coin loan on a lower interest rate, and if they let the businessman hold onto their additional coins from the previous year, those coins will collect interest. This could actually mean that in the upcoming year these particular villagers could make less money than they did the previous year and still break even. It is apparent that wealth or poverty can be handed down through the generations since, due to interest, money acquired increases over time and so does debt.
I know this is may seem oversimplified, but I think stripping things down to the basics helps to illustrate how at its core, our current money system can lead to the extreme situation of income inequality we have today. Even if everyone had the same work ethic and motivation, not everyone would be able to be successful. This is why social welfare programs and financial regulations exist. Once money becomes tight for an individual in a society where everything is paid for everything becomes difficult. Need someone to watch your kids for a few hours so you can go to a job interview? Need two more weeks until your next paycheck comes in to pay the electric? Need a months worth of bus fares to get back and forth your new job until your paychecks start coming in? Need to choose between paying for your prescriptions, food, heat, or cellphone bill? Need to mourn the loss of a loved but have to stress over how to pay for the funeral? Times get hard for people and usually not because folks are lazy deadbeats undeserving of a higher quality of life. I don’t believe the system is rigged in the sense that there is an evil puppeteer picking and choosing who does well and who doesn’t, but there will always be losers in this competition and the game doesn’t stop and restart anew for anyone. If someone is born into poverty they’d better hit the ground running, because they are likely to stay there.
If you are with me to this point you know that I have tried to show that income inequality is well beyond an acceptable level and cannot be explained by mere differences in talent or potential, and that the money system itself, regardless of human influence, is partly responsible for this extreme inequality. The next part of this blog is to explore what life is like for the poor, and if the consequences of inequality literally threaten the lives of people born or thrown into poverty.
(from my previous website, but with edits from the original version)