(Sukhveer Singh, an IAS officer of 1997 batch)
In the Covid-19 and the Russo-Ukraine war scenario, the people of the lower strata have been affected the most. The income of multinational companies is enormous. Even the UK government has imposed a ‘windfall tax’ on some companies. In the last two years, more than 31 lakh deaths were caused by the pandemic, primarily in low-income families. More than 120 million families have fallen below the poverty line.
Economic inequality is not a new topic. This, like climate change, remains an emerging area of concern on a global scale. The top 1% holds 50% of the world’s wealth; the top 10% of the population owns 85% the property; While the remaining 90% of the population has only 15% net worth. In his book ‘Capital’, Thomas Piketty has argued that wealth accumulates faster than the economy’s growth. The concentration of capital in a few hands could be attributed to the mechanism that income from capital is much less distributed among the masses than the income from labour. Capitalism promotes rapid growth and high wages, and this increases inequality.
Thomas Piketty advocates a wealth tax to reduce economic inequality. He argues that a significant decline in economic inequality occurred during the First and Second World Wars. The war destroyed much capital, and the western countries also increased the tax rate because they needed a lot of money to fight the war. This type of measure is more practical and fair, and it does not affect economic growth either.
There are many reasons in the capitalist system that encourage unequal wealth distribution. The first is that rising wealth and growing inequalities create a situation where people inherit poverty or prosperity – many affluent inherit wealth through inheritance. Second, in a capitalist economy, capital is privately owned, and the owner pays wages to the workers. The market rewards the entrepreneurs’ risky behaviour and helps them earn huge profits.
Thirdly, the company’s monopoly power allows the company to charge exorbitant prices for its products and services and could deter the entry of other companies into the market. Having a monopsony power for specific skills, the company may decide to pay meagre wages to its employees.
That’s right, and you get a higher reward if you put your capital at risk. If you work hard, you are entitled to earn higher wages. However, a society should be based on the principle that every individual leads a self-satisfied, healthy, and peaceful life. The rich should not dominate the poor, and their position in society should not be judged based on wealth.
I believe that the pricing of products and services in a capitalist economy plays an essential role in the distribution of wealth. To discuss this, producers can be classified into three categories: basic consumer goods and services, such as cereals, foodstuffs, and everyday products, produced by farmers, nurses, teachers, small and medium enterprises, and other competing firms. Clothes etc.; second, entertainment and recreational goods and services; and third, specialised luxury goods and services produced by multinational firms/large companies, for example, Apple phones, Swiss watches, designer clothes, and accessories, etc.
Pricing a product using the standard market method considers the cost of manufacturing it and the profit – that is, you need to know the cost of producing the product and the margin you need. Another factor that affects the pricing is the availability of substitutes in the market, which affects the demand and, ultimately, the supply and demand for the resulting product, which determines the commodity’s price. Regarding entertainment and recreational products and services, companies generally charge premiums after fixing the price based on the standard method.
The price of luxury products and services – such as branded watches, clothing, phones, etc. – is based on the brand value. If the selling price of these products is reduced, it reduces the brand value. For example, Burberry and Ralph Lauren actively offered price discounts during the current pandemic. They suffered a lot and compounded their existing issues of lower demand. Thus their prices are kept at a very high level compared to the cost of material, labour, and effort involved in producing the product.
The total value of the goods and services produced is a part of a country’s GDP. Generally, the quantity of essential goods and services is more than the remaining two segments. However, the proportionate value of the other two segments of goods and services is much higher than the former segment- the essential goods and services. This presence of a price differential redistributes wealth in favour of the rich, as the essential goods are usually produced by the commoner and the middle class and which, generally, do not count into capital-intensive industries.
Financialisation and digitisation of industry further exacerbate the above inequality. Financialisation is the process of increasing the size and importance of the financial sector relative to other industries in the economy. There are mainly two types of criticism regarding the process of financialisation. The rise of the shareholder value model of corporate governance, and second, the growing demand for financial experts. Studies show that this mechanism generates disproportionate wealth for the promoters, and it accounts for the top 1% of income earners. And second, it creates wealth for specialists, who constitute about 10% of the same people.
The trading prices of digital products such as cryptocurrencies and non-fungible tokens (NFTs) are skyrocketing, usually bought by the wealthy. The cryptocurrency is not issued or backed by any central bank, so economic policy decisions and macro parameters such as inflation, policy rates or economic growth are not affected. Their price is generally influenced by demand supply, regulations, and media news. At a conference in June 2021, Elon Musk stated that he supports bitcoin; He also said that he could accept bitcoin as payment. Bitcoin reaches new highs. Cryptocurrency ‘Dogecoin’ surged over 10500% after Elon Musk bought microblogging site Twitter. The total market for NFTs in January 2022 was $23 billion.
The above analysis shows how the unfair price differential of goods and services leads to the redistribution of wealth favouring the rich. The imposition of more taxes by the government will not necessarily lead to a better life or fair wealth redistribution for society. Most governments believe in solving this issue through a trickle-down approach. Thus, governments formally spend to strengthen businesses and the financial sector. So that industries can get more money and facilities to create adequate employment opportunities. This process ultimately supports a more centralised, financialised, and digitalised system.
Many economists also believe that property is liberty which brings wealth and prosperity. Some of them advocate that the wealthy redistribute wealth through philanthropy. On the other hand, financialisation and digitisation are inevitable. The adoption of cryptocurrencies and NFTs sounds like the adoption of gambling-like activities. However, human societies have evolved in the same way. New products have been added from time to time, and the countries that have adopted these inventions from the beginning have generally benefited. This seems like creating a dilemma.
Income inequality and the development of civilisations are inextricably linked. Inequalities of wealth and power are inevitable in any emerging society. Darwin considered economic inequality as a necessary step in the development of society. He meant that wealth naturally chooses the best and fittest person, which is a natural principle. When people settled in villages and towns, inequalities of wealth and power were the first things that came to the fore. Somebody has to produce; someone else has to make other products and services that most people want to consume to make them happy.
New asset categories – such as cryptocurrencies and NFTs – will continue to emerge, and so will the privileged, disproportionately benefited by unfair pricing mechanisms. I believe that any tax – whether it is on income or wealth – as may be proposed by many economists does not help in distributing wealth fairly. It looks like so but is a well-formed illusion. Then what can be the solution? Fair pricing of labour, products, and services in various sectors, regular examining and adjusting the redistribution of wealth from existing and new asset classes so that the work and capital employed by poor and middle-class individuals and their occupations get a fair value, this arrangement may be helpful in proper distribution of the created money. Inequality in wealth is not only inhuman, in fact, but it is also an insult to our innate instinct for objectivity
